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Raleigh Durham Open Stocks Futures FX Options Traders Meetup Message Board Trading Discussions › Bank Deposit Insurance Not 100%

Bank Deposit Insurance Not 100%

Don B.
Group Organizer
Raleigh, NC
Post #: 1,061
People are happily comforted by the existing of Bank Deposit Insurance, known in the U.S. as the FDIC program. Similar insurance regimes exist in European countries,

But in Cyprus this weekend, the government, pressed by the E.U. and IMF, announced a one time confiscation of about 10% of ALL bank deposits in the country's banks and credit unions (the exact percentage is variable depending on account size). Oh people will get bank shares in exchange.

And deposit insurance will not apply!

Here is a hilarious explanation posted on ZeroHedge:

Sun, 03/17/2013 - 17:43 | 3339834knukles

You see it works like this...
The banks take deposits from customers.
The banks then make investments
In stuff like European sovereign debt
The Banks also made a buncha other bad loans
Which go bad along side the sovereign debt getting sketchy
So they gotta be bailed out.
The countries in which the bad banks reside gotta bailout those bad banks which otherwise would fail
So the country has to raise MORE money from the banks to get the money to bail out the banks who made the bad loans in the sovereign debt in which they invested that went bad.
See, the Bank's insured by the country who's financed by the bank which is insured by the country.
So when all else fails the country takes the innocent bystander depositor's money as a tax to raise money for the country to bailout the bank so that the depositor's money will be safe.
And the politician doing all this s... keeps saying it's fixed.

..... amazing, no?

And this is why there are Bank Runs, money is kept under the mattress, gold and silver are preferred medium and why people really will probably start hanging bankers and politicians from lamp posts some day somewhere.

John C.
Raleigh, NC
Post #: 100
Thanks for posting Don. I was pretty taken aback when I read the news. If anyone is asking "could it happen in the US?" Zerohedge already asked: http://www.zerohedge....­
Dr. Jose' R.
Cary, NC
Post #: 702

In this corner: Cyprus an island (81th in the world by size and even smaller than Sicily and Sardinia in the Mediterranean sea) member of the European community with the Euro as currency, cannot print its own money, and has a banking sector (largely increased by dubious Russian money transfers) that is 8 times the size of its insignificant"economy". The proportion of Cyprus banking system is even larger than it was for Iceland. smile. Cyprus, a sovereign country that was successfully invaded by Turkey in 1974. More than one quarter of the population of Cyprus was expelled from the occupied northern part of the island where Greek Cypriots previously constituted 80% of the population

In the other corner: the USA free to print its own money that is freely accepted worldwide by the major economic powers as the currency of choice without being backed by gold or any hard asset, with a banking sector (at most) equal to its GDP, and the number one economic and military superpower in the world. laughing

Don B.
Group Organizer
Raleigh, NC
Post #: 1,062
The U.S. is not Cyprus, but it has violated contractual sanctity a few times in the past already, such as in 1933 when it abrogated the gold clause, eliminating the option to take payment in gold. It also confiscated all privately held Gold in the United States in that year.

Something exactly like this is not likely right now in the U.S., but the U.S. could be forced to do other things such as require IRA's to purchase a certain percentage of treasury bonds, etc.

What the incident does demonstrate, in my opinion, is that no government guarantee is absolute. They can change it any time they like! And, as fiscal circumstances become more and more dire, they resort to more and more desperate measures.

It will be interesting also to see what happens to the funds deposited with the many small Cyprus forex brokers, with the banks in Cyrus still closed.

I had a small account with one for a while.

I always figured that their real purpose was to earn 6%+ a year on deposits at shaky Greek or Cyprus banks.

Really the whole Cyprus (and Greek) banking sector was something of a sham, as José mentions.

It was all riding on implicit bailout protection from the EU, otherwise it would have collapsed long ago.

But it is still shocking that we have the banks closed in a European country!

The EU hates tax havens and really did not want to bail out the Russian mafia deposits.

We have at hand the old "moral hazard" dilemma - just as was the case with Lehman.
Don B.
Group Organizer
Raleigh, NC
Post #: 1,064
Oh here's a likely, and equally extreme, next step in these measures in Cyprus:

Mavrides said that the government was trying to renegotiate the deal with the Eurogroup, which had left open the option of Cyprus itself coming up with the money it needs to keep its banking system afloat.

"We have some ideas. We are thinking of nationalising the pension funds and provident funds of the state employees. That is about €2bn to €3bn, and we do have some other ideas which will come up in the next few days."

Dr. Jose' R.
Cary, NC
Post #: 703
ZeroHedge could be renamed EndOfWorldHedge smile, as many of their articles (and guest comments) are overly alarmist, where small problems are magnified to the level of a possible and imminent world-ending crisis. What matters to make money is how probable things are, and not just whether they are possible. From quantum mechanics it is possible that the egg that fell to the floor and cracked and splattered, bounces back to its original shape, but this is extremely improbable. From Newtonian physics, it is possible that we will be hit by a large asteroid and be wiped out like the dinosaurs, but it is much more probable that we will die in a car crash or of natural consequences than being hit by an asteroid.
Don B.
Group Organizer
Raleigh, NC
Post #: 1,065
The ECB says it will pull emergency funding of Cyprus Banks on Monday or Tuesday unless a new agreement is in place with the EU and IMF at that time.

Unless a new agreement is reached (and it could be) I would therefore expect either
- bankruptcy of their two largest banks
- default and an immediate withdrawal of Cyprus from the Eurozone

as soon as the weekend or early next week.

In any case, it does not look too rosy because all of the foreign and domestic depositors will create a bank run as soon as the banks re-open, unless the ECB guarantees them or some such huge leap from where we are.

Then the question will be, does this spread to Greece. Undoubedly they will try to set up a firewall to prevent that.

Could they possibly rush through Pan-European bank supervision and guarantees by the ECB in short order? They may have to. It is in the plan but not for right away.

On the other hand, if they could rush through mutualization of Bank supervision and guarantees across Europe, it would be a huge positive move and markets would be ecstatic. Europe would be immensely strengthened for some time.

P.S. As to ZeroHedge, and this is not to disagree with you on its merits in general, I quoted the excerpt in my first post for the wit and irony in it. I thought it was brilliantly written and laughed out loud when I read it. I agree that people should not look for conclusions on ZeroHedge, and that a lot posted there is pretty far out. I certainly do not use it to find conclusions. But using it to find questions and issues (as John intended I think in his post), and wit, is fine I think. I read Conservative media, Liberal Media, and Off-Beat media and find some unique insights in all of it. I do not doubt, though, that quite a few people are led down some pretty treacherous garden paths by it. It is too preoccupied with Gold, supposedly corrupt Bankers, European imminent collapse. etc. Still, I always find it amusing at the very least, and sometimes thought-provoking as well. Sometimes that thought is indeed, "how gullible could people be to buy this?", I will admit!
A former member
Post #: 11
Not sure, but prefer to add this to an existing thread that seems to fit.

I just finished reading lengthy article in Jan/Feb Atlantic: Frank Partnoy & Jesse Eisinger, 2013. "What's Inside America's Banks? How Wall Street Could Blow Up the Economy Againt"

Really a pretty scary tour through the general subject of the reliability of financial statements by banks, with Wells Fargo as an example. The opaqueness of the reports as to the risks in their portfolio and the ways that they are described and the sizes of risks relating to trading, portfolio composition, and so forth have led several authorities to declare that bank financial statements simply cannot be relied upon. IOW, the banks are not trustworthy.

Perhaps others have read this and have thoughts.
Don B.
Group Organizer
Raleigh, NC
Post #: 1,083

Thanks I just read it at http://www.theatlanti...­

It is interesting to learn that special purpose vehicles have been reborn as variable-interest entities, and about the continuing lack of full disclosure of their risks in their annual reports.

The article covers weaknesses in Basel III nicely also.

I think there are still other troublesome aspects not fully covered in the article, including

- the extent to which the Banks have crippled Dodd-Frank by intense lobbying (partly covered in the article)

- the moral hazard of "too big to fail"

- the abandonment of the classic principle of central banking of emergency lending to banks being done only at punitive interest rates and against good collateral

- the risks of under-regulated credit default swaps and pyramided re-hypothecation of collateral

- well-known weaknesses in currently decentralized European bank regulation (supposedly to be remedied within a year or two by new centralized ECB governance).

Will all of these issues come back one to haunt us one day in another banking crisis? I expect so.
Dr. Jose' R.
Cary, NC
Post #: 706
Referring to the article cited by Michael Rulison, it is also of note the very reputable background of the main author Frank Partnoy (George E. Barrett Professor of Law and Finance at the University of San Diego School of Law). He has written more than two dozen scholarly articles published in academic journals including The Journal of Finance.

For those who prefer watching a video, here is a link:­
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