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Cyprus: Bailouts? Been there. Bank runs? Done that. But the European rescue package for this Mediterranean island has introduced a cruel twist: Making depositors pay. All depositors. The proposed one-time "stability levy" would not only take 9.9% out of uninsured deposits above 100,000 euros, but also 6.75% of insured deposits below that threshold, no matter how small the savings. This detail sparked panic, as Cypriots queued up at ATMs over the weekend to withdraw as much cash as they could (the "stability levy" was helpfully announced at the beginning of a three-day religious holiday on the island), and outrage. The FT's Wolfgang Munchau calls the plan "a wealth tax with hardly any progression. … If one wanted to feed the political mood of insurrection in southern Europe, this was the way to do it. The long-term political damage of this agreement is going to be huge. In the short term, the danger consists of a generalised bank run, not just in Cyprus" but across the continent. It would be rational for depositors in countries with shaky finances, such as Italy, Spain or Portugal, to withdraw their savings because "the Cyprus rescue has shown that the creditor nations will insist from now that any bank rescue must be co-funded by depositors," Munchau writes. One Cyprus bank employee told the U.K.'s Guardian newspaper, "There's a feeling they're trying this on us before they do it elsewhere." As a consolation prize of sorts, depositors in Cyprus will get equity in their banks. Why are they being "bailed in" rather than bank bondholders? Because there aren't any bank bondholders, or hardly any; Cypriot banks have very little senior debt. (Though those few bondholders "aren't being touched," apparently because "the German government [influential in the EU] was determined that the Cypriot rescue should not be seen by German taxpayers as in effect rescuing Russian money launderers with deposits in Cyprus," writes the BBC's Robert Peston.) This brings us to the broader significance of Cyprus, aside from the usual contagion stuff: The importance of long-term senior debt in a bank's capital structure. Former FDIC chairman Sheila Bair has called attention to the declining issuance of such debt by U.S. banks relative to deposits and other short-term borrowings. Among other problems, she wrote in Fortune in December, "Replacing long-term debt with deposits … increases the government's exposure if the banks get into trouble again, shifting risk from private bondholders to the government." In a comment letter to the Fed almost exactly a year ago, Bair (along with MIT's Simon Johnson, Stanford University's Anat Admati and Wharton's Richard J. Herring) called for a "mandatory proportion of unsecured debt" in a bank holding company's funding mix to help absorb losses. The Cyprus debacle may support this school's argument. Meantime, Cyprus' government is scrambling to renegotiate the deal with Brussels to shift more of the burden to the larger depositors as financial markets freak out.
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Senators Whale on JPM: Friday's drama-filled, all-day hearing of the Permanent Subcommittee on Investigations revealed that JPMorgan executives, including CEO Jamie Dimon, bullied regulators and kept them in the dark about the London Whale's trading positions before the bet soured. Now, the FT reports, "Senate aides are looking for inconsistencies in statements made by" Dimon, who wasn't at the hearing, and former CFO Doug Braunstein, who was, "as they consider whether to make referrals to securities regulators and the Justice Department." And oops! Subcommittee chairman Carl Levin let slip during the hearing that in July the OCC had downgraded its confidential rating of JPMorgan's management — the "m" in CAMELS. Ask any bank examiner: The first rule of CAMELS is you do not talk about CAMELS.
Wall Street Journal
The paper profiles Fed Governor Jeremy Stein, who "has grabbed the attention of investors, traders and his own Fed colleagues by publicly airing concerns about overheating in some sectors of the credit markets" as low interest rates cause investors to "reach for yield."
"Number of Cases Filed by SEC Slows": "The agency is likely to fall short this fiscal year of its record-breaking number of enforcement actions in the previous two years."
"A Lot More Recovery Before Housing Bubble Redux," predicts the "Ahead of the Tape" column. The headline in the print edition goes further out on a limb: "No Housing-Bubble Redux Any Time Soon." Famous last words?
We usually skip Saturday personal finance columns, but this one's important for the banking audience: Some are questioning "whether assets held in custody are 100% secure if a bank goes bust." A lawyer who has researched the question warns investors that "bank custody should be regarded as 'another form of counterparty risk, and an unsecured one at that.'"
Financial Times
"Regulation must not curb innovation — New products may have helped fuel the financial crisis, but R&D has its place"
New York Times
"Prominent state attorneys general are calling on President Obama to fire the acting director of the Federal Housing Finance Agency."
