Monday, March 25, 2013

Cyprus And The Threat to 401k Plans

Cyprus, as you've undoubtedly read, reached a deal to survive as a country.  They're going to destroy one of their second largest bank, Cyprus Popular, transferring assets to others. 
(T)he plan will wind down the largely state-owned Cyprus Popular Bank, known as Laiki, and shift deposits under 100,000 euros to the Bank of Cyprus to create a "good bank", leaving problems behind in, effectively, a "bad bank".

Deposits above 100,000 euros in both banks, which are not guaranteed by the state under EU law, will be frozen and used to resolve Laiki's debts and recapitalise the Bank of Cyprus, the island's biggest, through a deposit/equity conversion.
All of that last sentence is a government doublespeak that means, the Cypriot government is going to confiscate assets from deposits over $100,000 Euros ($130,000) to bail out the banks and the government.  The government bought Greek bonds, fer cryin' out loud, of course they need bailing out.

Cyprus shows the willingness of governments to go after privately owned money to pay for stupid business decisions - by themselves or or other privileged classes like bankers.  In the US, the most noticeable (and therefore most vulnerable) group of accounts with large amounts of money in them are 401ks or IRAs.  One of the leading advocates for going after your 401k accounts is Teresa Ghilarducci, a policy analyst whom I've encountered and linked to before. 
In a 2009 research paper, Teresa Ghilarducci declared “Guaranteed Retirement Accounts (GRA’s) are like universal 401(K) plans except that the government, as befits a large and enduring institution, will invest and manage the pooled savings.”  That’s because, as the professorial Ghilarducci believes, “Humans often lack the foresight, discipline, and investing skills required to sustain a savings plan.”  (Of course, that analysis of “humans” would not apply to left-leaning PhDs, members of Congress, and bossy bureaucrats – who somehow are endowed with the skills needed to manage everyone else’s investments.)
 Financial advisor and retirement plan creator Jim Dreos puts it this way:
Ghilarducci touts her proposed accounts as enabling everyone to avoid stock market risk and still earn guaranteed inflation-beating returns.  She would have you believe that the government can magically guarantee that the money under its control will earn a 3% annual return on top of inflation.  The notion that anyone can guarantee sizable inflation-beating gains in perpetuity and zero downside is a naïve fantasy at best.  It’s probably more accurately described as a canard put out to hoodwink the gullible public.
I've written on the topic many times, as have many others.  The threat is real.  No, I can't give a good prediction of when.  The people in Cyprus were told right up until the moment that the banks closed that everything was fine; there's no need to be concerned.  And don't take financial advice from me any more than you would from any random dood on the internet.  I take my own advice, and put my money where my mouth is, but I may be less than 100% consistent.

Maybe not now, but coming to a country near you.


  1. And every time I bring this up as a reason to cash out my 401(k)'s, take the tax hit, and put the cash into tangibles, my dear, sweet (and somewhat naive) wife says "OH! THAT can't happen HERE!".


  2. I have similar thoughts regarding the safety of retirement accounts. My suspicion is that we will see another large stock market crash soon, at which point our benevolent friends in the government will see that those of us with retirement funds have, on average, lost large sums twice in two years and will step in to "protect" us by investing that money in something safe, like US Treasury bonds.

  3. Here is what my "Magic 8 Ball" says. We are safeish until the 2014 elections. If the D's win the house and keep the Senate, we will see the swearing in of the new congress and an immediate push to repeal the 22nd amendment limiting people to 10years as president. If the D's lose the Senate, or do not win the House we will see a nationalization based on a "False Flag" event over the Thanksgiving weekend. Banks will be closed from Wendsday evening until Monday AM, and kiss your "Private Retirement accounts" goodbye as well as the possibility of a direct capitation on savings.
    I wish I could be a little more up beat, but my "Magic 8 Ball" wouldn't lie to me on purpose would it????