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Willie Suttonomics


I am sure that the Eurozone finance ministers have never heard of Willie Sutton. But they are engaging now in Willie Suttonomics.

Willie Sutton was the bank robber from the early part of the 20th century who, when asked why he robbed banks, reputedly answered “because that’s where the money is!” This weekend, the Troika agreed to extend a critical loan to Cyprus in order to stave off a default for the small Eurozone nation. The €10bln loan was extended on condition that bank depositors be levied 6.75% or 9.9% of their deposits (the lesser amount if under €100,000) as part of the solution, and the new president of Cyprus said he accepted because he was given no choice.

I fail to see how this differs from what Willie Sutton did, except that Sutton at least went to prison – multiple times – for the crime. You went into the bank on Thursday and your deposits read €20,000 as you were saving for a new car, or a house, or college; on Monday, you have €18,650. It is being called, disingenuously, a “tax,” but considering that no Cypriot body approved the “tax” it is hard to see how that appellation fits. The money vanished from the vault with no warning. That seems more like a bank robber’s job…except that ordinarily, when a bank is robbed the depositors are protected. The depositors would have been better off if the money had been stolen by Willie Sutton!

My son, who is 9 years old, saw it the same way when I explained the basic facts of what happened to the depositors. He said “that sounds like something Lex Luthor would do.” From the mouths of children…and I don’t judge him wrong on this.

On Monday, I imagine that markets will try and behave as if this “puts the crisis behind us” again. But also on Monday, I imagine that every corporate Treasurer who has money in a bank in Europe will be trying to diversify those deposits to other jurisdictions. Perhaps, if I am such a treasurer, I will pull money from Italy to put into Germany or perhaps I will put it into UK or US banks. But one thing I certainly will not do is leave all of it in a bank in Italy, or Portugal, or Hungary, or Spain.

It is possible that nothing will happen, or at least not right away as stunned European depositors wait to find out if it’s really true, and some dwell in denial. But it’s also possible that we could see the mother of all bank runs, because it’s no longer necessary for depositors to stand in long lines to withdraw their cash, as happened in every major banking crisis that happened before deposit insurance. This is exactly the opposite of deposit insurance – instead of the government protecting depositors, the government is opening the vault for the robbers.

Now, it’s not completely approved as of this writing. According to Reuters, the Cypriot parliament will vote on Sunday whether to mug depositors for the levy. But, since the alternative is that Cyprus will have to default on Tuesday, the odds are good that either they’ll approve the levy (which banks have already sequestered, without any law to tell them to do so), or there will be some 11th hour brinkmanship with the Troika and Cyprus on Monday. But by Tuesday, you will either have the disorderly default of a Eurozone member, or confiscation of deposits held in banks of a Eurozone country. Now that’s a Hobson’s choice if ever there was one.

Here are some stories elsewhere about the crazy Troika scheme: here, here, and here. And I rarely cite Zerohedge but here is a good summary of some quotes from well-placed individuals in Europe. Comfortingly, the response so far has been shock and anger. Most observers are, rightly, dismissing the soothing statements that this action is an “exception.” Yes, it is – a confiscatory exception, and one that was completely random and unforeseeable by the depositors. Does it make one feel better that the crazy man on the street just set his neighbor’s car on fire, if he says “but it’s just his car – no one else’s.” No, because you know he’s a crazy man, and now you know there is nothing he won’t do. Random injustice is worse than systematic injustice.

Hold on to your assets, folks – I have no idea what happens on Monday but I have a feeling it will require more liquidity. But then, doesn’t everything these days?

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  1. Scott
    March 16, 2013 at 10:55 pm

    Working late tonight? Thanks for the heads up. Great article as always.

  2. Mark B. Spiegel
    March 16, 2013 at 11:02 pm

    I’d love to know what’s happening RIGHT NOW with Spanish and Italian ATM machines (5 AM Sunday morning over there)… Wanna bet they’re all empty?

  3. mark.althauser.1@facebook.com
    March 17, 2013 at 5:15 am

    Well spoken. This is definitely one of the most brazen confiscations of wealth to date. Pity the poor investor who believed in safe deposits in banks. Seems very unfair. Of course this puts the greater burden on the small guy. Can’t rustle the feathers of the wealthy. Could never accept a blanket tax on wealth. Too hard to collect in a crises and political suicide. But as the power of the middle and lower class consolidates we will see confiscation and redistribution of wealth from the wealthy through general wealth taxes and estate taxes. Not just overseas but here a home. Inflating our way out of debt just won’t pack it.
    IMO. M
    Mark

    • Mark B. Spiegel
      March 17, 2013 at 10:42 am

      Mark,

      Clearly, the losses here should be first taken by the creditors (and shareholders, if there are any) of those banks– privatized gains and socialized losses are bullshit. However in this case I bet that those creditors are mostly French and Germans so we thus run into the golden rule: he who has the gold makes the rules. (Ironically, that may soon be true LITERALLY.)

      • March 17, 2013 at 1:24 pm

        Like! Is there a “like” button? There should be.

        ________________________________

  4. Andy
    March 17, 2013 at 5:28 am

    In Cyprus things still are a mess
    The Troika said, “Here’s what we’ll bless”
    The bondholders trust
    To keep it we must
    Deposits get 10% less!

  5. Eric
    March 17, 2013 at 11:40 am

    Cyprus, per se, hasn’t really been part of my thinking on this, but I’ve been wondering for over a year now why ANYONE would keep money in a spanish/greek/italian/whatever bank? what’s the upside compared to just putting it a german bank? it should only take a tiny bit of perceived risk, i would think, to create bank runs in this situation, because the cost of running is so low.

  6. Jim H.
    March 17, 2013 at 5:49 pm

    Now, reports say, the EURidiots are tweaking the take … maybe 3% for the little fish, and 12.5% for the swaggering hundred-thousandnaires.

    Trouble is, they can’t put the toothpaste back in the tube. As someone pointed out, even if they now EXEMPT small accounts from the levy, depositors will clean them out quickly before the thieves change their minds, or take a second run at them.

    The EU has gone Argentine on us — corralito time! Not as fun as Miller time.

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