Bitter Lemons

From Paul Murphy, writing at the Financial Times Alphaville blog (h/t and lifted bodily from Krugthulu).

Big depositors in Cypriot banks stand to lose circa 40 per cent of their money here, which has drawn plenty of fury and veiled threats from Russia.

Victor_Dubreuil_-_Barrels_on_Money,_c._1897_oil_on_canvas

But what exactly can the Russians do about this? Sell euros? Tear up double taxation agreements? Murder Cypriot bankers? Medvedev and co could not have played a worse hand during this crisis — and it’s not immediately clear why.

Cyprus now has a binary choice: become a gimp state for Russian gangsta finance, or turn fully towards Europe, close down much of its shady banking sector and rebuild its economy on something more sustainable.

The choice is obvious.

Forgive me if I’m just too dense to live, but isn’t this how capitalism is supposed to work?  Yo! Russian travelers:  that citrus you just sucked may be bitter indeed, but you put a bunch of money at in play, and sometimes you lose it.  That has a lot to recommend to our banking sector, of course, but really, if we are ever to have a financial sector that does what it is supposed to do (allocate capital within the real economy and hedge –insure — risk) then we kind bankers to actually bank, and not view themselves as money lenders and casino operators.  I’ve sat in on quant conference tasks (ever want to learn how to trade on derivatives of volatility measures?  Me either), and it’s all fun and games until someone loses an eye.  Cyprus and naughty Russians are just far out enough on the periphery to stand at ocular risk.  But I do think we would be better off if our galtian overlords had just a bit of healthy fear back-crossed into the breed.

Image:  Victor Dubreuil, Barrels of Moneyc. 1897  And yes, I have used this one before.  Works here too.

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39 replies
  1. 1
    rikyrah says:

    I wouldn’t want to be a banker there….they could decide to plant a few bombs…just cause….

    who the hell wants to be on the wrong side of Russian Mafia?

  2. 2
    Chris T. says:

    Unfortunately, until the major governments (US and UK are at the top of this list!) get together and make banking boring again, we’ll stay on this roller coaster.

  3. 3
    srv says:

    Next up Tahoe.

    You’d think the place was Little Russia or something now.

  4. 4
    PeakVT says:

    Cyprus now has a binary choice: become a gimp state for Russian gangsta finance

    I think it’s kinda funny that a London-based financial publication would be sneering at tax-dodging by Russian companies (which is the source of most of the Russian money in Cyprus, not the Russian mob).

  5. 5
    Tom Levenson says:

    @Chris T.: One of the things I’m too rushed to research/talk about (yet) is the problem of Euro-zone wide deposit insurance. That would require Euro-zone wide banking regulation that actually meant something. That would probably require G8/20 coordination on approaches that would kill the offshoring/roundtripping of money in bank-secrecy/tax avoidance shelters like Cyprus, Iceland-as-was, and many other places as well.

    And our folks can’t get together long enough to confirm a CFPB chief. WASF

  6. 6
    Derelict says:

    that citrus you just sucked may be bitter indeed, but you put a bunch of money at in play, and sometimes you lose it.

    No, not really. The Russians may lose some of the money they play. But modern, Western bankers? Never. As demonstrated every day by CitiGroup, JP Morgan, Bank of America, Andrew Mozillo, Jamie Dimond, et al., when you play roulette with the firm’s assets and lose bigtime, it’s the taxpayers who have to pony up.

    Modern capitalism: Privatize the profits, socialize the risks.

  7. 7
    Villago Delenda Est says:

    They say they’re capitalists, but they are (understandably) averse to the risks involved.

    Everyone talks “free market”…in theory, until they’re the ones failing, then suddenly, exceptions must be made. This is especially true in the financial sector, where they go into the cas1no and fully expect to win, guaranteed, because they’re Masters of the Universe. If they do not, SOMEONE needs to bail them out, and if that involves outright theft from those who do not have the ear of the police, well, so be it.

    They’re not honest operators. There is scarcely any difference between Jamie Dimon and the loan shark on the block who has a last name that ends in a vowel.

  8. 8
    Redshirt says:

    Hey Tom! OT, but I saw your book review blurb for “Frankenstein’s Cat” in an ad in the most recent Scientific American and I was all like “Hey! I read that guy’s posts and follow his Twitter. Yay!”.

    Cool!

  9. 9
    Roger Moore says:

    @rikyrah:

    who the hell wants to be on the wrong side of Russian Mafia?

    The time to think about that is before you get in bed with them, not after they’ve made you their bitch.

  10. 10
    roc says:

    But why be an actual capitalist if you have enough clout to socialize your losses? Not exercising your political power would be leaving money on the table…

  11. 11
    Omnes Omnibus says:

    Commercial banks and investment banks should never mix. It would not solve everything, but it would be a damned good start. Also too, remove corporate protections from investment banks; make them partnerships again.

  12. 12
    Tom Levenson says:

    @Redshirt: Cool indeed. Thanks for the follow, btw.

    I do really like Emily’s work, btw — just all round good stuff.

  13. 13
    Villago Delenda Est says:

    @Roger Moore:

    But the money seems so good…and as a bonus, we get the sex!

    “I have altered the bargain. Pray I do not alter it further.”

  14. 14
    Yutsano says:

    @Roger Moore: Barn door, horse, etc.

    @Villago Delenda Est: From an objective standpoint, some Russian women are very attractive. The fact that some of them might have unpleasant associations is just a side effect.

  15. 15
    Roger Moore says:

    @Chris T.:
    Wrong lesson. A huge lesson of all of the recent banking crises is that easy movement of money let’s banksters shop for a friendly regulatory environment. If the USA and UK decide to shut the banksters down, they’ll just take their money to some other country that will let them do what they want. If there isn’t a country like that, the banksters can probably wave around enough cash to buy a country and make behave that way. Until we’re willing to make countries pariahs for behaving that way and back it up as vigorously as we do when they host terrorists, the banksters will keep getting their way.

  16. 16
    Roger Moore says:

    @PeakVT:

    I think it’s kinda funny that a London-based financial publication would be sneering at tax-dodging by Russian companies

    They’re just upset about the loss of business.

  17. 17
    Alex S. says:

    Cyprus has to take this loss – yes, it hurts the economy and probably has a few (really only a few) consequences for other european economies, but this ‘business model’ of being a tax haven has to die. Smaller deposits will be protected anyway.
    Interestingly, Putin condemned the previously proposed contribution of wealthy people for the bailout – even though these rich Russians use Cyprus to hide their money from the Russian state. So in the end, Putin is acting in the interest of the oligarchs, not the Russian people. It’s corruption at the highest level.

  18. 18
    Villago Delenda Est says:

    @Alex S.:

    So in the end, Putin is acting in the interest of the oligarchs, not the Russian people. It’s corruption at the highest level.

    This is a Russian tradition, dating back to Ivan the Terrible, and before.

    Same old same old.

  19. 19
    Roger Moore says:

    @Alex S.:

    So in the end, Putin is acting in the interest of the oligarchs, not the Russian people.

    In other news, the sun rose in the east today, the ocean is wet, and the House Republicans are a bunch of wingnuts.

  20. 20
    Alex S. says:

    @Villago Delenda Est:
    @Roger Moore:

    Yeah, you’re right. It’s just so obvious this time. Do ordinary russian citizens not know, or do they just not care?

  21. 21
    Petorado says:

    The ECB may get a chuckle now, but I wonder as a result of this if a natural gas supply disruption will be looming in northern Europe’s future?

    I’m not sure if it’s the gangsters or the banksters that are the ones with the “thug life” tattoos anymore.

  22. 22
    Yutsano says:

    @Alex S.: They seem to care, but it also seems like every time they try to change it they just get the same deal again.

  23. 23
  24. 24
    Commenting at Balloon Juice since 1937 says:

    Maybe somebody could supply Goldman Sachs bankers’ home addresses to some ‘Russians’ and let capitalism sort itself out.

  25. 25
    catclub says:

    @Alex S.: “It’s just so obvious this time.”

    Does “What’s the Matter with Kansas” ring a bell?

    It ain’t just Russians.

  26. 26
    Trakker says:

    Very few “capitalists” know how capitalism really works.

  27. 27
    El Cid says:

    No one in the West cares that there may be criminal money invested in Cyprus banks, unless they’re just angry that that money isn’t in their banks.

    The biggest banks in the world were kept afloat in 2008 due to narco-trafficking money-laundering, and no one gave a shit then or gives a shit now.

    The United Nations’ crime and drug watchdog has indications that money made in illicit drug trade has been used to keep banks afloat in the global financial crisis, its head was quoted as saying on Sunday.

    Vienna-based UNODC Executive Director Antonio Maria Costa said in an interview released by Austrian weekly Profil that drug money often became the only available capital when the crisis spiralled out of control last year.

    “In many instances, drug money is currently the only liquid investment capital,” Costa was quoted as saying by Profil. “In the second half of 2008, liquidity was the banking system’s main problem and hence liquid capital became an important factor.”

    The United Nations Office on Drugs and Crime had found evidence that “interbank loans were funded by money that originated from drug trade and other illegal activities,” Costa was quoted as saying. There were “signs that some banks were rescued in that way.”

    At worst it was that there was too much money, Russian or otherwise, criminal or otherwise, in the Cypriot banking sector.

    On the plus side, that open and deregulated bank sector led to lots of wonderful international financial innovation!

  28. 28
    Joel says:

    Considering that we’re talking about russian gangsters, I suppose they would opt for second amendment solutions.

  29. 29
    Concerned says:

    NZ is also gearing up to confiscate bank accounts. Suppose it’s going to catch on – like a bad case of flu??

  30. 30
    burnspbesq says:

    It’s so far from a binary choice that that statement is patently ridiculous.

    Unlike, say, the Netherlands, Ireland, Switzerland, and Singapore, Cyprus has no actual economy and no prospects of developing one. All it has is the legal framework that makes it a great holding-company jurisdiction.

    Given that, it’s hard to imagine a democratically-elected government turning its back on the 21st Century and sending its population back to subsistence farming.

    The Russians broke it. They own it.

  31. 31
    burnspbesq says:

    @Alex S.:

    this ‘business model’ of being a tax haven has to die

    Oddly enough, sovereign countries get to decide for themselves what kind of tax system they have. That’s part of what it means to be a sovereign country.

  32. 32
    TenguPhule says:

    @burnspbesq: And if they have no national defense to protect that right, then its going to be taken away from them until they decide to play nice with other countries.

  33. 33
    PeakVT says:

    @Concerned: Link for NZ, please.

  34. 34
    marshall says:

    Please note, and note well, that the Cyprus banking system is in trouble, not because of any criminality, but because they invested in Greek sovereign bonds. I have heard that the ECB encouraged that investment, but I don’t know if that is true. What I do know is true is that the ECB and the troika bankrupted those Greek sovereign bonds as a condition of Greece’s “bailout.” So, to be blunt, Cyprus got the shaft so that German banks would not have to suffer over Greece’s enforced austerity. This forcibly reminds me of the Melian dialog in Thucydides’s History of the Peloponnesian War, where Melos was destroyed by the Athenians, who bluntly said “the strong do what they can and the weak suffer what they must.”

    In this rerun of history, Germany and the ECB are playing the role of Athens in 415 BC. I hope they remember that the destruction of Melos was the beginning of the downfall of the Athenian empire.

  35. 35
    Regnad Kcin says:

    “Gimp state” as a new tag

    “Gimp state” as a new tag

    “Gimp state” as a new tag

  36. 36
    Delia says:

    So the difference between the gangsters and banksters is what? Besides one set speaking Russian and the other English (or apparently German)?

  37. 37
    Ray says:

    Cyprus now has a binary choice: become a gimp state for Russian gangsta finance, or turn fully towards Europe, close down much of its shady banking sector and rebuild its economy on something more sustainable.

    I’m struggling to understand why being a gimp state would be a worse choice for Cyprus

  38. 38
    Chris T. says:

    @Tom Levenson:

    That would require Euro-zone wide banking regulation that actually meant something. That would probably require G8/20 coordination on approaches that would kill the offshoring/roundtripping of money in bank-secrecy/tax avoidance shelters like Cyprus, Iceland-as-was, and many other places as well.

    Yes … but I believe that none of that can happen until the US and UK, which have the two biggest banking sectors in the world, first “put their own houses in order” as it were. Otherwise you’ll just get a lot of whining about how the Big Dogs aren’t house-trained so why do Little Dogs have to poop properly, etc.

    @Roger Moore:

    Wrong lesson. A huge lesson of all of the recent banking crises is that easy movement of money let’s banksters shop for a friendly regulatory environment. If the USA and UK decide to shut the banksters down, they’ll just take their money to some other country that will let them do what they want.

    It’s often not that simple. A small drug cartel may be able to do that, for instance, but once they’re moving/laundering 100 billion dollars a year, there’s nowhere to take that kind of cash other than the US or UK.

    The EU as a whole is big enough, but the Russian Mafia can’t run their profits directly through the ECB (not yet, at least … and we can hope they never get quite that openly corrupt). Running them through Cyprus leads to, well, exactly what’s happening right now.

    PS: the comedians got this right years ago: the banksters threaten that if they’re taxed and regulated, “we’ll just go screw up someone else’s economy”…

  39. 39
    TR says:

    What can the Russians do?

    EU,
    We’re having plumbing problems with our natural gas. Service will be discontinued until repairs have been completed.

    Thanks for your patience,
    Russia

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