The Truth Behind the Cyprus Bank Crisis:

The Real Reason the Bank “Tax” Was Proposed, Only to be Summarily Rejected by the
Cyprus Government
Where We Go From Here

Just when we decided to step up our efforts to find a solution to the biggest economic and financial crisis of our lifetimes, Cyprus leaped from financial obscurity into the headlines this past weekend. We’ll try to answer the question of why the IMF’s decision to “tax” bank accounts in Cyprus to save their banking system has now been summarily rejected by the Cypriot government. As is usually the case in situations like this, we had to get past the media’s explanations. What we found was an old friend – quantitative easing – and an old enemy – the Soviet Union – hovering over this crisis, directing the drama in ways most of us might have completely missed were it not for the efforts of an individual you’ll meet in the course of this report.

The first thing you need to know is that what was proposed wasn’t a tax at all. The use of the term “tax” is deceitful, a form of lie intended to distort what is really going on here. The proposal of a “tax” on individual bank depositor accounts was simply an attempt at “legal” confiscation. To put it more bluntly, the IMF proposal would have stolen money from private accounts, pure an simple. To call it a “tax” was a purposeful manipulation of language – again, a lie. Anyone living in a civil society functioning under the rule of law who understands this would naturally recoil at the attempt by the IMF and the Cypriot government to pervert language in order to accomplish their objective of saving the banking system of Cyprus.

It’s important to right now set the record straight and resist the endless repetitions by not only the source of the lie – the IMF (International Monetary Fund) as well as the Cypriot government – but also by the media. (I leave it up to you to decide whether the media spreads this falsehood because they are ignorant, perhaps culpably so, or actually complicit in perpetrating this lie, and, if so, why they might do that.) Now, let’s move on to our key topics:

• The Real Reason the “Tax” Was Proposed, and
• Why the Cyprus Government Rejected It

Later, we’ll also consider:

• Three Lessons We All Must Learn from the Cyprus Disaster
• Why the Cyprus Disaster Will Prove to be Bigger and More Important Than Most People Realize

Before we begin, let’s remember that we started this year searching for a solution to our current crisis, and we intend to continue that search. But even in the midst of proposing reasons (and there are many) for hope, we flatly told you:

Why the “Tax” Was Proposed in the First Place

The banks in Cyprus – like so many other banks – needed to be bailed out. The powers-that-be feared that if one or more Cypriot banks failed, it would set off a chain reaction across the Euro zone – the same reason they’ve bailed out other institutions. But this time, something new would be tried. Instead of pumping money into the banks, as has been done so many other times in Europe and in the U.S., this time the depositors would “chip in” to save the banks – without the depositor’s consent, of course. But the question arises: why try something new if the old bailout methods have worked just fine so far?

On the face of it, doesn’t this “new” approach strike you as evil? And who in their right mind would put up with this? Wouldn’t you be up in arms if the government announced it was taking 10% of your bank account? Imagine if you had decided to sacrifice present consumption and save your money, then, rather than invest the savings in speculative securities, you park it in the bank, where – you were promised – your money was safe. Not only was it safe from loss of principal due to market gyrations, but your principal was insured by the government – in the case of countries in the Euro zone, up to 100,000 Euros. Suppose these savings were intended to buy a home, or pay for college, or, indeed, this was all the money you had in the world. And then, all of a sudden, you’re told your government is going to take some of your money – just like that, with no notice, and no way to get your money out of the account before they did it. That’s exactly what occurred last week. After close of business on Friday, the government of Cyprus announced they were taking anywhere from 6.75% to 10% of the money from every deposit account at every bank on the island of Cyprus. The banks were immediately closed and would remain closed for as long as the government needed to accomplish its plan. While ATMs were working at some banks, the percentage that the government was planning to take was already electronically frozen. The only thing people at the ATMs could do is get some of whatever was left over.

Why did the authorities believe people would sit still for this? We need to dig a little deeper.

To do that, think of Cyprus as a kind of laboratory set up for government bureaucrats to run an experiment. Rather than use the old treatment for failing banks, i.e. the “bail-out,” they concocted a new treatment: the “bail-in.” It’s not really the opposite of a bailout but it certainly sounds better than “confiscation” or “theft.” Here’s a quick and dirty summary of the difference between bail-outs and bail-ins.

In a bail-out of banks, what’s being bailed out is bad loans. Government’s central banks create money out of nothing and with that newly created money they “buy” the bad loans from the bank, thereby removing the toxic junk and replacing it with fresh cash. Voila! The bank’s balance sheet looks healthy again. (For now, we’ll set aside what happens to the toxic junk the central banks “buy.”)

In a bail-in, it would seem the plan is to confiscate money from the depositors and move the money from the individual depositor accounts to the bank’s balance sheet. With more cash, the bank’s balance sheet looks more healthy, and the bank is no longer in danger of failing.

In the case of the banks on Cyprus, the logic (such as it is) seemed to be that they need to be bailed-out by a bail-in. Make sense? No?

Apparently the Cypriots didn’t think so either, and so they took to the streets, resulting in a reversal by the government. However, having closed their doors before letting their customers know they would be stealing their money, those doors remain closed as we go to press. The banks continue to teeter on the edge of collapse, and a solution must be found. It’s just that now (apparently) the solution won’t be to steal money from the banks’ customers.

So the Cyprus government caved in to its citizens all because their citizens spoke out by taking to the streets. Yes? Not so fast. The protests on Cyprus can’t hold a candle to the protests precipitated by the IMF’s other bail-out programs. In fact, recent outbreaks in Bulgaria and the threat of continued outbreaks in Italy remind us that, despite a general lull, people remain edgy due to the austerity imposed by those bailout programs. And in the face of such protests, the IMF and other local governments have so far held the line. So why didn’t Cyprus’s government hold the line as well? Couldn’t they have somehow either forced or finessed their citizens to accept the bail-in?

For example, think back to 2007-2008, when our current crisis struck its first blow in dramatic fashion. Americans, when faced with the initial government bail-out of big banks, dug in their heels. “We the people” rose up and made it clear that we would not re-elect anyone who voted for that first trillion-dollar package. (This was way back when such bailouts seemed outrageous. Seems so long ago, doesn’t it?) It was only the claim by then-Secretary of the Treasury Henry Paulson that the world’s financial system would collapse – an assertion backed up by then-President George Bush – that people thought twice about the scheme. Having sown a seed of doubt, the government crouched at the ready, the people blinked, and the government quickly pounced. Thus we had our first massive bail out.

People who instinctively understood that the use of the public purse to bail out private institutions was simply transferring money from the pockets of ordinary people into the pockets of bankers were somehow convinced they simply didn’t “get it,” i.e., understand the big picture. The threat of collapse – real or imagined – caused common sense to give way to fear. Of course, we’ll never know whether or not collapse really was imminent, but it’s all water under the bridge now. After the first bail-out passed, the rest were a lot easier. Now the concept of banks bailed out with taxpayer money creates hardly a peep amongst the “sheeple.” It’s only when austerity measures are imposed that the crowds take to the streets.

Which brings us right back to wondering why the “bail-in” was deemed necessary, and why the government backed down. They clearly could have followed the previous script and avoided all – or at least most – of the drama through some combination of lying and fear. In digging around for answers, I came across some insightful commentary from James Sinclair that I believe throws the brightest light on this dark mystery. (He’s that “individual” we made reference to in the first paragraph.)

Now for the Real Reason

The bail-in was, it seems, an attempt to shift the strategy of dealing with impending bank failures away from quantitative easing. Remember that quantitative easing (QE) is another name for the central bank policy of providing “liquidity” (also known as “printing money”) when banks need it. Lately central banks’ money printing has been increasing to such an extent that the simple term “quantitative easing” wasn’t sufficient to explain what has been going on. And so the media had to ratchet QE up to“QE to Infinity.” And while this new way of describing QE instantly spread faster than last winter’s flu epidemic, hardly one in ten thousand people had any idea that its origin was none other than our friend Mr. Sinclair.

For the last several years, he has predicted that “QE to Infinity” was the only possible destination for central bank money printing schemes designed to “save” our massively debt-laden financial system. His analysis was and remains compelling. However, the media grabbed hold of it for other reasons. When the U.S. Federal Reserve announced that its most recent round of quantitative easing would have no limits imposed on it regarding either the amount money printed or the time it would take to achieve their objectives (as opposed to previous limited rounds of QE) the press had found in Sinclair’s monicker just the sort of punchy, spicy phrase they needed to hold their readers’ hopelessly short attention spans for just a few more precious moments.

In any case, “QE to Infinity” holds the clue that reveals the real reason for the attempted experiment with this Cyprus bank “tax.” The concern would seem to be that the reality of QE in its infinite form eventually sinks in. Combine QE with the increasing fiscal irresponsibility of governments continuing to run huge deficits and pile up mounds of new borrowing on a gigantic mountain of debt already beyond the comprehension of any rational mind. At some point, the sleeping “sheeple” might wake up to the fact that these policies cannot end happily. They might understand that the constant debasing of their currency can only end with their money losing value until – at some point – it finally becomes essentially worthless.

And so the “bail-in” was intended to preclude, or at least delay, such a realization. Using depositors’ money to address the bad debts of these banks rather than relying on QE to create the money to buy the debts, would have signaled that QE would possibly not go to infinity after all. The “sheeple” would then go back to sleep. The government and their bankers could go on with business as usual.

Instead the government reversed itself and announced that there would be no “tax” on bank customer money. They abandoned the “bail-in.” Why?

Why the Cyprus Government Rejected the “Bail-in”

We’ve already discounted the impact of their citizens protests. Governments are quite skilled at manipulating their citizens’ when they really need to, as we saw in the early bailouts. And that’s why I believe that if they really, REALLY wanted to go with the bail-in, they would have found some way to make it work.

So it’s not the people’s protests that forced the government’s hand here. To understand what did, we need to leave our old friend QE and turn to that old enemy we mentioned as we began today’s investigation: the Soviet Union – more specifically: the KGB.

It seems that a rather large portion of the depositors in Cyprus banks are Russian. But we’re not talking about your everyday Ivan and Svetlana here. The Russians who have deposited billions in Cyprus banks are Russian businessmen, otherwise referred to as “oligarchs.” And if you know anything about the history of post-Soviet Russia, you know that the core of the Russian oligarchy – i.e. the businessmen who own and run big business in the “new” Russia – for the most part consist of ex-KGB agents.

Now the story of how these fellows morphed from KGB operatives into oligarch-businessmen is fascinating. While we’ve no time to tell that tale now, it is important to know who we’re dealing with here.

We Americans, who might be tempted to somehow compare the KGB with our CIA or FBI, need to step back a moment and remind ourselves that the KGB was not merely the Soviet “spy” network. It was the guts of the massive security apparatus that facilitated the terror that controlled the Soviet state for decades by brute force, completely unconstrained by law, until its collapse in 1989. They always got their way, and suffered no opposition. Picture Michael Corleone in The Godfather and multiply by 1,000. But as opposed to Michael, who wanted to transform his criminal enterprises into “legitimate” businesses and never could quite get there, these KGB fellows not only now run the Russian government but own and operate the most profitable Russian businesses. Michael could have learned a thing or two from them. And these are the same people who deposited money in Cypriot banks – lots and lots of money. Even worse, it was no secret that these KGB-oligarchs used the Cypriot banks to launder money.

Think about it. You’re in the Cypriot government. It’s time to vote to steal money from brutal thugs who’ve proven that they’re capable of using any methods – including torture, maiming and murder – to get their way. How would you vote? And don’t forget that these government officials know that while revenge may not come tomorrow or the next day, it surely will come. The Russians don’t forget.

In this first – and most likely last – encounter between Cypriot government officials and Russian ex-KGB, score it game, set, match: KGB.

So the crisis in Cyprus continues. Assuming it is resolved in some way in the coming days, we plan to report to you next time:

• Three Lessons We All Must Learn from the Cyprus Disaster
• Why the Cyprus Disaster Will Prove to be Bigger and More Important Than Most People Realize

If more comes out of the woodwork in the meantime, we’ll adjust our next report accordingly.

Just remember this: What happens in Cyprus in the coming days and weeks will impact all of us, sooner or later. You simply can’t be naive and think that the IMF came up with the idea of bail-ins to apply them only in this one case. This was a test. It failed. Had it succeeded in stealing money from customers (without calling it stealing), a precedent would be set.

As for what might have happened then, well, let’s just wait until next time before I get really carried away and say something like “I suspect they could practically taste the money as they were prepared to suck it out of all those accounts. And like the vampires that they seem to emulate, the taste will drive them to seek even greater satisfaction with their next victim.” (Uh, did I just say that?)

Why Lies Are Bad

Some lies work better than others. A toddler with chocolate icing smeared around his mouth and on his fingers who says he didn’t eat the cake doesn’t stand a chance of fooling Mom and Dad. On the other hand, a guy who tells a girl he “loves” her just to get his way can often “succeed” where the toddler failed. One of the tough parts about being a parent is not letting the toddler’s cute chocolate-smeared face get the better of you so that you overlook or minimize the lie. When parents let lies go unpunished, or give the impression they’re not that big of a deal, the toddler grows up to be the guy who tells the girl he loves her when he doesn’t. Or maybe he grows up to be Christine Lagarde, President of the IMF, who calls stealing a “tax.”

A lie is a lie and all lies are bad, and, no, I’m not making a big deal over nothing here. Maybe the best way to illustrate this is to remember that first lie in the Garden of Eden. After Adam and Eve ate the apple, God confronted them: “Have you eaten from the tree that I commanded you not to eat from?”

In case you’ve forgotten, it wasn’t Adam and Eve that lied. Adam, for his part, immediately deflects the question onto his wife: “The woman you put here with me – she gave me some fruit from the tree, and I ate it.” (Kind of cowardly, wasn’t it, blaming his wife?) So, seeing what He was dealing with, instead of wasting any more time with Adam, God turns to Eve: “What is this you have done?” To her credit, Eve answers in a straightforward manner: “The serpent deceived me, and I ate.” She doesn’t lie.

It was the Devil who told the first lie. That’s why we call the Devil “The Father of Lies.” When we lie, we take our cue directly from the source. And yet we fallen sons and daughters of Adam and Eve go on lying all the same.

While we can’t solve the problem of lying today, we can, however, turn to Rigoletto (as we did last time) for a perfect example of that lie by a guy (the Duke) who tells a girl (Gilda) he “loves” her to get his way. If you remember, last time we witnessed Gilda’s distress at discovering that the Duke had lied to her after all. This time, we turn the clock back to a “happier” time, right after Gilda first meets the Duke. We know he has lied to her in not telling her his true name. Of course, she doesn’t know this yet, and sings one Verdi’s most touching aria’s, “Caro Nome” – Dear Name.

I happened to be listening recently, during an intermission of the Metropolitan opera radio broadcast of Rigoletto, to a discussion about the character of the Duke. The first expert excused the Duke as simply a young man who “loves women.” What’s the big deal? After holding my breath for some seconds, the others were – thankfully – mortified and condemned the Duke’s deceitful character. “Ah, there’s some hope for humanity after all,” says I.

And so we conclude today’s letter with this lovely and touching aria sung by the great German soprano, Diana Damrau, as Verdi captures the innocence of Gilda’s young and tender love for that (unbeknownst to her) lying creep, the Duke. Ignore the video quality, the bluish set and the silly costumes of the men at the end of the piece. (It’s a modernist production, replete with all the idiocy that such productions frequently impose on great opera.) Just click HERE, take a deep breath and listen to Ms. Damrau’s gorgeous voice and her beautiful expression of innocent love.

Since I couldn’t find a video with the lyrics, here they are in both Italian and English:

Until next time,

P.S. – Lest you think blatant expropriation of your money only comes from the fertile minds at the IMF, check this disturbing report Retirement Accounts at Risk?” Meanwhile, we’d better find that solution to our financial crisis fast, especially with Congress Funding a Future Catastrophe.”

Richard S. Esposito, ChFC
Lighthouse Wealth Management LLC
405 Lexington Avenue, 26th Floor
New York, NY 10174
Tel: 212-907-6583/Fax: 866-924-1952

Email: resposito@lighthousewm.com