Tuesday, March 19, 2013 - First, They Came for the Bank Deposits

Mark your Calendar, April 5 & 6 and make your reservations for the 2013 Wealth Protection Conference in Tempe, AZ. For conference information visit www.buysilvernow.com or click here or call 480-820-5877. This year's conference features Roger Weigand, Nathan Liles, David Smith, Mark Liebovit, Arch Crawford, Ian McAvity, Bill Tatro, and I will speak on Friday. There is an expanded Q&A session with all speakers on Saturday. I hope you can attend.

First, They Came for the Bank Deposits

by Sinclair Noe

DOW + 3 = 14,455
SPX – 3 = 1548
NAS – 8 = 3229
10 YR YLD - .05 = 1.91
OIL – 1.72 = 92.39
GOLD + 7.00 = 1613.80
SILV + .01 = 29.01

The best quote I've seen on the Cyprus Bank Heist; and I wish I had thought of this; “First, they came for the bank deposits.”

Actually, they are still in the planning and scheming stages of stealing bank deposits from the Cypriots; some say it's really an attack on Russian mob money. And so one new scheme being floated is to only expropriate accounts above 100 thousand-euros. The Cyprus banks are still on holiday. We should note that at least half the Cyprus bank bailout capital needs come from the restructuring of Greek debt held by Cyprus banks that Cyprus government agreed to as part of 'EU solidarity'. You remember the haircut on Greek bonds? You didn't expect the bankers to really take a hit on that did you? No, eventually it worked its way back to the bank depositors, some goat herder in Nicosia has to pay for the bankers' gambling debts.

But surely those Cypriots were fiscally irresponsible, free-loading from the government trough? Nope, not the case. Prior to the 2008 crisis, Cyprus had high growth, low unemployment and sound public finances. And then the next point being tossed about is that surely those crazy Cypriots had it coming to them for living in a tax haven. Of course, I'm not sure how different tax evaders like GE and Exxon Mobil and Apple and Honeywell are compared to the tax evading Russian oligarchs. Maybe we should expropriate all the bank deposits of those businesses formed in that little tax haven known as Delaware. Maybe the next time a US bank comes crying for a bailout, we can just tell them to raid all the bank accounts in the Cayman Islands.

Anyway, this whole Cyprus thing is falling apart before it happens. Plan A was for the Euro Commission to steal money from all the Cypriot depositors, then use than money as a down payment for a bailout of the Cyprus banks. Plan B calls for leaving the Cypriot goat herders alone, and not raiding accounts under 100 thousand-euros, but hitting the bigger 100 thousand-euro-plus accounts. Plan C is developing and it has the Cyprus legislators rejecting the whole scheme, because Cyprus is a small island, and people actually know their politicians and where they live.

The whole idea that Cyprus would be destroyed by bad banks apparently doesn't resonate the way Hank Paulson's speech on how a bank default would result in a global financial meltdown which would cost much, much more than a simple bailout. Instead, the Cypriots are not falling in line like the Americans and the Greeks and the Portuguese and the Spanish.

And a side note for today's Cyprus update; you may recall that there were some big discoveries of oil and gas deposits near Cyprus. No, I don't know how it all fits into the scheme, but I think someone should make a movie; I can't wait to see the ending.

Now, the big problem with the Cyprus Bank Heist is that bank deposits are supposed to be senior, meaning everyone else who gives money to the banks gets wiped out before the depositors. The equity holders get wiped out, followed by junior debt, followed by senior debt (which is usually sovereign or central bank debt), and the last to lose is the depositor, that goat herder form Nicosia. And I know what you're thinking: I'm not a goat herder from Cyprus. How does this apply to me?

In the US, depositors have actually been put in a worse position than Cyprus deposit-holders, at least if they are at the big banks that play in the derivatives casino. The regulators have turned a blind eye as banks use their depositaries to fund derivatives exposures. And as bad as that is, the depositors, unlike the Cypriot depositors, aren’t even senior creditors. Remember Lehman? When the investment bank failed, unsecured creditors (and remember, depositors are unsecured creditors) got eight cents on the dollar. One big reason was that derivatives counterparties require collateral for any exposures, meaning they are secured creditors. The 2005 bankruptcy reforms made derivatives counterparties senior to unsecured lenders. Lehman was an investment bank and didn't have retail deposits. What about banks with retail deposits?

Remember when Bank of America, the parent of both the retail bank and the Merrill Lynch securities unit moved derivatives from the Merrill Lynch unit over to the bank holding company? It was the autumn of 2011. Moody's downgraded BofA's long term credit ratings. The Moody’s downgrade spurred some of Merrill’s partners to ask that contracts be moved to the retail unit, which had a higher credit rating. Why did it have a higher credit rating? Because it is FDIC insured. Bank of America’s holding company -- the parent of both the retail bank and the Merrill Lynch securities unit -- held almost $75 trillion of derivatives back in 2011. About $53 trillion, or 71 percent, were within Bank of America NA.

The concern is that there is a temptation for the banksters to dump losing derivatives onto the insured institutions. And you might think we have some fairly tight restrictions on that sort of thing. But when BofA dumped derivatives from Merrill Lynch onto the FDIC insured banking side of the business, the Federal Reserve seemed to think this was perfectly fine. The FDIC, which would have to pay off depositors in the event of a bank failure, thought it was a bad idea, but it happened anyway.

And so, the pecking order in the US is that derivatives counterparties are first in line. If there is a problem, they get to grab the assets first and leave everyone else to fight over the crumbs, if there are any. And in theory, the FDIC will make sure there are crumbs, but in reality, if the derivatives counterparties get paid first, there are no crumbs. The FDIC doesn't have enough money to pay trillions on derivatives plus deposit holders.

Wait a minute; we're not really talking about trillions of dollars in losses; that's just the notional amount, and that just Bank of America. But BofA is not alone. JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, as of the fourth quarter 2011, contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives. Maybe you remember the story of the London Whale, Bruno Iksil, the derivatives trader who lost $6.2 billion or maybe $8 billion, part of which included insured deposits.

After outcry from the people of Cyprus and anyone who cares about financial markets and worries about the implications of a government suddenly seizing a chunk of the money people kept in supposedly safe bank accounts, the terms of the rescue deal were being renegotiated.  Europe has spent the past three years trying to persuade global investors and ordinary citizens that their money is safe in European banks. They had finally succeeded in the last several months. And then they pull this stunt.

The modest declines in financial markets the past couple of days are a sign that global investors are betting  that the losses being forced upon Cypriot bank deposits will be a one-off situation, and not form a precedent for future aid to banks in Greece, Spain, Portugal and beyond. This is not to say that the Cyprus Bank Heist will spread. The greater likelihood is that there will be resolution, but this is not yet certain.

For a measly $5.8 billion euros, the EU has now put the entire Eurozone on edge-not to mention the entire global economy. It revolves around something as simple as trust. After all, if governments can just seize deposits by means of a "tax" then deposit insurance is worth absolutely zip.

Meanwhile in Cyprus, there were a number of alternatives to breaking this underlying bond of trust. The banks have some bond debts outstanding, which certainly should have been written down before the deposits were attacked.  In fact, the tax is an attempt to avoid this, and should be resisted on that ground alone.

What the Cyprus Bank heist does is to expose the nasty little banking secret; the banksters can't be trusted.

And if you think it can't happen here, think again; the mechanisms are already in place.

First, they came for the bank deposits.

The Federal Reserve is meeting today and tomorrow. Each time the Fed has tried over the past few years to ease off efforts to stimulate the economy, each time they've made the slightest move to turn off the free money spigot, it has come to regret the decision as premature. Its leading officials say the recovery has been slower as a consequence of those pauses. It is a mistake they do not want to repeat.

The central bank is buying $85 billion a month in Treasury and mortgage-backed securities because it wants unemployment to fall more quickly. While recent economic data suggests that growth is quickening, Mr. Bernanke has said that the situation remains unacceptable and that the pace of progress is uncertain.

Mr. Bernanke and the Fed’s vice chairwoman, Janet L. Yellen, have been abundantly clear in recent commentary that the improvement in the labor market to date falls far short of what they will need to see before reducing monetary policy accommodation.

Also, the federal government has just embarked on another round of spending cuts, known as sequestration, and the extent of the resulting drag on the economy may not be evident for several months. The Fed will not take overt steps to scale back its asset purchases any time soon. The Fed is not going to take any chances until it is sure that we have avoided another spring/summer swoon.

The Federal Reserve has increased its assets from $900 billion in 2007 to over $3,150 billion and still climbing today. On the liabilities side of the Fed's balance sheet, reserve balances held by banks have gone from $10 B in 2007 to $1,750 B and climbing today.  Expect the Fed to continue to buy long-term assets at its current pace through the end of 2013. Then at the beginning of next year you might expect the Fed would buy new assets only to the extent necessary to replace maturing holdings so as to keep total assets steady through 2014, and then..., well nobody knows for certain what happens. Maybe they sell, maybe they hold to maturity, likely a mix of selling and holding.

Who knows? There is a good chance the Fed doesn't even know. And so tomorrow, when the FOMC wraps up its 2 day meeting, they will issue a statement saying nothing has really changed and they will remain vigilent, which is Fedspeak for: we've painted ourselves into a corner and we hope you don't notice.

The new pope, Francis, spoke today, the first official day of his pontificate Tuesday by setting out a vision for the Roman Catholic Church of mutual caring and of concern for the environment, urging followers to pay special attention to society's poor and neglected.

Before tens of thousands of pilgrims and dignitaries gathered for his inauguration in St. Peter's Square, the pontiff made clear that his papacy would reflect the themes of service and love of nature so closely identified with the saint after whom he named himself, Francis of Assisi.

"Let us be protectors of creation, protectors of God's plan inscribed in nature, protectors of one another and of the environment," the pope said. "Let us not allow omens of destruction and death to accompany the advance of this world!"

He called on government leaders, and himself, to "protect all of God's people and embrace with tender affection the whole of humanity, especially the poorest, the weakest, the least important."

Where were you ten years ago today. I'll give you a hint; it was the start of the Iraq war. Ten years later, here we are: 4,488 US deaths in Iraq, more than 32,000 significant injuries. Suicide rates of soldiers are so high it is impossible to ignore -- some while in Iraq and others after returning home. Traumatic brain injuries, grieving families, moral injury and multiple limb loss are just a few of the constant reminders of the tremendous costs of war.  More than 100,000 Iraqis died, we didn't keep accurate records; about 3 million Iraqis were displaced. These figures cannot be ignored. And they are the results of war.

The cost to the economy has been high. Estimates range from about $1 trillion to more than $3 trillion. It's hard to count, but those estimates are probably low. We're still paying for Vietnam. Some pay more than others. The waiting time for a first time claim with the VA is more than 600 days for some claims. One cost that has just begun to accumulate is Iraq veterans' medical care and disability payments, which could top out in yearly spending around 2050 and total in the hundreds of billions of dollars. This is not surprising, even though there is no special fund set aside to help us meet the towering commitment. A look at previous wars shows that VA spending continues to climb for decades after a conflict is over then falls off as veterans die in old age.

When we go to war, the most sacred commitment is to never leave anyone behind, even after they return home. The deal has always been that if you fight for your country, your country will take care of you. That has always been the deal. U.S. troops invaded Iraq 10 years ago this week, and our obligations to veterans of the post-9/11 wars have just begun. We're aren't living up to that commitment.