We have had a lot of interesting news the past several days out of Cyprus. It all started March 14, when Cyprus became the fifth country to receive a bailout from the European Union (EU). The interesting aspect of this is that it became a “bail in” instead of a bailout.
A bail-in takes place before a bankruptcy, and generally involves the losses being imposed on bondholders. This has rarely taken place throughout the euro crisis. (Remember a while back, Greek bondholders took a haircut on the bond value at one point in the Greece
meltdown.) In fact, the government (taxpayers) consistently makes the private sector whole.
This bank rescue in Cyprus is no exception, except this time there is a bail-in, not of bondholders but of depositors. This is a direct contradiction to the usual legal claims on the capital structure. Think about this: Instead of the bondholders and/or stockholders shouldering the risk of failure, the depositors are paying for the rescue!
Obviously, the powers that be knew that this would be a problem and called for a bank
holiday for March 17. This quickly became such a major issue with people trying to get
their money out of the banks via ATMs, that the bank holiday was extended to March 28 as
of this writing.
Taking money out of a depositor’s account without any consideration other than that the money is there is a direct assault on individual property rights and every one of us that
lives in the developed world should pay attention. If this should actually go through, not only would this become a serious contagion of panic across the rest of the EU but it would spread to other countries as well.
Why would anyone put money into a bank account if at any given time the government could reach in and confiscate whatever amount it wanted without due process, simply because the money is there?
Equally disturbing are three other stories or situations related to this. The first is that
the American Bankers Association this week came out with a statement simply stating
that the situation in Cyprus has “no implication for depositors in U.S. institutions. Depositors in U.S. banks are insured up to $250,000 and no insured depositor has ever lost
money in a bank failure.”
The second was an article from The Wall Street Journal that states that 57 percent of Americans have less than $25,000 in savings and investments, thereby freeing those
unwealthy individuals from being subjected to the same confiscation threshold as Cypriots.
And finally, the fact that New Zealand has legislation in process, namely the Open Bank Resolution, that says that all depositors of a failing bank will have their savings reduced to fund big bank bailouts.
Could it happen here? Doubtful.
But then again, I thought it was very doubtful that we would have national health care and go to a onepayer system, and yet here we are.
We do have the Federal Deposit Insurance Corporation (FDIC). However, the FDIC has $25 billion in reserves against $3 trillion in deposits, so we should feel very comfortable
about that.
I am at the stage of my life where I rarely need a haircut and when I do, it’s a five minute ordeal. But when it comes to my deposits getting a haircut, I am at a stage in my life where it is a much larger deal than when I was 25. I am not going to withdraw all of my money out of the bank (yet), but I am going to stay diligent. If I think a late-night haircut is coming our way, I will act and act quickly.
Gary L. Rathbun is the president and CEO of Private Wealth Consultants, LTD. He can be heard every day on 1370 WSPD at 4:06 p.m. on “After the Bell,” every day on the Afternoon Drive, and every Tuesday, Wednesday and Thursday evening at 6 throughout
Northern Ohio on “Eye on Your Money.” He can be reached at (419) 842-0334 or email him at garyrathbun@privatewealthconsultants.com.
