Bail-ins, Magic Wands, and Con Men

by Shah Gilani, Money Morning

Originally posted at Wall Street Insights & Indictments

Last week, I was emailed a link to Barry Ritholtz’s “The Big Picture” site. That’s where David R. Kotok, Chairman and Chief Investment Officer of Cumberland Advisors, posted a piece on the “bail-in” of Cypriot banks, versus the bailout fixes that we’re used to seeing.

As it was an email, a lot of people were copied on it. And a lot of them hit “Reply All,” and forwarded their reactions and comments.

I read everyone’s responses.

No one had any clue about what’s really going on, or how to fix the banking mess the world faces, or whether bailouts or bail-ins are the answer.

Myself? I got really angry.

I can’t believe so many smart people can be so oblivious, or worse, are themselves knowingly a part of the problem – to the degree that they twist the truth. Like great prestidigitators (magicians) who point to over “here” while manipulating tricks over “there.”

Watch the birdie. Pay no attention to the man behind the curtain…

David Kotok, by not legitimately addressing the real cause of bank failures, performs the usual trick. He obfuscates, clouding the issue by addressing bailouts versus bail-ins.

It bothered me that Mr. Kotok, representing Cumberland Advisors, an independent fee-for-services money management firm with approximately $2.2 billion under management, was talking up his services – and not cutting to the chase instead.

He said:

“At Cumberland, in thinking about bail-in vs. bailout, we see the following issues in portfolio management. First, credit analysis is important. Risk needs to be identified and evaluated with the highest standard of integrity. In a private firm, one can give counsel to banking clients and portfolio-management clients and act to sell securities in which there may be very early warning signs of credit deterioration. From a portfolio-management point of view, one should not wait around. Our approach is to run quickly from credit deterioration and hope it does not get worse. Let someone else take that risk, not our client.”

What’s my problem with that?

It came on the heels of addressing the “transformation underway with regard to bank-deposit safety” in terms of government and taxpayer bailouts being potentially augmented with depositor exposure, where deposits above insured amounts are seized. That’s the new “bail-in” bailout of insolvent banks.

Mr. Kotok advocates that depositors do credit analysis and due diligence on the institutions they bank with.

Of course, not many depositors have the skill set to do that. And virtually none of the hundreds of millions of depositors – trusting their money to the very institutions that are supposed to be safe – have the time to do that.

That’s where Cumberland comes in. They do that for their customers. Sure, that’s talking up his “book” of services, but you can’t blame the guy for that. He has a job to do.

He also points out that there are problems with crying wolf when it comes to analyzing banks. Crying fire in a crowded bank could cause a run and get you in trouble.

With regard to analysts offering warnings, Mr. Kotok himself warns,

“providing that warning also puts the service provider at great risk, because there are laws, in most jurisdictions, against sharing information that might trigger a run on a bank.”

I’m writing this and I’m getting really angry… again.

The whole game is rigged. So how in the world can depositors trust any bank?

How can anyone do due diligence when bank transparency is a myth?

Remember the financial crisis? Every single big American bank CEO came out in public and told us they were in excellent health. They were – and are – all liars. They were all taking money, indirectly and directly from the Fed and the Treasury.

The Chairman of the Federal Reserve is a liar. Ben Bernanke was flooding banks with “liquidity” through the Discount Window, and a whole host of multi-lettered programs they invented on the back of matchbooks. There was no planning.

They rushed money to banks here and around the world, and to insurers and corporations. Oh yeah, and they rushed it to governments, too.

And what was he telling the world? After he said that the subprime slump would pass without affecting the economy, he said the banks were all safe and sound, so sleep tight.

Now we know why they are all liars. They don’t want to be accused of causing a run on their own banks. What a bunch of hogwash.

I say, directly to them: You are all liars, and I challenge any and all of you to debate me in public. Afterwards, you presumably won’t mind taking a lie detector test.

This is what we’ve come to. Liars leading liars, lying to the public that banks are safe institutions. Liars are lying to equity investors, bondholders, and depositors to get their money just to make more for themselves. And central banks give them all the backstopping they need to lie their way out of insolvency, to play the game again until they are back in the business of making themselves and their protectors rich – make that richer.

So, what Mr. Kotok should have said is that he knows what the problem really is, and he knows how to solve it. But then he wouldn’t have so many clients coming to him, asking for analysis of banking institutions, and which ones they should put their money in.

There is no need for bank bailouts. And there is certainly no need for any bail-ins. Ever.

Banks are utilities, only they have the power to point over “there” and say they are capitalist tools, while over “here” they are making us tools of their trade in lies.

We can fix the lack of transparency problem with a few regulatory waves of the truth wand.

To end the problem of banks ruining economies – and people’s lives – all we have to do is raise the reserves they have to keep against loans and the other “assets” that they hoard.

What’s wrong with a reserve ratio of 25% rising to 50%? We have to put up 50% margin when we buy stocks, don’t we?

Nothing is wrong with substantially higher and more straightforward protective reserve ratios. Except that banks won’t be as rich and powerful – and dangerous – as they are, that’s what’s wrong with it.

I’ve haircut the answer to what ails banks to save we, the people – who rely on them as safe institutions – but it’s a start.

Of course, the details of what assets are, and how they are classified in terms of risk has to be addressed, as well as how to make banks truly transparent. But it can all be done easily.

The whole Basel regime is nothing more than a bunch of bankers pretending they’re making the system safer, when in fact they are pointing to over “there” while they take care of themselves under cover of what’s really in their interests over “here.”

If you’re not angry about the lies and the red-herring discussions constantly being used as a smoke screen for the power banks wield, you might want to learn to read between the lines of most of what you read.

Or, stop by the Magic Castle in Hollywood, California, and see for yourself how great magicians can use prestidigitation to make you believe that pigs really do fly.