It's hard to believe considering what happened in 2008 on Wall Street and in Washington, but banking is built on trust.
A worker hands his hard-earned dollars to a teller and trusts the money will be deposited and available for withdrawal when needed. Despite the crash on Wall Street, workers still trust bankers to safeguard deposits from robbers and reckless investments.
Granting banks a little less credulity might be wise. Just consider what happened in the past two weeks. A U.S. Senate investigation revealed that the 2010 Dodd-Frank banking reforms utterly failed in the case of the $6.2 billion "London Whale" gambling loss at JPMorgan Chase. Then a U.S. House committee passed seven measures to weaken Dodd-Frank. And there was the European Union's demand that Cyprus expropriate money from depositors to prevent that nation's big banks from failing. That means no depositor can trust that a government won't dip its hands into savers' accounts to bail too-big-to-fail banks. The trust is gone, baby.
Last week's bad banking news began in Cyprus. It's a cautionary tale about trust in both politicians and bankers. Cyprus is a tax haven for wealthy Russians the way the Caymans are for wealthy Americans. The Cypriot financial institutions, which made bad bets on Greek debt, are teetering on the edge of bankruptcy and were closed last week to stave off bank runs.
The European Union, which includes Cyprus but not Russia, was not eager to provide loans to secure moneyed Russians. Eurozone finance ministers and representatives of the International Monetary Fund (IMF) and European Central Bank worked out a deal under which Europe and the IMF would provide $13 billion to bail out the banks if the country took $7.5 billion from depositors' accounts.
Cypriot and European officials betrayed depositors, particularly small ones whose savings of less than $130,000 supposedly are insured. The newly elected president of Cyprus, Nicos Anastasiades, turned on his own people. He rejected a proposed deal under which Cyprus would take 12.5 percent from depositors with more than $130,000 euros and about half of that from smaller account holders. Anastasiades demanded the rich, often Russian oligarchs, pay less, which meant, of course, the smaller depositors, everyday Cypriot workers, would have to pay more.
As a result, a deal was struck under which 9.9 percent would be taken from the wealthy and 6.75 percent from those with less than $130,000, effectively nullifying their insurance.
Naturally, the working people of Cyprus went crazy. Their president had focused on protecting rich foreigners. And he decided it was fine for the government to reach into workers' savings accounts and grab money to rescue big banks.
Cypriots asked how a depositor could trust any bank in the Euro Zone now that finance ministers had determined that countries could confiscate money from insured accounts. A 26-year-old Cypriot, Andreas Andreou, told the New York Times he'd withdraw all of his money as soon as the banks re-opened, adding:
I'd rather put the money in my mattress.
Trust is seriously breached when a mattress seems safer than a bank vault. Cypriots pointed out that no one should feel immune. If Cyprus can pinch depositors, any government can.
In 2008, the U.S. Congress did not take bailout money from depositors, but instead from every taxpayer. And it wasn't a mere $700 billion in Toxic Asset Relief Program (TARP) money. Including loans and other help offered by the Treasury Department, Federal Reserve and FDIC, it"s more like $4.76 trillion, with $1.54 trillion not paid back.
The Dodd-Frank Wall Street Reform and Consumer Protection Act was supposed to give taxpayers some trust that the banks would be sufficiently regulated, that too-big-to-fail wouldn't happen again. But the London Whale drowned that fantasy.
JPMorgan Chase, long considered the safest Wall Street bank, an institution whose managers lobbied hard for a lily-livered Dodd-Frank, has paid more than $8.5 billion since the crash in fines, settlements and other litigation expenses.
Joshua Rosner, co-author of the New York Times bestseller Reckless Endangerment, analyzed JPMorgan for consulting firm Graham Fisher & Co. and wrote in a report titled "JPMorgan: Out of Control:
JPM has a reputation of being the best managed of the biggest banks. This has enabled the company to employ its muscle with elected officials and thwart regulatory efforts.
Regulators saw no evil as a JPMorgan trader in London lost $6.2 billion last year. A scathing Senate investigative report released March 14 says the nation's largest bank fought with and dodged federal regulators, misinformed investors and the public and circumvented internal and federal rules.
Less than a week after the Senate released the report, a House committee passed seven bills that would gut Dodd-Frank's already weak-kneed regulations governing the very derivatives that the London Whale traded.
This action is an example of right-wing Cypriot President Anastasiades' view of government: protect the wealthy and influential and compel the workers to pay.
It didn't go over well in Cyprus. After massive street demonstrations, the Cyprus Parliament unanimously rejected the initial plan to seize money from small depositors' insured accounts to rescue the banks.
But unless Americans step up the way Cypriots did and demand real regulation, as well as send the message that they don't trust Wall Street by moving their money to community banks and credit unions, they can bank on being bilked. Again.