Deutsche Bank and the 26 billion euro vanishing trick

The biggest banks in Europe have little to fear from the EU’s new banking regulations. But the public does. Due to loopholes the new rules will not prevent costly bailouts in the future. The risks are made clear in a recent accounting sleight of hand by Deutsche Bank.

New EU banking rules were adopted in early April after more than four years of studies, debates, and a few tugs of war.  Banks will be obliged to possess bigger reserves – known as capital requirements – than in the past to make them more resilient to market downturns. These reserves act as a buffer of cash and safe assets that banks can always access in order to protect their creditors and secure the bank against insolvency; the ratio of capital to assets is a key measure of financial health. The promise is that the new rules raising capital requirement levels will help prevent or mitigate a fresh collapse in the financial system and the possible ensuing expensive bailouts of ailing banks. A brief glance would appear to show that the capital requirement increase is substantial; in some cases they appear to be doubled1.

So far, so good. However, there is a giant loophole that allows big banks such as Deutsche Bank to do the calculations of the minimum reserves required themselves. Allowing this kind of self-regulation threatens to undermine the new banking regulations. For example, recently, Deutsche Bank made an adjustment to its own internal calculation model for capital requirements, and this alone improved its books by 26 billion euros: quite a magic trick of creative accounting that puts the bank’s slogan: “A Passion to Perform” in a new light.

This loophole was heavily criticised in the wake of the financial crisis, but despite a lengthy debate on banking reform, it remains in place – a sign that the banking lobby is still extremely powerful and effective at pursuing its own interests. As a consequence, the new rules do not seem to offer any guarantee that exorbitant bailouts of bad banks – which have so far cost taxpayers in the European Union 1,7 trillion euro since 2008 – can be avoided in the future. That is, not unless new pressure for more fundamental reforms emerge.

Capital requirements and loopholes

The new European Union rules are derived from the Basel Accords, international agreements on banking regulation negotiated by representatives of the biggest financial powers within the framework of the “central bank of central banks”, the Bank of International Settlements. The key feature of the Basel rules are capital requirements – that banks have to retain a certain amount of capital in reserve compared to their assets. The riskier and the bigger the assets (i.e. anything that has value, such as shares, bonds, financial instruments of all kinds etc.), the bigger the capital requirements.

While that sounds relatively straightforward, calculations to set the minimum rate of capital required for a bank to be considered financially secure have become very complex. The Basel rules from 2004 – called Basel II – introduced the option for banks to use their own advanced internal risk assessment models to make these calculations, known as the Advanced Internal Ratings Based Approach. This new approach was pushed heavily by two big global players in the financial lobby; the Institute of International Finance (IIF) that represents the biggest banks, and the International Swaps and Derivatives Association (ISDA), the largest financial trader association2. The financial lobby was keen to protect its own self interest in being able to take bigger risks with less capital. As banks are not interested in having their capital ‘laying idle’, and as they make their money from taking risks, they consider demands for big reserves as a nuisance. Therefore any loophole to scale down the reserves required is welcome.

The decision practically allowed banks to self-assess via their own complex models how risky their investments are, and thus determine by themselves the size of their capital requirements. And all big banks of some size seized the opportunity immediately, while smaller banks with fewer resources had to stick to a standardised approach used pre-2004, based on fixed, transparent, and not least externally produced assesments.

This has given larger banks an unfair advantage over small ones. At a medium sized bank, for instance the Danish bank Nykredit, out of 4.000 employees in total, 70 staff members are dedicated to risk modeling alone. This is a measure of just how economically valuable this type of internal modeling is to big banks. Smaller banks, on the other hand, do not have the resources of such a sizable staff, and will have to use a standardised approach used before Basel II. As a consequence, they will feel “the full weight of higher capital requirements”3. Crucially, the situation also gives big banks more space to take more risky investments backed up by less capital in the vaults, potentially paving the way for bankruptcies and financial crisis.

The financial crisis reopens debate

The main problem is the vast difference between what the banks report as their reserves (as a percentage of their assets) and what they actually have available according to a standard calculation. Before the financial crisis in 2008, many banks bragged in public that they were backed up by 10 percent capital, while in reality they were down to 1-3 percent, according to a study from the German Max Planck Institute4.

The original objective of the Basel II rules was actually to raise capital requirements. However, thanks to the introduction of the internal risk models, this was derailed. Despite higher requirements, as a consequence of the leeway provided by Basel II, capitalisation of big banks dropped considerably5. This drop in capital ratio due to this “self-regulation” approach to banking was cited as one reason why the sector showed little resilience during the financial crisis in 2007 and 2008. “It is stating the obvious to say that the faith placed in models has been dented by the events of the recent crisis,” said Wayne Byrnes, Secretary General of the the negotiating body of the Basel Accords, the Basel Committee, recently6.

The financial crisis naturally led immediately to a review of international banking regulation. Negotiations started in 2009 and were concluded in the summer of 2010 with the agreement called Basel III. This process was again characterized by fierce lobbying by the biggest banks, spearheaded by Joseph Ackermann, CEO of Deutsche Bank, acting on behalf of the Institute of International Finance (IIF). The IIF succeeded in convincing the negotiators not to raise capital requirements too much, arguing this would be detrimental to growth7.

And as a bonus, in the aftermath of the crisis the banks managed to maintain the loophole created by internal models. Though some procedures were tightened, in fact, the internal risk models were never in the danger zone during the negotiations over the next set of global guidelines, Basel III.

Fixing numbers, hiding losses

As for the capital requirements that were adopted with Basel III, the banks have been in an excellent position to defend themselves from any real impact from higher capital requirements in the aftermath of the crisis with this loophole of self-calculation models assured. In fact, it seems banks have been preparing for years to deal with a potential increase. In anticipation of higher capital requirements, they seem to have been gaming the system by producing low estimates of how risky their assets are, with the aim of bringing down the capital they would in the end be required to have available. This can be seen from their assessments of risk: as the required capital is set according to numbers measuring the ‘riskiness’ of banks’ assets; between 2007 and June 2012, the banks’ own assessments of the risk was very optimistic. In a number, their ‘riskiness’ (Risk Weighted Assets, RWA) fell from 65 percent to 35 percent8.

Judging by recent discoveries, some banks went very far in their efforts to stave off an increase in capital requirements. The scandals are now popping up one by one, and the sums contested are not in the petty cash category. In January 2012, Wall Street Bank JP Morgan Chase changed its risk assessment model and in the act hid losses on derivatives deals  that turned out to amount to no less than 4,8 billion euro (6,2 billion dollars)9. This incident lead to an investigation for fraud. Later, in March this year, the Bank of England accused UK-based banks of overstating their capital by 59 billion euro and hiding losses of 36 billion10.

Over the past few years, it seems, the fact that higher capital requirements seemed inevitable with the onset of Basel III, has inspired the banking community to become very creative in response. In their advanced computer models they’ve juggled with numbers so as to ensure the bottom line would not produce uncomfortably high capital requirements.

Deutsche Bank secretly on the brink

Deutsche Bank is no exception. Neither at present,  nor when the financial crisis hit.

At the height of the financial crisis in 2008, Deutsche Bank was not regarded as a problematic bank, and its top management did everything in its power to retain an image as a rock solid giant. The books showed a fairly good position in that the bank seemed to meet the capital requirement criteria and the CEO of the bank, Joseph Ackermann, famously announced: “I would be ashamed if we were to accept government money in this crisis.” “At no point”, he claimed, had Deutsche been in danger11.

But in June 2011 the first testimonies emerged that indicated Deutsche Bank had not been in as good a state as it had claimed. Three whistleblowers from inside the bank itself have come forward and delivered evidence that Deutsche Bank hid a loss of about 13 billion euro in a complex derivatives deal with a nominal value of 130 billion euro. So while Ackermann smiled confidently and convincingly, during the peak of the financial crisis in 2008 when most banks were suffering distress, behind the scenes his top risk managers were struggling to cover up losses.

The reason why this episode is particularly embarrassing to Ackermann and Deutsche Bank is because the German Government was operating with a capital threshold of 8 percent, typical at the time. Banks below this level of capitalisation would be invited to join the government’s support scheme. Officially, Deutsche Bank stood at 10 percent, but if the information on the losses had been properly reported, the bank’s level would have been below 8 percent – bringing it within the threshold for government support and severely undermining its reputation as a solid bank. This would have exerted a severe blow, had Deutsche been compared to banks that were bailed out: its level was close to Commerzbank that did receive government support after sustaining a loss of 285 million euro – a number considerably less, in fact, than the losses covered up by Deutsche Bank12.

Deutsche Bank and the 26 billion euro magic trick

Deutsche Bank has also delivered an astonishing recent example of how much an adjustment to a banks’ risk assessment model can mean in terms of its capital ratio. In 2012 Deutsche Bank had a major problem with the capital requirements in place. Its accounts showed it was about to miss the mark, so the bank did three things to avoid the problem: it sold off risky assets, it bought derivatives to insure against losses on other assets, and last but not least it dramatically adjusted its internal models on risk assessments. In total, the bank managed to adjust its balance sheets to the tune of 55 billion euro. Of this, a full 26 billion euro was the result of fiddling with its risk assessment models alone13.

What does this mean? It means the bank reviewed its own computer models that had been set up to assess the value – or rather the riskiness – of the banks’ assets. This procedure allowed it to present a much more optimistic view of its investments than seemed warranted. Since there is ample space to define the models internally, the move has not been disputed by regulators so far.

The advantage to the bank was to bring its books closer in line with the capital requirements in force, putting it on similar footing to other big banks albeit “at the lower end”14. But in terms of society’s interest in resilient banks, the change to the model did nothing but obscure the bank’s real financial health.

The affair has been closely followed by the business press, and by financial institutions. One of them, Portuguese investment bank Espirito Santo, has a research department according to which the use of a standardised method, such as the one used by all before Basel II, would lead to a 52 percent increase in Deutsche Banks “risk weighted assets”, which means the bank is very far off the mark in its stated estimation of the capital it needs to have available in order to comply with the standards15.

The 26 billion dollar conjuring trick, however, worked magic for Deutsche Bank as its shares went up.

Belated concern

Once again, there seems to be evidence enough to show that banks are using well-designed models to drive down capital requirements to a level where the rules on their reserves become almost meaningless. On occasion this is even recognized by the banks themselves, as when analyst Mike Harrison at Barclays stated in February: “The Basel rules stand or fall by the RWA (risk assessment) calculations. If there are questions on how banks calculate their RWAs, the right amount of capital is almost a moot point if you cannot trust the denominator.”16

Scandals such as those outlined above have caused a stir in the regulatory community, since they are far more than isolated anecdotes: they involve a significant number of major players in the world of banking. As a result, the Bank of International Settlements is currently looking into these internal models17. Both internationally as well as in the European Union, the question being raised is whether a standardised approach to risk assessment with much less space for creativity would be a way forward.

In Europe too, the problem is systemic. At the moment, the European Banking Authority (EBA) is conducting investigations into the risk models of the banks, and in an initial report, the EBA asks what the reason is for the big variation in banks’ assessments of their assets. The Authority come to the conclusion that half of the variation owes not to different regulatory approaches or different structures in the balance sheets, but to variations in the banks’ models. “The dispersion calls for further investigations and possibly policy solutions”, the EBA’s chairperson Andrea Enria said in February18.

Models not challenged in the EU

But looking at the legislation adopted, a policy solution seems far away. The new European Union laws are an adaptation of its own version of the Basel rules – a weaker version by several accounts19. As far as the internal risk modeling is concerned, it was never seriously contested and hardly even formed part of the debate. While steps are being taken to include internal modeling in EU law – whereas before this was left to member states – this is not necessarily with a view to adopting strong rules on the matter.

Continuing to allow banks to use their own internal models in the new EU legislation was actually a key demand of Deutsche Bank and presumably of other big banks. In Deutsche Bank’s communication with the Commission, consolidating internal risk assessments in the European Union was on its wish list. They preferred to see a more common approach across banks to internal risk modeling. In particular they wanted to see quicker approval by regulators and a set of rules that would allow ample access to the use of internal models20. To get this far, a separate chapter on international ratings would be required – one that would leave space for common standards. This wish was fulfilled by the Commission, introduced in the draft regulation, and subsequently endorsed by the Council and the European Parliament with some loose ends to be decided at a future stage.

Generally, though, the models barely even featured in the political debate. To the extent that they were,  the position of the big banks was defended, not challenged. Among the hundreds of proposals discussed in the European Parliament, for instance, only one was directly relevant to internal models. This proposed amendment, tabled by the German MEP Werner Langen, asked the Commission to respect the “proportionality principle”, should the Commission decide to adopt “technical standards” for the models21. This amendment, finally included in the adopted legislation, sent a message to the Commission not to be too anxious to regulate the internal models, very much in line with Deutsche Bank’s position22.

At the moment, the Commission is awaiting the results from the EBA’s investigations before it considers whether the “remaining degrees of freedom are still too large”23 and whether it should take new initiatives. But most likely this will merely boil down to technical standards to be proposed by the EBA end of this year24. Furthermore, what is worrying about the procedure is that it is basically a matter left to the Commission – in a close dialogue with ‘The Banking Stakeholders Group’ – an advisory group established under the umbrella of the European Banking Authority, dominated by the financial sector, including banks such as BNP Paribas, Rabobank, Santander and Deutsche Bank25.

Banking regulation in crisis

With this in mind, and the Commission’s position so far, it would be a big surprise if the big banks will see their internal models come under any significant regulatory control due to proposals adopted via this process. And the lack of political attention given to this matter – partly due to the fact that the banks easily dominate this kind of complex topic, partly due to strong banking lobbies – means there are few indications of any significant developments.

Indeed, looking at the scale of the disaster created by this type of self-regulation, it would be a more healthy response to discard the models altogether. Specialists at the OECD would agree. In a contribution to a hearing in the German Bundestag recently, two such specialists, Adrian Blundell-Wignal and Paul Atkinson, testified that: “The core problem is the Basel risk weighting system, designed to introduce an illusory ‘risk sensitivity’ that relates minimum capital requirements to ‘risk-weighted assets (RWA)’, instead of actual balance sheets. This has evolved into a system of extreme complexity that invites regulatory arbitrage to reduce RWA relative to Total Assets (TA), defeating the entire purpose of capital adequacy rules.”26

In other words, the attempt to make banks more resilient by increasing capital requirements – which is fundamentally what Basel III and the new EU laws are about – will be in vain, if the banks are allowed to persist in using their own internal models.

The argument goes even further than that. The questions posed by quite a few specialists at the OECD27, the Bank of England28, and by regulators in the US29 is actually more fundamental: it’s whether capital requirements are in the end the best tools to avert the collapse of banks in the first place. They stress that the present rules have become overly complicated and make it difficult if not impossible for regulators and supervisors to keep track of the banks. Basically they’re advocating a type of banking regulation with little space for the kind of self-regulation that the current risk assessment models embody.

A new approach to banks

In summary, the situation gives a strong impression of banking regulation in crisis. At the very moment when the European Union has adopted its own diluted version of the Basel rules, the key basis of Basel itself is being questioned. One of the reasons Basel ended up in this mess, was successful lobbying against standardised regulation by the banks. Both at the international level as well as in the European Union, big banks have had significant influence over the policies supposedly being developed to regulate them. This includes their self interested demands for the space and flexibility offered by the use of internal risk modeling, which in the end could turn out to be the most significant outcome of the Basel negotiations and the EU implementation.

At the moment, Deutsche Bank is under scrutiny for a number of business strategies, including tax fraud, the cover up of losses of the Italian bank Monte Passchi, as well as for the creative way it hid its own losses in 2008. These cases might even end up with convictions. In the case of the 26 billion euro trick, however, it seems likely that the rules were followed and everything was done by the book.

But doing everything by the book is no help to society if the rules in the book are made by and for the banks. Creative accounting is incredibly dangerous as it has the potential to paint a confident façade over a bank that might be in big trouble, and that could end up costing millions of people dear. And most importantly, considering they were a key factor in creating the financial crash of 2008, lax banking regulations need to be reformed so that we are not doomed to repeat this crisis.

The question is what kind of reforms would be able to safeguard the public from expensive bailouts and the austerity measures that tend to accompany them? A way forward could be to end the era of self-regulation, create a diverse banking sector with no banks that are too big to fail, and with public banks as an increasingly important component. Big private banks have had their chance.

1. For instance, so called Tier 1 capital will have to be raised from 4 percent to 7 percent or slightly more in some cases. The rules include different kinds of requirements, and cannot be reduced to single digits, but all in all, there is a significant increase, though – many would have it – from a very low level to begin with.

2. See for instance Ranjit Lall; “From failure to failure: the politics of international banking regulation”, Review of International Political Economy, 19:4, 2012, pp. 609-638.

3. Interview with Lars Pehrson, Director of Merkurbank, a small Danish alternative bank, April 2013.

4. Numbers cited are “core capital”, aka tier 1 capital. See Martin Hellwig; “Capital regulation after the crisis: Business as usual?”, Max Planck Institute, 2010. http://www.coll.mpg.de/pdf_dat/2010_31online.pdf

5. This was obvious from the “Quantitative Impact Studies” of the Bank of International Settelements, eg. in 2006, which showed a decline in capitalisation of 26,7 percent for the banks with advanced internal risk assessment models, and a 1,7 percent increase for the banks using a standardised approach. Quoted from Ranjit Lall (2012), page 613.

6. Wayne Byrnes, speech at a BCBS-EMEAP-FSI High-Level Meeting, 25-26. February 2013.

7. Ranjit Lall; ”Reforming global banking rules: back to the future?”, DIIS working paper 2010:16, page page 27 ff, http://www.diis.dk/graphics/Publications/WP2010/WP2010-16-Lall-Reforming…

8. Reuters, 31. January 2013, http://www.reuters.com/article/2013/01/31/us-deutsche-capital-boost-idUS…

9. Bloomberg, 4. February 2013, http://www.bloomberg.com/news/2013-02-01/occ-said-to-admit-it-missed-jpm…

10. Financial Times, 8. April 2013, http://www.ft.com/intl/cms/s/0/3c660d16-a02e-11e2-88b6-00144feabdc0.html…

11. Deutsche Welle, 20. October 2008, http://www.dw.de/german-government-sets-conditions-for-bank-bailout/a-37…

12. Der Spiegel Online, 3. November 2008, http://www.spiegel.de/international/germany/financial-crisis-germany-s-n…

13. According to Crédit Suisse the number might even be higher. The Swiss bank believes it might be as much as 41 billion euros. http://www.reuters.com/article/2013/01/31/us-deutsche-capital-boost-idUS…

14. Bloomberg, 1. February 2013, http://www.bloomberg.com/news/2013-01-31/deutsche-bank-posts-loss-as-cos…

15. Deutsche Bank’s “risk weighted assets” stand at 18 percent, which put the bank at the very low end of the spectrum. If the judgment of Andrew Lim, Espirito Santo Investment Bank, is correct, the figure would change Deutsche’s standing in the banking community dramatically, with a RWA of 27-28 percent. New York Times/Dealbook, 31. January 2013, http://dealbook.nytimes.com/2013/01/31/deutsche-banks-capital-trick-will…

16. Reuters, 25. February 2013, http://uk.reuters.com/article/2013/02/25/uk-banks-britain-riskweightings…

17. Bloomberg, 1. March 2013, http://www.bloomberg.com/news/2013-03-01/cocos-draft-bond-cops-to-stop-b… Also: In a speech in February 2013, the Secretary General of the Basel Committee – the committee developing and negotiating the Basel Accords – spoke of the possibility to ask banks to report on their capital ratio using both their internal models and a standardised approach: http://www.bis.org/speeches/sp130226.pdf

18. Press release from EBA, February 2013, http://www.eba.europa.eu/News–Communications/Year/2013/EBA-interim-repo…

19. For instance, though the Basel Accords prescribe capital requirements as minimum requirements, member states in the EU will not be able to increase minimum requirements without prior authorisation by the Commission. Also, a new kind of ratio is introduced; a leverage ratio. This is set at an unambitious level (3 percent) in the Basel Accords – unambitious because 3 percent is actually worse than the ratio of Lehman Brothers shortly before the bank collapsed in September 2008. However, the EU rules appear to be even less ambitious in that there is not fixed leverage ratio yet.

20. Letter from Hugo Banziger (Deutsche Bank) to Commissioner Michel Barnier, 17. November 2010.

21. Corporate Europe Observatory has asked Werner Langen if his amendment was encouraged by any outside parties, such as German banks. So far, Werner Langen has not responded.

22. The European Parliament’s proposals for amendments to the directive and the regulation can be downloaded here: http://www.europarl.europa.eu/sidesSearch/search.do?type=REPORT&language…

23. Response from the Directorate General Internal Market and Services to a question from Corporate Europe O,bservatory, 7. May 2013.

24. Regulation on prudential requirements for credit institutions and investment firms, article 138, paragraph 5.

25. List of members of the Banking Stakeholder Group available at the website of the European Banking Authority: http://www.eba.europa.eu/Aboutus/Organisation/Banking-Stakeholder-Group/…

26. Adrian Blundell-Wignal & Paul Atkinson (OECD), statement at the German Bundestage Finance Committee Hearing on the Draft Bank-Separation Law”, 22. April 2013.

27. Blundell-Wignal & Atkinson; ”Thinking beyond Basel III: solutions for capital and liquidity”, OECD, 2010,

28. Andrew Haldane; ”The dog and the frisbee”, paper at Federal Reserve Bank of Kansas City’s 36th Economic Policy Symposium, August 2012, http://www.bankofengland.co.uk/publications/Documents/speeches/2012/spee…

29. Jeremiah Norton (FDIC Director): ”A more prominent role for the leverage ration in the capital framework”, Speech in Orlando, Florida, February 2013 & FDIC vice-Chair Thomas Hoenig on the “illusion of safety” of Basel, see Central Banking.com, 10. April 2013.

via Deutsche Bank and the 26 billion euro vanishing trick.

via Deutsche Bank and the 26 billion euro vanishing trick.

Why are the Irish People Making Payments to Criminals?

Why are the ‘ Bondholders’ and the Irish government so concerned that the Irish people be forced to take the loss and pay the debts of the speculators

But when we talk of Anglo Irish’s bondholders  we talk of people with already accumulated wealth
We are not talking about widows and orphans or you and me. It is therefore worth
remembering, the next time an Irish politician, or any of our politicians for that matter, say that
some welfare payment can no longer be afforded, it is because the money that could have paid for
it has been given instead to the already wealthy bondholders. The Irish people are
paying and protecting the interests of the bondholders over the interests of their own children.
And it is our very own politicians who have arranged this not you not me

At the end of the third quarter of 2010, not long before Dublin requested a bailout, German banks had $208.3 billion in total exposure to Ireland, according to data from the Bank for International Settlements. That includes $57.8 billion in exposure to Irish banks, an amount exceeding British and French banks’ exposure to Irish lenders combined.

Dublin campaigned to impose haircuts on banks’ senior bondholders to reduce the amount of money the state would have to pump into Irish banks. The ECB refused, fearing contagion.

Most of these banks have indulged in absolute criminal activity and have been able to get away with their criminal acts.

So, at the end of the day the Irish people are paying off a bunch of criminals.

To copper fasten the point lets have a look at Deutsche Bank

Recent Deutsche bank events worth noting

Spying scandal – From as late as 2001 to at least 2007, the Bank engaged in covert espionage on its critics. The bank has admitted to episodes of spying in 2001 and 2007 directed by its corporate security department

Housing Bubble and CDO Market – Deutsche Bank was one of the major drivers of the collateralized debt obligation (CDO) market during the housing credit bubble from 2004–2008, creating ~$32,000,000,000 worth. The 2011 US Senate Permanent Select Committee on Investigations report on Wall Street and the Financial Crisis analyzed Deutsche Bank as a ‘case study’ of investment banking involvement in the mortgage bubble, CDO market, credit crunch, and recession. It concluded that even as the market was collapsing in 2007, and its top global CDO trader was deriding the CDO market and betting against some of the mortgage bonds in its CDOs, Deutsche bank continued to churn out bad CDO products to investors.

Deutsche Bank Gambles Bailout Money in Las Vegas – Loses BIG During the financial meltdown of 2008, Deutsche Bank received at least $11.8 billion in US taxpayer-funded bailout money. The banking giant had made some bad credit decisions and took on some enormous risks – but the gamble failed miserably. So what did Deutsche Bank do with the funds provided by the American taxpayers? The Financial Times has the pathetic story:

Deutsche Bank has apparently gambled in the world capital of gambling and it looks like they may lose: Deutsche Bank has risked a total of $4.9 billion, the institute, a newspaper reported in a luxury casinos in Las Vegas – a significant portion of the money will probably never be seen again.

Deutsche Bank convicted in Italy in widening scandal

Deutsche Bank slashes profits to meet sub-prime mortgage legal action costs
German bank sets aside billions of euros to cover litigation linked to US bonds as Libor-rigging investigations continue

Deutsche Bank under US investigation for Iran dealings

Bundesbank investigating Deutsche Bank derivatives trade

The Cypriot Options

Bank Depositor “Haircuts”: Grand “Financial Theft” is the Money Market’s “New Normal”

On March 29, Cyprus Mail said banks opened Thursday. They did so amid calm.

Long lines queued. People waited patiently. A feared stampede didn’t materialize. Whether it’s the calm before the storm remains to be seen.

Looting Cypriot bank accounts reflects the new normal. It set a precedent. It did so for Europe. More on that below.

Wall Street banks operate the same way. So did MF Global.

Grand theft reflects official policy. Money is made the old-fashioned way. It’s stolen. Nothing’s done to stop it. Corrupt politicians and regulators permit it. They do so for benefits they derive.

Scamming investors is commonplace. Goldman Sachs derisively calls them “muppets.”

MF Global’s CEO Jon Corzine formerly headed Goldman Sachs. He looted customer accounts. He did so brazenly.

He used client money to speculate. More went for internal purposes. Much went to cover debt obligations and losses. Top firm executives made millions. They did so at customers’ expense.

Financial reform accomplished nothing. Grand theft is institutionalized. Europe’s no different from America. Anything goes is policy.

Banks deposits were considered safe. No longer. Eurocrats changed things. Euro Group head Jeroen Dijsselbloem explained.

Expect more wealth extracted from depositors. Cyprus established a template. Bank accounts in other troubled economies aren’t safe.

“If there is a risk in a bank, our first question should be ‘Okay, what are you in the bank going to do about that,” he asked? “What can you do to recapitalize yourself?’ ”

“If the bank can’t do it, then we’ll talk to the shareholders and the bondholders. We’ll ask them to contribute in recapitalizing the bank, and if necessary the uninsured deposit holders.”

“The consequences may be that it’s the end of story, and that is an approach that I think, now that we are out of the heat of the crisis, we should take.”

In late February, ECB Executive Board member Benoit Coeure suggested raiding depositor accounts for bail-ins, saying:

“There needs to be an appropriate burden-sharing….because we need to achieve debt sustainability.”

At the time, he suggested not doing it across the board. Whether he meant it isn’t clear.

He added that he doesn’t “pre-judge any instruments because the vocabulary matters, and there are many ways to achieve burden-sharing.”

It bears repeating. Grand theft is official policy. Even bank accounts aren’t safe.

Market analyst Marc Faber believes “governments one day (will) take away 20 – 30% of (his) wealth.” There’s no place to hide.

German Finance Minister Wolfgang Schaeuble proposed a 40% haircut on all deposits. So does IMF head Christine Lagarde.

Cypriot Finance Minister Michalis Sarris said large uninsured Laiki Bank depositors could lose up to 80% of their money. Other European depositors race similar risks. So do people elsewhere.

Some may lose everything. It’s the new normal. Personal savings are up for grabs. Bank bailouts will be borne on the backs of ordinary people.

Think it can’t happen here? Think again. There’s no place to hide. Ellen Brown explained. Banks legally own depositor funds, she said.

“Our money becomes the bank’s, and we become unsecured creditors holding IOUs or promises to pay.”

Banks once repaid depositors on demand. A joint December 10, 2012 FDIC-Bank of England (BOE) paper changed things. Plans to loot customer accounts were made earlier.

The Bank for International Settlements originated them. It’s the privately owned central bank for central bankers. Major ones have final say.

Looting depositor accounts is policy. Cyprus isn’t a one-off. Guaranteed insured deposits don’t matter. They’re up for grabs like all others. It’ll be done clever ways or outright.

Brown said the FCIC-BOE plan involves converting deposits (IOU promises to pay) into bank equity. They get our money. We get bank stock.

Ready cash on demand is gone. Whether it’s ever returned, who knows. Take the money and run looks more than ever like policy. Depositors anywhere may be hung out to dry.

Even gold and silver in safety deposit boxes aren’t safe. Not in America. Homeland Security told banks in writing. It may inspect their contents on demand.

Under Patriot Act provisions, it may seize them with no warrant. It can do so anywhere. Banco de Mattress isn’t safe.

Investor Jim Rogers said “run for the hills now. I’m doing it.” Cyprus is no one-off.

“I want to make sure that I don’t get trapped,” he said. “Think of all the poor souls that just thought they had a simple bank account.”

“Now they find out that they are making a ‘contribution’ to the stability of Cyprus. The gall of these politicians.”

“If you’re going to listen to government, you’re going to go bankrupt very quickly.”

“I, for one, am making sure I don’t have too much money in any one specific bank account anywhere in the world, because now there is a precedent,”

“The IMF has said ‘sure, loot the bank accounts. The EU has said ‘loot the bank accounts, so you can be sure that other countries when problems come, are going to say, ‘Well, it’s condoned by the EU. It’s condoned by the IMF. So let’s do it too.’ ”

The Daily Bell asked “What Is The REAL Euro End Game? It is time to apply the free-market to bank depositors.”

Strategy involves shifting responsibility from taxpayers to depositors. Things ahead won’t be the same. Eurocrats’ policy is wrongheaded. They’re deepening crisis conditions, not alleviating them.

They believe achieving “full-on political union” depends on it. Their well-documented comments reflect it.

“….Cyprus shock and subsequent statements are not only deliberate, but have contributed to spreading uncertainty throughout Europe.”

“Now people no longer trust their banks, contributing to their destabilization.”

“If you have a bank crisis, the last thing you want to do is further destabilize trust and confidence in the system. But Brussels Eurocrats have done just that.”

“Don’t think it was a mistake. If one accepts that line of thinking, the ramifications are serious and deep from a sociopolitical, political and investment standpoint.”

The Economic Collapse blog said global elites plan to loot bank accounts. Don’t be surprised when they steal yours.

“They are already very clearly telling you that they are going to do it.” Your money is theirs. It’s up for grabs on demand.

People put money in banks for safety. Removing it “jeopardize(s) the entire system.” Cyprus is a tip of a giant iceberg. Major global banks are highly leveraged. Many are insolvent.

When their bets pay off, they win. When they don’t, we pay. Wealth confiscation is now policy. Commerzbank chief economist Joerg Kraemer urges a “tax rate of 15 percent on (Italian) financial assets.”

It’s “probably enough to push (government) debt below the critical level of 100 percent of gross domestic product,” he said.

New Zealand Finance Minister Bill English proposed across the board depositor “haircut(s)” in case of major bank failures.

Britain’s Daily Mail headlined “One of the nastiest and most immoral political acts in modern times,” saying:

“People who rob old ladies in the street, or hold up security vans, are branded as thieves.”

“Yet when Germany presides over a heist of billions of pounds from private savers’ Cyprus bank accounts, to ‘save the euro’ for the hundredth time, this is claimed as high statesmanship.”

“It is nothing of the sort….It has struck fear into the hearts of hundreds of millions of European citizens, because it establishes a dire precedent.

If Eurocrats can loot Cyprus, why not anywhere.

“This is the most brutal display since 2008 of how far the euro-committed nations are willing to go to save the tottering single currency.”

“It shows that the zone’s crisis will run and run to the grievous disadvantage” of most everyone.

“Surely the euro cannot long survive by such anti-democratic means. It certainly does not deserve to.”

Graham Summers says “Europe is out of options and out of money.” It’s “totally and completely bust.”

It’s banks are highly leveraged. They can’t raise capital “because no one in their right mind wants to invest in them….”

“European nations are bankrupt because AGAIN no one in their right mind wants to buy their bonds UNLESS they believe they can dump their investments on the ECB at a later date. Who is the greater fool there?”

Europe isn’t fixed because enough capital isn’t there to do it. “Europe and its alleged backstops are out of money. This includes Germany, the ECB, and the mega-bailout funds such as the ESM (European Stability Mechanism).”

The ECB is “chock full of garbage debts.” It’s insolvent. It can print money, “but once the BIG collateral call hits, (it’s) useless because (what’s needed) would implode the system.”

“What could go wrong?” Virtually anything. “It’s only a matter of time before (crisis conditions reach) hyperdrive, and we have an event even worse than 2008.”

Zero Hedge says Russia’s “next in line to restrict cash transactions. (They’re) taking a page from the Europeans’ book.”

Russia Beyond the Headlines said “Russia to ban cash transactions over $10,000.” It plans to “slash the amount of cash in domestic trade.”

It may do so by 2015. It’s “expected to boost” bank reserves “and put a damper on (its) shadow economy. However, the middle class will most likely end up having to pay the price for the scheme.”

According to Zero Hedge, leaders realize that “limits of fiscal and monetary policy have been reached.”

They’re “now changing rules, limiting freedom, and (instituting) outright confiscation (as) the only way to maintain a status quo.”

Doing so reflects predatory capitalism’s failure. It’s a house of cards. It’s heading perhaps for eventual collapse. At risk is whether it takes humanity with it when it does.

Stephen Lendman lives in Chicago. He can be reached at lendmanstephen@sbcglobal.net.

His new book is titled “Banker Occupation: Waging Financial War on Humanity.”

http://www.claritypress.com/LendmanII.html
By Stephen Lendman
http://sjlendman.blogspot.com

His new book is titled “How Wall Street Fleeces America: Privatized Banking, Government Collusion and Class War”