Mike "Mish" Shedlock in the comments at Golem XIV links to his own blog where he in turn posts an email from somebody who has done his homework:
I read with interest your article on the Cyprus bailout deal. After a quick review of the most recent financial statements of the four publicly listed Cypriot banks as shown on their websites, it is notable that a simple alternative proposal could protect the country from bankruptcy and make its depositors whole.
By wiping out 100% of the equity, 100% of the bondholders, and 17% of the banks’ liability to central banks, the Cypriots could stabilize their banking system (based on the 5.8Bn EUR figure being discussed) without penalizing local savers.
Instead of raising 5.8Bn EUR from depositors, it could raise 1.4Bn from combined market cap, 2.0Bn from bondholders and preferred shareholders, and 2.4Bn of the 14.3Bn in combined Central Bank loans (Cypriot and ECB) it has on its books. This assumes zero contribution from the Cypriot subsidiaries of foreign banks so it may be conservative.
If the banking system is bankrupt, anything other than an Alice-in-Wonderland recovery system suggests that the order of liquidation is shareholders, preferred shareholders, debt holders, Central Bank creditors, and THEN depositors. If 10Bn or even 17Bn EUR is truly required, then coincidentally up to 17.7Bn EUR is available from equity holders, debt holders, and Central Bank creditors without impairing a euro cent from depositors.
That's much the same picture as with UK banks. Their losses (i.e. bad debts) so far as a percentage of total assets were relatively small (certainly less than 5%, even in the case of Northern Rock) and they could have been straightened out by converting a proportion (about a quarter or a third) of the bonds they have in issue to share capital. This might or might not involve cancelling existing shares, that's a minor issue. There was no actual need for the taxpayer to pay for bank bail-outs, that was just pilfering and looting on a grand scale during the smokescreen of a recession.
The idea of cancelling loans from the government is a bit off piste, because that's effectively saying that income taxpayers should pay it. I think that the general idea here was that they didn't want Cyprus to do like Ireland, have the government underwrite the banks and then go even more horribly bankrupt itself.
Writing down deposits and/or converting them to share capital is also a kind of tax (some have described the Cyprus idea as a "wealth tax") but even then, to the extent that a share capital and bond capital write-off won't cover the losses, it is far better to have a one-off specific "tax" on depositors (or pro rata write down of deposits) and have done with it*, than it is to bail out banks via inflation, low interest rates (these two are also "wealth taxes") and taxes on earned income (the worst kind of tax), which is what they have been doing in the UK (as Philip Inman says in The Guardian).
* Or even better, convert everything back to deposits, sack the top echelons of "management" and turn the bank into a building society again.
Monday 18 March 2013
Cyprus debt-for -equity swap: update
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17 comments:
"anything other than an Alice-in-Wonderland recovery system suggests that the order of liquidation is shareholders, preferred shareholders, debt holders, Central Bank creditors, and THEN depositors."
Yes, but shareholders, preferred shareholders, debt holders and Central Bank creditors are largely powerful financial institutions and therefore sacrosanct. Depositors, on the other hand are largely the powerless little people who can be pillaged with impunity. This is not Alice-in-Wonderland, this is Machiavelli.
B, correct.
MW, can you just clarify:
Are you 100% certain that the 'tax' or 'bail in' or 'haircut' or 'debt for equity swap' (depending on what you read) means that the liabilities are to be erased/converted to shares as opposed to trasferred to some other creditor like the government, ECB etc?
Just there's a bit of conflicting info out there and the 'deal' doesn't even seem to have been finalised yet.
I guess this is what buying a second term president gets Goldmans and JP! Could they even be worse than Exxon and Lockheed Martin?
SL, there are infinite different kinds of bail in, bail out, debt for equity swap and so on.
In the current case of Cyprus, all the reports say that x% of deposits will be converted to shares, so you lose EUR1 in deposits and get approx. EUR 1's worth of shares.
The ECB's role in all this is rather murky, it appears that their angle was "we don't want the Cyprus government to bail out its banks (like Ireland) and then come crying to us. So we'll get the depositors to bail out the banks and then we'll tide over the Cyprus government."
Which from their point of view seems quite sensible.
And yes of course, the whole thing is run by GS and JPM senior people, that's obvious. But these shits aren't risking their own money, they are just creaming off commission left right and centre.
Thanks MW.
It still looks like a scam to me. You make a 'safe' bank deposit and - abracadabra hey presto - it's a convertable bond! You 'were' senior in an insolvency, but we're not going to have one but make you junior anyway!
It's all so depressing isn't it? I am heartily pissed off with all these lying shits. (Not a contribution to the debate - apologies).
Would Carswell's bank reform ideas help prevent this sort of arbitrary sequestration? That is that a bank customer could choose between whether the money he deposited was either storage - bank acting as his fiduciary; or a loan to the bank - bank acting as an intermediary, and paying a share of its return (related to riskiness) to the depositor?
Supplementary. Intriguingly 'when' this happens can the bank customers make a claim from one or other of the deposit protection schemes?
Lola: Presumably, the "storage" account wouldn't need any deposit protection. The risky accounts could also be insured, but at the cost of interest rate return, and this would be third party (private) insurance.
The intermediary solution is ofcourse similar to now, require third party insurance on all accounts, at the cost which the third party judges the bank's behaviour. Or don't. I believe NZ does not have either government or mandatory private deposit insurance.
Addendum to NZ: I suspect there is an implicit political promise of bank stability in there, but I could be wrong.
SL, of course it is a scam. Protect the bankers and landowners, possibly the bond holders and the little people (shareholders and depositors) can f- off.
L, that's the same as the Positive Money idea which is a nice idea but which will achieve nothing whatsoever, I explained why here. I understand this better than they do, end of.
The only sensible way to do this is stamp down on selling price of land with LVT and go back to the tightly regulated "building society" way of doing things.
L, good supplementary!
Kj, yes but then the insurer will just go bankrupt - see AIG.
Kj, sensible bank regulation is not difficult, even if you allow a house price boom - see Canada.
MW: Yes, the "Free banking" response would be the insurance would have to be underwritten by unlimited liability. Although persons can also be bankrupt, so someone would have to insure them as well...
But ofcourse, in the case where loans+equity is largely made against real property, buildings, machines, materials, crops etc., there isn't much of a problem, the problem is when land enters the picture isn't it?
I don't know much about Canada, only that they presumably have a lot of credit unions, what's with Canada?
Kj, the insurance companies are a massive scam and end up being bailed out.
Yes, the cause of banking failures is in 99% of cases leveraged land speculation.
I don't know a lot about the Canadian banking system either, but they do a mixture of the following:
- no sub-prime lending
- no bank to bank lending
- higher capital requirements and/or lower leverage
- and other bits and pieces.
And none of their banks are in trouble - even though they had a land price bubble like everywhere else.
Haven't we prviously decided that the answer to the banking issues is to remove limited liability from bank senior management and their auditors?
In re your response to Positive Money, isn't that all a bit different to what Carswell is on about? He is not trying to limit credit creation per se but reform the 1844 Act by making it clear that deposits into a bank are loans to the bank - not the banks money - and make it clear that some deposits are loans and others are storage?
L, removing limited liability would help, but they will just deny liability and the courts would not enforce it.
As to Carswell, that is exactly the same as positive money's half-baked idea.
If people really want "safe" bank accounts backed directly by the government, we could set up a government owned bank - let's call it Trustee Savings Bank or the Post Office Bank or something like that - for people who want to deposit money 100% safe.
And if you want something a bit racier, lend your money to a normal commercial bank who will help themselves, no government guarantees would be required as such depositors clearly do not demand "safety".
MW. "L, removing limited liability would help, but they will just deny liability and the courts would not enforce it." That seems to be the key problem, doesn't it? Basically you're saying that the Courts are in on the whole H-O-Ist conspiracy then?
L, as Karl Marx might have said:
"Wherever there is great property, there is great inequality."
Chapter I, Part II, p. 770
"Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all."
Chapter I, Part II, 775
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