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Last week I posed the question "Is The Cypriot Government Crazy Or Do They Really Fear Bankers That Much?" The country even considering imposing loses on bank depositors over creditors seemed absurd at best. Even the faux consolation of compensating holders of pure liquidity (or at least what was formerly believed to be pure liquidity - banks have been closed for a week now and ATM withdrawals have been limited to 100 euro per day due to the capital controls I clearly warned of last year) was a scheme born out of lunacy, and unlikely to compensate anyone for anything. Well, this is the latest from Bloomberg:

The revised accord spares bank accounts below the insured limit of 100,000 euros.

I was curious to see how they could impose losses on insured accounts in the first place, after all the accounts were insured basically (through implied backstop) by the same entities (EU/EC/ECB) that were attempting to force the loss, no?

It imposes losses that two EU officials said would be no more than 40 percent on uninsured depositors at Bank of Cyprus Plc, the largest bank, which will take over the viable assets of Cyprus Popular Bank Pcl (CPB), the second biggest.

Losses of 40% are outrageous, particularly considering this is the most liquid and presumably the most sacrosanct tier of the capital structure. How can one assume that this will not have extremely negative repercussions?

Cyprus Popular Bank, 84 percent owned by the government, will be wound down. Those who will be largely wiped out include uninsured depositors and bondholders, including senior creditors. Senior bondholders will also contribute to the recapitalization of Bank of Cyprus.

Here we see the bondholders, both junior and senior taking losses. This is interesting, like in Ireland, all of the market risk takers are assuming losses, many of these losses are absolute. Of even greater interest is what happens when the depositors are added into the fray. Now, junior and senior bondholders, as well as depositors are on guard. The ONLY likely scenario to occur when these banks re-open is capital flight, capital controls or not!

Banks in Cyprus, which have been shut for the past week, will remain closed until further notice. Lawmakers in Cyprus voted last week to impose capital controls to prevent a run on deposits when they reopen. “This solution we reached tonight doesn’t have the downsides that the solution of last week did,” said Dutch Finance Minister Jeroen Dijsselbloem, chairman of the euro ministers’ panel.

Yeah, they can try to prevent the run on deposits, and even with some limited success, but now that you have wiped out (or nearly wiped out) junior and senior creditors as well as depositors, you have a lot more holes to plug in that liquidity dam, don't you? Again, from The Anatomy of a European Bank Run!

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Using this European bank as a proxy for Bear Stearns in January of 2008, another bank collapse situation that I warned of months in advance (see Is this the Breaking of the Bear?). The tall stalk represents the liabilities behind the bank's illiquid level 2 and level 3 assets (including the ill fated mortgage products). Equity is destroyed as the assets leveraged through the use of these liabilities are nearly halved in value, leaving mostly liabilities. The maroon stalk represents the extreme risk posed by capital flight through a depositor run, which Cypriot officials feel they have controlled through capital controls, still there is the excessive reliance on very short term liabilities to fund very long term and illiquid assets that have depreciated in price. Wait, there's more!

The green represents the unseen canary in the coal mine, and the reason why Bear Stearns and Lehman ultimately collapsed. As excerpted from "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style":

The modern central banking system has proven resilient enough to fortify banks against depositor runs, as was recently exemplified in the recent depositor runs on UK, Irish, Portuguese and Greek banks – most of which received relatively little fanfare. Where the risk truly lies in today’s fiat/fractional reserve banking system is the run on counterparties. Today’s global fractional reserve bank get’s more financing from institutional counterparties than any other source save its short term depositors.  In cases of the perception of extreme risk, these counterparties are prone to pull funding are request overcollateralization for said funding. This is what precipitated the collapse of Bear Stearns and Lehman Brothers, the pulling of liquidity by skittish counterparties, and the excessive capital/collateralization calls by other counterparties. Keep in mind that as some counterparties and/or depositors pull liquidity, covenants are tripped that often demand additional capital/collateral/ liquidity be put up by the remaining counterparties, thus daisy-chaining into a modern day run on the bank!

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I'm sure many of you may be asking yourselves, "Well, how likely is this counterparty run to happen today? Well, with the bondholders getting fully wiped out and the primary rung on the capital structure remaining simply because it is forcibly locked in against its will - at least whats remained if it since uninsured depositors face losses of up to 40%, if it were your money opposing Cypriot banks as counterparty, wouldn't it be pretty much guaranteed. This was clearly demarcated in my piece last week,Liar, Liar Banking System On Fire! Watch As I Spit Fact That Burns Down The Sham Formerly Know As The EU Banking System.

And back to that Bloomberg article...

On the creditors’ side, parliaments in Germany, Finland and the Netherlands may hold votes to approve loans to Cyprus from the European Stability Mechanism, the 500 billion-euro rescue fund.

Klaus Regling, managing director of the rescue fund, said approval by creditor governments in mid-April will pave the way for the first payouts to Cyprus in early May.

This is interesting. The first payments are due out in early May, and the capital will flee from these banks early TUESDAY morning, or as soon as the bank holiday is over and the banks reopen. Damn, that was a good plan if I ever heard one!!!

Lagarde said she will recommend that the IMF provide loans, without giving a figure. “There might have been a bit of friction here and there,” she said.

And on top of it, the IMF hasn't even guaranteed a loan amount. The Cyprus banks gutted the confidence of its banking system and robbed its wealthiest depositors for an IOU of an unspecified amount and time frame. Damn, that was a good plan if I ever heard one!!!

The next step lies with the ECB, which needs to keep funds flowing to solvent Cypriot banks to enable them to open. While Draghi and Executive Board member Joerg Asmussen left Brussels without commenting to reporters, a statement by the ministers said the bank will channel liquidity to the Bank of Cyprus “in line with applicable rules.”

... The effort to go after insured deposits, while abandoned, may have harmful repercussions, said Moody’s in a note early today. “Policy makers’ recent decisions raise the risk of deposit outflows, capital flight, increased bank and sovereign funding costs and broader financial-market dislocation throughout the euro area in the future,” Moody’s said.

No shit, Sherlock! And it is uncanny insight such as this that has spawned documentaries such as this....

In closing, I will also like to add that the 100k euro limit will likely hit the small businesses and middle class ex-pat community considerably harder than it hits the Russian oligarchs 0who are wealthy enough to have some geographic diversification. The small businesses are the ones who employ the vast amount of the population (them, and the now extra broke government, that is). Wiping out 40% of a small to medium business's liquid assets over 100k is tantamount to corporate genocide. Add to that the extreme taxation to come from attempting to pay back the Troika and the guaranteed spike in unemployment stemming from all of those broken companies, the breakdown economic activity from those missing businesses and the near guaranteed counterparty run whenever those banks open up again (if ever), and you have a austerity-imposed depression on your hands. This is a depression that's currently occurring in Greece and was forecast 3 years ago, see The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious! That's actually good news compared to what's likely to happen to those other countries' bank depositors who feel that their liquid assets, at one time thought to be actually liquid and sacrosanct, are at risk like those of the Cyrprians. 

Ready! Set! Bank Run!!!

Cyprus contagion raw

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On Monday, 25 June 2012 I penned "No Capital Controls In The EMU? Liar Liar Pants On Fire". Let me excerpt the first paragraph so as to bring those who have not read it up to speed before we jump into current events...

I have outlined the upcoming EU bank runs up to two years in advance (see the many links below). Whenever one expects a bank run, the first things TPTB do is institute capital controls to stem said bank run - which of course makes the bank run that much more necessary to get your capital out - wash, rinse, repeat! Remember, by treaty, no country in the EMU may use capital controls without automatically being removed from the union. Well, do you believe that to be fact that will last? Yeah, I don't either. Simply watch as the money bleeds from the banks and the bumbletrons attempt to staunch the flow using mechanisms that will simply exacerbate the flow. Even more incredible is the fact that even to this date, with the existence of publications such as BoomBustBlog, entire nations as well as their financial advisors, leaders, regulators and politictians STILL DO NOT EVEN COMPREHEND the nature of the modern bank run. You cannot stem the tide with capital controls, you can only exacerbate it. 

Now, As Predicted Last Year, The French and the Greeks Are In A Race For The Biggest Bank Run!

 On Saturday, 23 July 2011 I penned "The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!" wherein I went through both the motive and the mechanism of a European bank run, focusing on Greece and France as impetus.

Okay, I'm writing this on 3/23/2013, referring to the events of yesterday. I apologize to my paying subscribers for being 9 months and a few miles/kilometers off, but as the more intellectually capacitive among you know, this stuff is not an exact science. Now, yesterday's headlines...

Cyprus passes laws for capital controls

Lawmakers in Cyprus passed legislation to impose capital controls on its banks and create a "solidarity fund" to pool state assets, according to media reports late Friday. The measures will help fulfill conditions for Cyprus to get a euro-zone bailout. With a Monday deadline, Cypriot lawmakers still need to vote on measures needed to restructure banks in Cyprus and possibly place levies on deposits.

I appeared on the Max Keiser show in London yesterday, and broke down the Cyprus issue as simply as could be done. In essence, "What is a bank???!!!"

In "The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!" I detailed for my readers and subscribers the mechanics of the modern day bank run, particular as I see (saw) it occurring in Europe.

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You see, the problem with this bank holiday thing is that the real damaging bank run will not be staunced by the conventional bank holidays, et. al. because it is a counterparty run that will cause the damage, not depositors. TPTB in Europe don't have the chops to stem this one, at least not from what I've seen. As for how that institutional bank run thing works, we excerpt "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style":

The modern central banking system has proven resilient enough to fortify banks against depositor runs, as was recently exemplified in the recent depositor runs on UK, Irish, Portuguese and Greek banks – most of which received relatively little fanfare. Where the risk truly lies in today’s fiat/fractional reserve banking system is the run on counterparties. Today’s global fractional reserve bank get’s more financing from institutional counterparties than any other source save its short term depositors. In cases of the perception of extreme risk, these counterparties are prone to pull funding are request overcollateralization for said funding. This is what precipitated the collapse of Bear Stearns and Lehman Brothers, the pulling of liquidity by skittish counterparties, and the excessive capital/collateralization calls by other counterparties. Keep in mind that as some counterparties and/or depositors pull liquidity, covenants are tripped that often demand additional capital/collateral/ liquidity be put up by the remaining counterparties, thus daisy-chaining into a modern day run on the bank!

Make no mistake - modern day bank runs are now caused by institutions!

And Yes!!! The fodder for bank rungs are ALL OVER THE EUROPEAN SPACE!!!!

Those that follow me know that I have been warning on Europe and its banking system years before the sell side and mainstream financial media (reference the Pan-European Sovereign Debt Crisis series). 

A reader has convinced me to consult with him on a specific situation, regarding overseas monies and the (lack of) safety of those funds, which prompted me to dig up the Sovereign Contagion Model that we developed in 2010. Long story short (if it's not already too late), my next extensive series of posts on this topic will likely spark bank runs throughout the periphery and the core of Europe, for much of the assets that depositors think are there are simply not, and I proffer ample proof for all to see. For the banks, it's too late to pull the evidence down from your various web sites, for I already have it safely stored and distributed. Keep in mind, once the fissures form in one section of the already weakeed EU, cracks widen in the other sections... 

Description: foreign claims of PIIGS

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Last month I opined on The Truth About Facebook That No Media Outlet Or Analyst Has Bothered To Notice. As its shares marched back up towards its ridiculous IPO price that I warned the entire year previous was basically a marketing/hype scam engineered to confiscate one's hard earned capital, sell side analysts and mainstream media types ignored basic yet blatant cracks in this media darlings armor yet again. For one, we know this high growth company is already experiencing negative growth in active users...

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We also know that Google has essentially caught up to Facebook as a social media platform, reference I Don't Think Facebook Investors Will "Like" This!!! Google Has Already Caught Up In Terms Of Active Users. Despite these pertinent (and quite negative) facts, FB shares have been on the rise, although recently have last some of their froth. Why did the shares pop? Irrational exuberance! The sell side marketing analysis has it that Facebook is perfecting the marketing and mobile business model, and as a result is able to monetize its massive, yet shrinking user base. 

The counter to this argument is basically that it's not true. For one, the shrinking user base is real. The school age youth, once a mainstay of Facebook, is moving on. Simply ask the one's that you know. More importantly, it's ad model is basically a Sham! Any sell side analyst who attempted to value this company based on ad revenues without actually trying out its ad system is not worth postage used to send his bonus check. I tried the ad system out. While the click through rates were actually about 2/3rds that of Google's comparable ad model, the actual sales from the ads were less than abysmal - and this is for a rather interesting product. Even worse, the delivery of the ads proved to be highly intrusive, causing a significant and material amount of negative feedback from the Facebook community. Here are some examples of the feedback received from the so-called Facebook 'ads" that I paid for...

• "Hey, I don't like this post. Please remove it."
• "Please remove me from your list"
• "I am getting unsubscribed advertisements and friend request that say I approved them"

There's actually a lot more than that, this just what was sitting in my inbox before it was deleted. Here's a screenshot of a conversation I had with on of the recipients of the so-called Facebook ads which are essentially paid for placements on somebody's wall...

Facebook ad failure

"I am getting... friend request that say I approved them"??? Does that sound like a sustainable business model to you? This is simply Grouponzi 2.0, just on a much larger scale!

The updated valuation for Facebook (which has actually has an increase in terms of value now that we have more information to deal with) is available to download for all paying subscribers (FB Q4-2012 Analysis & Valuation Note - update with per share valuation). I'm available to discuss this with professional and institutional subscribers via phone or Google+. Click here to subscribe or upgrade.

picsay-1363698572Following yesterday's highly analytical rant on Cypriotic bank nonsense, I present an interesting analysis on the value of the gas assets pledged to those who's bank accounts may be clipped by the Cypriotic government/ECB. For those who don't know, the proposal was to compensate those who were subject to the tax/levy on their bank accounts with bonds linked to the output of Cyprus natural gas mines. Of course, the first question anyone should ask is "Why not simply pledge the gas assets directly to the ECB vs stealing from the bank depositors?" I think we can all ascertain the answer to that question. I was tweeted an analyst by Anthony Alfidi wherein he delved into the fundamental value of the exchange. I would like to reproduce a portion of it here. The balance can be found on his site.

Cyprus Bank Deposit Levy and Natural Gas Bonds