Bailout, Cyprus-Style: Could It Happen Here?

The deal to rescue the banking system of the tiny island of Cyprus has the world drawing a guarded deep breath. Certainly, the bailout is good news. Just as certain, however, is the distasteful quid pro quo: Many depositors will have their bank accounts raided to pay for it, in a pact agreed to by others.

This is only one uncomfortable facet of the bailout terms, but it is a corker. It didn’t take long for media reports to emerge strongly suggesting that this is the new European method for dealing with these ticking time bombs. Despite an official denial of this rumor, markets slogged to a desultory close, unsure of what will happen next.

Can it happen here?
The news that smaller savers -- that is, those with bank accounts with less than $100,000 therein -- won’t have to pony up for the rescue is good, of course. But those with larger accounts could lose up to 40% of that overage amount -- not good news at all. And, since the largest bank, Bank of Cyprus, will be absorbing the assets of the next largest, Laiki Bank, depositors there will likely be completely out of luck.

This, of course, would be akin to JPMorgan Chase (NYSE: JPM  ) swallowing Bank of America (NYSE: BAC  ) whole, then taking some of its own clients’ money, and probably more from customers of B of A, to hand over to the government. Considering how upset Main Street was with our own bank bailout, I suspect this action would be met with an unusually vocal protest.

Then, of course, there are the very wealthy depositors. Considering that Bank of America, JPMorgan, Citigroup (NYSE: C  ) , and Wells Fargo (NYSE: WFC  ) all have private banks for well-to-do clients, you can just imagine the howling that would take place when those funds were seized. Assuming, of course, that the well-heeled -- possibly learning a lesson from the current debacle -- hadn’t withdrawn all of their money ahead of time.

But, you think, this would never happen here. After all, Cyprus is only taking the haircut from accounts harboring more than six figures, and the first $100,000 is insured by the Central Bank of Cyprus -- just as our own deposits, up to $250,000, are insured by the Federal Deposit Insurance Corporation.

All true, but the ugly fact is that just last week, all account holders were going to take a hit. For small depositors, it was to be 6.75%; for amounts over $100,000, 10% was to be sacrificed. So, insurance would have meant nothing, just last week.

Could it happen here? If we were ever forced to ask the world for a bailout, it probably could. As the too-big-to-fail debate heats up again, that is something to keep in mind.

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