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The Ugly Truth About Bail-ins, Magic Wands and Con Men

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 in a matter of 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.



[Editor's Note: If you'd like to read David R. Kotok's "solution" to the banking mess we're in, click here. Just watch for the smoke and mirrors.]

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About the Author

Shah Gilani is the Event Trading Specialist for Money Map Press. He provides specific trading recommendations in Capital Wave Forecast, where he predicts gigantic "waves" of money forming and shows you how to play them for the biggest gains. In Zenith Trading Circle Shah reveals the worst companies in the markets - right from his coveted Bankruptcy Almanac - and how readers can trade them over and over again for huge gains. He also writes our most talked-about publication, Wall Street Insights & Indictments, where he reveals how Wall Street's high-stakes game is really played.

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  1. Frank B. | April 12, 2013

    My piece of mind increased when I removed all funds from the banks, my local credit union works just fine for my everyday economy, the rest of my cash???? Can you say precious metals?

  2. Eric S. | April 12, 2013

    Very, very courageous article – I am not surprised that there have been laws enacted to ensure that nobody overtly questions the solvency of banking institutions. In the same way that politicians have made it a criminal offence to publicly call for thier demise, anybody who tries to rally the ignorant masses into an informed and active force for reform is branded as a criminal and carted off to oblivion. The ultimate in corruption is reached when the system itself is altered to protect the corruption itself. From this, there is no recovery – and we are relegated to watch our civilization self-destruct as a result. Hopefully, those responsible will receive the full measure of thier due when the time comes.

  3. Ed the Grocer | April 12, 2013

    I'm all for higher reserves, except. You know who they stop lending to. Small business. One morning you are a fantastic customer., next morning they simply won't lend you any money and they want everything back. "The rules have changed Mr Nichol." The good thing is that I will never let any bank ever put me in that position again and I do everything to reduce any fees that I do have. Never again.

  4. francisco fernandez | April 13, 2013

    Lydon La Rouche has been warning about all this since 1990, at least. Nobody has ever listened to him. ( I do not belong to any organization belonging to him, nor I am in anyway related with him) But sometimes I read.

  5. Walter Baltzley | April 13, 2013

    There is a titanic battle royale between banks, government, and corporations over who will control the volume of money in the economy. Each holds part of the power and is trying to leverage that power to dethrone the others. Each one is trying to crash the system so that they can blame the other two for the disaster, and then ride in as the hero to save the day.

    Regardless of who wins, the end result is a PLUTOCRACY…rule by the rich…where dollars (or gold coins) count as votes and freedom must be purchased with money. They don't care WHAT we use for money…only WHO controls its flow.

  6. H. Craig Bradley | April 15, 2013


    A "Terrorist" who is privy to some incriminating accounting information about a specific bank could release it to a sympathetic Al Jazeera for wider discimination. If the disclosure were to actually cause a "run", then their objectives might be met by such alternative means. If so, it proves the old addage: "There is more than one way to skin a cat". If said individual were then arrested for releasing such "illegal" information, well, its certainly better than the usual methods employed by traditional terrorists. Club Fed is not so bad- certainly better than Guantanomo, but you don't have the company of 12 virgins in Paradise. Club FED is not co-ed.

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