Forum Post: Is Cyprus in Our Future?: The Plague of Wall Street Banking
Posted 11 years ago on March 22, 2013, 10:44 a.m. EST by LeoYo
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Is Cyprus in Our Future?: The Plague of Wall Street Banking
Thursday, 21 March 2013 10:09 By Kevin Zeese and Margaret Flowers , CounterPunch | News Analysis
http://truth-out.org/news/item/15250-is-cyprus-in-our-future-the-plague-of-wall-street-banking
The economic news this week highlights what happens when governments are unable to confront the root cause of the financial collapse – the risky speculation and securities fraud of the big banks. What happens? They blame the people, cut their benefits, tax their savings and demand they work harder for less money.
In the United States there have been no criminal prosecutions for securities fraud in the big banks. Just as the Justice Department has made it clear that the big banks are too big to jail because doing so jeopardizes the stability of the banking system; financial fraud investigator Bill Black points out that the SEC cannot institute fines that are too big for the same reason. “The art is to make the number sound large to fool the rubes, but to insure that the fine poses only a modest inconvenience to our ‘most reputable’ fraudulent banks.” So, the SEC trumpets “more than 150 firms and individuals, with sanctions totaling $2.7 billion.” Black points out that this number sounds big, but it isn’t compared to the losses caused by the fraud epidemic in the US which are well in excess of $15 trillion. A trillion is a thousand billion. Are we, ‘the rubes’ or do we know that our government is in cahoots with big finance?
In fact, the big banks have been engaged in all sorts of nefarious activity for a long time, asWashington’s Blog points out with this jaw-dropping list of crimes, and are rife with fraud. And, this week the biggest of the too big to prosecute, JP Morgan, had its financial fraud and disrespect for government on display when the Senate Banking Committee issued a massive 300 page indictment, errr report, documenting the $6.2 billion “London Whale” scandal. The report traces the scandal right to the top, CEO Jamie Dimon, and shows how the bank lied to bank examiners and investors. Experts state the obvious from this evident fraud; investigations and fines, and possibly a large monetary settlement are possible but a prosecution by DOJ remains unlikely. Obvious because everyone knows the game in Washington is one of no criminal prosecutions.
Although, another too big to jail bank, Goldman Sachs did have a loss in court this week, when the US Supreme Court refused to overturn a Court of Appeals decision requiring the bank to defend a civil suit by investors claiming securities fraud. There are lots of hurdles ahead, but this provides a glimmer of hope.
This week our too big to prosecute philosophy of the (lack of) Justice Department was shown to apply to foreign banks as well. The second largest bank in Germany got a pass when it offered a job to an IRS agent who cut its tax burden. Again, the rubes were told that Commerzbank paid $210 million in tax liability, sounds good, but it was only 62% of what it owed. The day after the agreement the IRS officer was offered a job at Commerzbank. The agent pled guilty to charges this week, but the bank and the officers involved were not prosecuted.
Europe is showing us what happens when government fails to confront the big banks – the people pay and the economy collapses into depression. Is this our future?
The horror story of the week for struggling workers and poor countries has to be Cyprus. The country was being built up as a big banking area but when it all went sour, they went to the EU for a bailout. The EU hemmed and hawed and finally agreed, but with a very big requirement which takes structural adjustment to a new level of abuse – they required “a one-off 10 percent tax on savings over €100,000 and a 6.75 percent tax on small depositors. Senior bank bondholders and investors in Cyprus’ sovereign debt will be left untouched.” [See update below.]
This is causing a run on the banks in Cyprus, but is also raising red flags in many other struggling Euro countries. Can bank accounts in Greece, Italy, Spain, Portugal or any other country in Europe be safe? Are more and more people going to take their money out of the banks and keep it under their mattress? It may seem like the sane thing to do but a run on the banks will just weaken shaky banks further.
Leaders of the EU, IMF and Germany are all staying with their demand for more austerity and greater productivity (i.e. lower wages for greater output). At the same time they are urging bailout of the banking system which remains weak. This same leadership recognizes their approach may lead to a “social explosion” and Standard & Poors is also warning that the situation is socially explosive. The reality is that southern Europe is essentially in a depression and Germany, EU and IMF are demanding that they squeeze more money out of impoverished people.
In Washington, DC, the two Wall Street parties keep talking about cuts to the budget – austerity measures that will hurt the old, the poor, the young and working class – and disregard the fact that government spending is actually not the problem. While they push austerity, they remain silent as big business interests go into their sixth year of big tax avoidance. Paul Buchheit summarizes “For over 20 years, from 1987 to 2008, corporations paid an average of 22.5 percent in federal taxes. Since the recession, this has dropped to 10 percent – even though their profits have doubled in less than ten years.” He highlights the worst of the worst. On top was Obama’s jobs czar, General Electric.
There is some sanity, but not much, among the US financial elite. Dallas Fed Chairman Richard Fisher told the Conservative Political Action Conference that it was time to break up the big banks and end the crony capitalism that protects them. Liberal Democrat Sherrod Brown has introduced a bill to do just that. Of course it is opposed by the administration so it will probably not go anywhere.
Instead, President Obama is pushing the anti-democratic Trans Pacific Partnership which is a gift to the big banks and other transnational corporate interests. For the big banks it will require countries to let capital flow in and out without restriction, not allow the banning or regulation of risky investments like derivatives and credit-default swaps and will prevent the formation of much-needed public banks. Our Wall Street government continues to serve Wall Street first at the expense of the people’s necessities.
All of this shows it is time to remake the banking system: hold security fraud violators criminally accountable, break up the too big to jail banks, support community banks and credit unions and create public banks at least at the state and local level; and make the Fed transparent and accountable to democracy. This would be a transformed banking system that would serve the people and the economy, move toward economic democracy and take power away from corrupt Wall Street. Failure to confront and remove the plague of Wall Street-centered banking will continue to infect the entire economy. Is Cyprus in our future? It doesn’t have to be.
Update: On Tuesday, March 19, the Parliament in Cyprus rejected the tax on bank accounts after mass protests by the people. This leaves Cyprus in a mess with no bailout and no money to contribute to a bailout. Will Russia invest in future oil found recently off the coast of Cyprus in return for the Parliament protecting $30 billion in Russian deposits that are in Cyprus banks? Will Germany and the EU bend, not requiring Cyprus to raise money for the bailout? Will Cyprus leave the EU? Lots of questions without answers right now, but the banks in the country will remain closed until they figure it out.
This piece was reprinted by Truthout with permission or license.
A Safe and a Shotgun or Public Sector Banks? The Battle of Cyprus
Friday, 22 March 2013 09:24 By Ellen Brown, Web of Debt | News Analysis
http://truth-out.org/news/item/15268-a-safe-and-a-shotgun-or-public-sector-banks-the-battle-of-cyprus
If these worries become really serious, . . . [s]mall savers will take their money out of banks and resort to household safes and a shotgun.
– Martin Hutchinson on the attempted EU raid on deposits in Cyprus banks
The deposit confiscation scheme has long been in the making. US depositors could be next . . . .
On Tuesday, March 19, the national legislature of Cyprus overwhelmingly rejected a proposed levy on bank deposits as a condition for a European bailout. Reuters called it “a stunning setback for the 17-nation currency bloc,” but it was a stunning victory for democracy. As Reuters quoted one 65-year-old pensioner, “The voice of the people was heard.”
The EU had warned that it would withhold €10 billion in bailout loans, and the European Central Bank (ECB) had threatened to end emergency lending assistance for distressed Cypriot banks, unless depositors – including small savers – shared the cost of the rescue. In the deal rejected by the legislature, a one-time levy on depositors would be required in return for a bailout of the banking system. Deposits below €100,000 would be subject to a 6.75% levy or “haircut”, while those over €100,000 would have been subject to a 9.99% “fine.”
The move was bold, but the battle isn’t over yet. The EU has now given Cyprus until Monday to raise the billions of euros it needs to clinch an international bailout or face the threatened collapse of its financial system and likely exit from the euro currency zone.
The Long-planned Confiscation Scheme
The deal pushed by the “troika” – the EU, ECB and IMF – has been characterized as a one-off event devised as an emergency measure in this one extreme case. But the confiscation plan has long been in the making, and it isn’t limited to Cyprus.
In a September 2011 article in the Bulletin of the Reserve Bank of New Zealand titled “A Primer on Open Bank Resolution,” Kevin Hoskin and Ian Woolford discussed a very similar haircut plan that had been in the works, they said, since the 1997 Asian financial crisis. The article referenced recommendations made in 2010 and 2011 by the Basel Committee of the Bank for International Settlements, the “central bankers’ central bank” in Switzerland. The purpose of the plan, called the Open Bank Resolution (OBR) , is to deal with bank failures when they have become so expensive that governments are no longer willing to bail out the lenders. The authors wrote that the primary objectives of OBR are to:
•ensure that, as far as possible, any losses are ultimately borne by the bank’s shareholders and creditors . . . .
The spectrum of “creditors” is defined to include depositors:
At one end of the spectrum, there are large international financial institutions that invest in debt issued by the bank (commonly referred to as wholesale funding). At the other end of the spectrum, are customers with cheque and savings accounts and term deposits.
Most people would be surprised to learn that they are legally considered “creditors” of their banks rather than customers who have trusted the bank with their money for safekeeping, but that seems to be the case. According to Wikipedia:
In most legal systems, . . . the funds deposited are no longer the property of the customer. The funds become the property of the bank, and the customer in turn receives an asset called a deposit account (a checking or savings account). That deposit account is a liability of the bank on the bank’s books and on its balance sheet. Because the bank is authorized by law to make loans up to a multiple of its reserves, the bank’s reserves on hand to satisfy payment of deposit liabilities amounts to only a fraction of the total which the bank is obligated to pay in satisfaction of its demand deposits.
The bank gets the money. The depositor becomes only a creditor with an IOU. The bank is not required to keep the deposits available for withdrawal but can lend them out, keeping only a “fraction” on reserve, following accepted fractional reserve banking principles. When too many creditors come for their money at once, the result can be a run on the banks and bank failure.
The New Zealand OBR said the creditors had all enjoyed a return on their investments and had freely accepted the risk, but most people would be surprised to learn that too. What return do you get from a bank on a deposit account these days? And isn’t your deposit protected against risk by FDIC deposit insurance?
Not anymore, apparently. As Martin Hutchinson observed in Money Morning, “if governments can just seize deposits by means of a ‘tax’ then deposit insurance is worth absolutely zippo.”
The Real Profiteers Get Off Scot-Free Felix Salmon wrote in Reuters of the Cyprus confiscation:
Meanwhile, people who deserve to lose money here, won’t. If you lent money to Cyprus’s banks by buying their debt rather than by depositing money, you will suffer no losses at all. And if you lent money to the insolvent Cypriot government, then you too will be paid off at 100 cents on the euro. . . .
The big winner here is the ECB, which has extended a lot of credit to dubiously-solvent Cypriot banks and which is taking no losses at all.
It is the ECB that can most afford to take the hit, because it has the power to print euros. It could simply create the money to bail out the Cyprus banks and take no loss at all. But imposing austerity on the people is apparently part of the plan. Salmon writes:
From a drily technocratic perspective, this move can be seen as simply being part of a standard Euro-austerity program: the EU wants tax hikes and spending cuts, and this is a kind of tax . . . . The big losers are working-class Cypriots, whose elected government has proved powerless . . . . The Eurozone has always had a democratic deficit: monetary union was imposed by the elite on unthankful and unwilling citizens. Now the citizens are revolting: just look at Beppe Grillo.
But that was before the Cyprus government stood up for the depositors and refused to go along with the plan, in what will be a stunning victory for democracy if they can hold their ground.
It CAN Happen Here
Cyprus is a small island, of little apparent significance. But one day, the bold move of its legislators may be compared to the Battle of Marathon, the pivotal moment in European history when their Greek forebears fended off the Persians, allowing classical Greek civilization to flourish. The current battle on this tiny island has taken on global significance. If the technocrat bankers can push through their confiscation scheme there, precedent will be established for doing it elsewhere when bank bailouts become prohibitive for governments.
That situation could be looming even now in the United States. As Gretchen Morgenson warned in a recent article on the 307-page Senate report detailing last year’s $6.2 billion trading fiasco at JPMorganChase: “Be afraid.” The report resoundingly disproves the premise that the Dodd-Frank legislation has made our system safe from the reckless banking activities that brought the economy to its knees in 2008. Writes Morgenson:
JPMorgan . . . Is the largest derivatives dealer in the world. Trillions of dollars in such instruments sit on its and other big banks’ balance sheets. The ease with which the bank hid losses and fiddled with valuations should be a major concern to investors.
Pam Martens observed in a March 18th article that JPMorgan was gambling in the stock market with depositor funds. She writes, “trading stocks with customers’ savings deposits – that truly has the ring of the excesses of 1929 . . . .”
The large institutional banks not only could fail; they are likely to fail. When the derivative scheme collapses and the US government refuses a bailout, JPMorgan could be giving its depositors’ accounts sizeable “haircuts” along guidelines established by the BIS and Reserve Bank of New Zealand.
Time for Some Public Sector Banks?
The bold moves of the Cypriots and such firebrand political activists as Italy’s Grillo are not the only bulwarks against bankster confiscation. While the credit crisis is strangling the Western banking system, the BRIC countries – Brazil, Russia, India and China – have sailed through largely unscathed. According to a May 2010 article in The Economist, what has allowed them to escape are their strong and stable publicly-owned banks.
Professor Kurt von Mettenheim of the Sao Paulo Business School of Brazil writes, “The credit policies of BRIC government banks help explain why these countries experienced shorter and milder economic downturns during 2007-2008.” Government banks countered the effects of the financial crisis by providing counter-cyclical credit and greater client confidence.
Russia is an Eastern European country that weathered the credit crisis although being very close to the Eurozone. According to a March 2010 article in Forbes:
As in other countries, the [2008] crisis prompted the state to take on a greater role in the banking system. State-owned systemic banks . . . have been used to carry out anticrisis measures, such as driving growth in lending (however limited) and supporting private institutions.
In the 1998 Asian crisis, many Russians who had put all their savings in private banks lost everything; and the credit crisis of 2008 has reinforced their distrust of private banks. Russian businesses as well as individuals have turned to their government-owned banks as the more trustworthy alternative. As a result, state-owned banks are expected to continue dominating the Russian banking industry for the foreseeable future.
The entire Eurozone conundrum is unnecessary. It is the result of too little money in a system in which the money supply is fixed, and the Eurozone governments and their central banks cannot issue their own currencies. There are insufficient euros to pay principal plus interest in a pyramid scheme in which only the principal is injected by the banks that create money as “bank credit” on their books. A central bank with the power to issue money could remedy that systemic flaw, by injecting the liquidity needed to jumpstart the economy and turn back the tide of austerity choking the people. The push to confiscate the savings of hard-working Cypriot citizens is a shot across the bow for every working person in the world, a wake-up call to the perils of a system in which tiny cadres of elites call the shots and the rest of us pay the price. When we finally pull back the veils of power to expose the men pulling the levers in an age-old game they devised, we will see that prosperity is indeed possible for all.
For more on the public bank solution and for details of the June 2013 Public Banking Institute conference in San Rafael, California, see here.
This piece was reprinted by Truthout with permission or license.
Cyprus...What You Can Learn From Iceland
Thursday, 21 March 2013 15:18 By The Daily Take, The Thom Hartmann Show | Op-Ed
http://truth-out.org/opinion/item/15263-cypruswhat-you-can-learn-from-iceland
As the Eurozone financial crisis continues to plague the island nation of Cyprus, its citizens are receiving a crash course in how an out-of-control banking industry and its corrupt banksters can bring an entire economy to its knees. The Cypriot economy has ground to a halt, thanks to massive losses that its oversized banking sector sustained from investments in Greece and a deep recession.
Banks in Cyprus have been shut all week, and are not due to reopen until next Tuesday at the earliest, to try to prevent a run on the banks. When all is said and done, and if the Cypriot economy ever recovers from this financial collapse, Cypriots will hopefully have a new-found awareness of the banks, and implement better oversight and regulation over their financial industry.
That’s exactly what they did in Iceland, and its working wonders for the small island nation.
In 2008, when the global financial crisis began taking down economies one by one, Iceland was hit incredibly hard.
All three of the country’s major privately owned banks collapsed, and Iceland’s stock exchange, the OMX Iceland 15, plummeted. Pension funds were slashed, and businesses were wiped out.
Iceland could have responded to that financial crisis the same way that the United States did, and come up with a massive bailout package to save the banks, and let their crimes go unpunished. Or, Iceland could arrest the banksters that brought down the economy, bail out those most affected by the collapse – the average Icelanders themselves – and begin to rebuild the financial industry. Iceland chose the latter. Jail the bums.
In December of 2008, the Icelandic parliament passed a bill establishing an Office of the Special Prosecutor.
The job of this new office was to investigate suspected criminal conduct leading up to, in connection with, or in the wake of the banking crisis, and to follow up these investigations by bringing criminal charges against those responsible for the crisis.
Since the Office of the Special Prosecutor was created, Iceland has been rounding up their banksters one after another.
In March of 2011, Robert and Vincent Tchenguiz were arrested in London, as part of the Special Prosecutor’s Office investigation into the collapse of the Icelandic bank Kaupthing.
In December of last year, a Reykjavik court sentenced two of the top executives at Icelandic bank Glitnir to jail time.
And just yesterday, nine more banksters from the Iceland bank Kaupthing were indicted and charged for their roles in orchestrating five large-scale market manipulation conspiracies.
These are only a few of the arrests that have been made, as Iceland cleans up its banking industry, and holds its own corrupt banksters accountable for their actions in the 2008 financial collapse.
Meanwhile, here in the United States, the Wall Street banksters that brought our economy to its knees are still sitting pretty in their corner offices or retired with hundreds of millions of dollars of your money. Just look at Jamie Dimon, CEO of JPMorgan.
In a recent report on JPMorgan’s monumental multi-billion dollar trading loss, Dimon is alleged to have criminally withheld from regulators key details about the bank’s daily losses.
And numerous other reports have suggested that Dimon may have been complicit in JPMorganChase engaging in additional criminal and/or unethical activity.
But Dimon and the rest of his fat-cat buddies are doing just fine today, continuing to rake in multi-million dollar bonuses or golden-parachute retirements.
And Dimon’s actions pale in comparison to executives at the HSBC bank, who recently admitted in court to allowing Mexican and Colombian drug cartels to launder nearly $900 million through their bank. If you'd done that, you'd be in jail for the rest of your life, but these are rich white banksters who give millions to politicians and political parties.
Executives of the banks also admitted to using various schemes to move around hundreds of millions of dollars to nations subject to trade sanction, including Iran, Cuba and Sudan. And, reports suggest that some of this money made its way into the hands of terrorist organizations. If you'd done that, you might be in Guantanamo. But, then again, you're not a bankster.
Despite these egregious criminal actions, the United States has yet to jail a single HSBC bankster.
So, what’s the bottom line to all of this?
Eventually, when Cyprus’ economy recovers, the Cypriot government will have a choice to make.
They can choose to let their banksters go free, and risk another financial meltdown like we in the United States have chosen to do. Or they can take the Icelandic approach, crack down on corruption in their financial industry, and prosecute and jail those responsible for causing and worsening the collapse.
At the start of the 2008 worldwide economic collapse, Iceland was in worse shape financially than just about every country in the world. Today, Iceland is home to one of the fastest growing economies in the world.
They got from there to here by throwing their banksters in jail. Hopefully Cyprus will take a page out of the Icelandic playbook, and lock-up the banksters.
And America should do the same thing, too!
Copyright, Truthout.