Monday, May 20, 2013

Investigation of the largest Czech credit union: assaulting the victims

...including your humble correspondent...

Another annoying event occurred to me on Friday – and it's still happening and will be happening for quite some time.

I learned that the Czech National Bank, the supervisor of our financial markets, began to audit MSD ( or Metropolitan Credit Union (the largest Czech credit union) where I sent a very large amount of money on Tuesday. The transaction wasn't completed (which is why I started to be interested in the situation on Friday) and the money should have been returned but they remained in the air, invisible at both places. (Update, June 14th: After exactly 1 month, this particular amount of money was returned from the air to my account in the original bank.) Today, I learned from the chairman of MSD that a reverse transaction (sending the money back from MSD) was ordered by MSD last Wednesday but it wasn't allowed because the authorities began to block outgoing payments (approximately) on that very day (?) and they didn't do it right.

Between Friday and today (Monday), I was gradually learning what was happening. The audit by the Czech National Bank that found it suspicious that the percentage of "loans given by MSD that need monitoring" is extremely low, was apparently combined with another (totally independent?) intervention, an investigation (by the Supreme Office of Prosecutors in Prague, whatever is the right English translation) of two large loans worth $50 million in total which are apparently fraudulent (attempts to rob most of the members of MSD such as myself by some individuals).

The credit union has 15,000 members – only members may have deposits and/or loans – and the balance sheet is about $750 million. You may calculate the average member's savings (well, the right number is actually higher than that because you should only count the members who are savers and not those who are members to borrow the money). Most of the growth of the members occurred in the last 2 years (I was added a month ago or so: a very unlucky timing, indeed), after years in which the credit unions regained their good name (damaged by failures in the 1990s; no insurance existed at that time).

About a quarter of that balance sheet may be available in cash. The financial situation of MSD seems very healthy according to their documents, much like the business model. It's the ultimate super-simple bank with a single savings account offering a reasonable interest rate; and just several types of CDs (three or four different maturity dates). They lend their members money for 10% a year in average (a large percentage of them is returned OK); and they can therefore afford to pay 2+ percent on the savings account and 2.5-4.5% or so on the deposits (the savers must be members of the credit union, too). No large expenses for complicated software (the internet banking is only passive), employees giving plush bears to clients, and so on.

I have always thought that a 10% interest rate for loans is reasonable. Near-zero interest rates are a pathological component of the postmodern age; they always amount to some government institutions' campaign to cram the banknotes down the people's throats. Such government institutions may think that they're helping the economy but they only help to distort it and screw it. It is just not natural to lend the money for near-zero interest rates. Such a habit completely ignores the (often unpredictable) risks as well as the pain associated with the "postponing of the consumption". Lenders wouldn't naturally demand that low interest rates; they're only willing to do so because the banking market has been heavily distorted by activists trying to "revive the economy" who actually just create one bubble after another, one crisis after another.

Moreover, in conservative nations such as Czechia (which inherited the conservative approach to finances from the Austrian Empire), the lowering of the interest rates really reduces the consumption because the economically most relevant people are "more savers than borrowers" and they just feel poorer when the interest rates are low, so they reduce their consumption. No one cares about these rather self-evident facts and one-size-fits-all dogmas about "good low interest rates" are parroted by pretty much all central bankers etc. in our country, too.

So I learned today that my large amount of money is "hanging in the air" today, from the chairman of MSD. I sent it while the Czech National Bank was already blocking the incoming payments. But the payment was still accepted and added to a shared "collecting" account of MSD but no longer moved to my account in MSD internally (because the people executing the block didn't do it at the right place).

Aside from that very large amount of money, I also have about 2.5 times the very large amount of money in MSD which is still far from my only assets but it's very, very large. I haven't had any contacts with any credit unions throughout my life but a month ago, I found the near-zero-percent (and less-than-inflation) interest rates in the large banks really obscene and moved a significant portion of my savings, encouraged by the full insurance of savings up to €100,000 (I wouldn't be attracted to a credit union without this insurance).

You may imagine that I wrote some number of e-mails to the Czech National Bank, to the prosecutors, to various banks etc. today, in order to fix the situation – especially with the not-fully-completed transactions (a problem that MSD is totally aware of but the government institutions never seem to care if they screw something). It's annoying. Well, it's not an existential thing for me, either. I've seen postings by a 60-year-old man who had all his life savings in MSD and can't pay his rent and food now because he didn't diversify at all. A possible millionaire-turned-homeless.

I can't resist to say a broader point: it's just another episode that is teaching me that the regulation and the government is a cure that is (much) worse than the disease. It seems to me that the prosecutors in particular are fanatics who are obsessed by the hope of catching a criminal – or a likely criminal – but they don't hesitate to shoot 15,000 innocent people (actually victims) along the way. More generally, the government institutions are bodies where one isn't really responsible for his or (in this case, mostly) her acts, in which he (or she) isn't really forced to compare costs and benefits. The costs of some potential achievement may be many times higher than the benefits (in this case at least 15 times) but these folks may still decide it's the right thing to do. They're ready to block a whole credit union because of two suspicious/bad loans. They're ready to destroy your national economy because of one totally bogus problem (e.g. "global warming") or anything of the sort. They have no sense of proportion because the "omnipotent" character of the government allows them to remain ignorant about all proportions.

Needless to say, there are always some people who support these more-harmful-than-useful activities by the government: it's the jealous voters who are more hateful towards other, successful people than the degree to which they want to enjoy their own life. So a government that does more harm than good is what they actively prefer.

So the members of MSD who are really victims of the two large possibly fraudulent loans are forced to spend at least a week or weeks (and maybe months or perhaps years, who knows) enhanced by some extra anxiety. Some of them probably become homeless because of that – the status of the credit union is probably going to remain uncertain for quite some time which makes it impossible to pay 100% of the savings from the insurance fund. The people in the government and state-organized independent supervising bodies aren't able or willing to distinguish criminals from their victims. They're not even able to properly block the transfer of money between a credit union and the rest of the world so that some money remain floating in the air (on the shared "collecting accounts"). If I am dissatisfied with a bank, I may try a competitor; if I am dissatisfied with some government bureaucrats or agencies, I am just screwed. Of course that the effectively two-choice elections have no chance to find the right recipes to improve the situation in hundreds of government bodies.

Speculations exist that the interventions are controlled by large banks that find the more effective competition from the credit unions inconvenient. I have nothing to say about these speculations except that I see no way to prove them invalid.

The investigators and regulators just don't seem too competent or helpful in any sense but all of us are paying these people (and they have obscenely high salaries) to "improve" the free markets. The free markets aren't, can't be, and shouldn't be perfect – but the government ain't a way to improve them. In the present crisis, government is not the solution to our problem; government is the problem.

And that's the memo (thanks, Mr Reagan 1981).

An article claims that MSD has been giving loans – up to 4 billion crowns (1/4 of the balance sheet) – to foreign firms with no history, probably represented by puppet representatives. These firms were probably supposed to rob the money out of the savings bank and never return them. If true, it's good that they stopped it, of course, if they did. If the fraudulent loans represent 40% of the currently available loans out there, it seems very likely to me that MSD will converge towards failure (or violation of the financial-situation conditions that savings banks have to satisfy) once the fraudulent loans are closed because the good loans can't produce enough profit to cover the interest rates etc. On the other hand, MSD should have enough cash to cover all the savers when it's closed so maybe no money will have to be used from FPV.


  1. i probably lost a considerate amount of least for me! in bank stocks with the problems in cyprus couple months ago but i am sure in the long term the crisis will actually help me.

  2. You appear to trust that the insurance will cover failure of this credit union? Does your government regulate or provide this insurance?
    In USA I am told $250,000.00 is insured if my Credit Union fails. Insurance is a gambling bet. One must be able to collect the bet.
    I hope neither of us need try and collect on such a bet. But crooks and government can be offering insurance, too. Government is unable to effectively control crooks or them winning and losing bets by regulation, either.

  3. Dear Robert, the approved credit unions are exactly in the same situation as large banks and they're covered by "FPV", the Deposit Insurance Fund, which covers 100% up to EUR 100,000. Everyone agrees it's the case, See the list

    The fund, FPV, contains lots of money to cover the possible failure of many - probably all - credit unions. If it had to cover more losses, e.g. large banks, it is legally obliged to borrow the money.

    I am not really afraid that there's a risk that this law could be circumvented.

  4. You probably don't remember that in the US the combination of government insurance and lax government regulation combined to allow crooks running credit unions to siphon off hundreds of billions after the sainted Reagan's "deregulation." Few of the crooks were punished (what a coincidence - one was a Bush brother), but the honest people payed the bills.

    If anybody is paying 10% real interest (inflation corrected) something crooked is nearly certain to be going on.

  5. Pig, I don't think your comment makes any sense. The real interest rate in MSD is 0% on savings accounts and 1-2% on CDs. The figure 10% was nominal (inflation near 2 percent) for the loans which I claim to be a highly sensible rate for a wide variety of loans.

    Credit unions may be insured or uninsured in different contexts. Some behavior may be legal in some situations, illegal in others, and it's sometimes possible and sometimes impossible to catch the criminals. At any rate, deregulation is a good thing.

    "Paid" is not spelled "payed".

  6. The worst part is that these actions can result in panic and actually destroy the company... even though there might not be any problems.

  7. A special page - I decided to post it as a comment for those who follow it here - FPV (the insurance fund) confirms that MSD savers are insured here:


  8. At least Lubos has money in the bank thats good news. Perhaps he can offer me a loan at 12% ? I need to pay off my dentist.

  9. Dear Casper, when one has this large amount in the air and uncertain, the will to lend is reduced... How much do you need?

  10. Slightly off topic, but still related to what I describe as the Ponzi world of finance...

    Since 2013 marks the 50th anniversary of chaos theory, I thought it
    appropriate to mention that when a money-flaps its wings in Japan, this
    is what happens in Greece:

    "It's perhaps worth remembering its central lesson – that complex
    interrelated systems create unexpected outcomes from seemingly benign
    inputs. It appears the complex inter-related world in which we live is
    becoming more and more chaotically unstable at the margin and this
    current euphoria does not approximately determine the future. There are
    more than enough variables out there – the butterflies flapping away –
    which can change outcomes in an instant."

    H/T: Zero Hedge

  11. Lubos, I don't think it will ever get to the point where the Fed and other central bankers actually raises rates.

    ZIRP, QE and other forms of monetary easing will slowly stop working as it is running on max for years. Once the Fed and the BOJ (and possibly the ECB) are completely out of bullets, it will be like a supermassive star that has burned all its nuclear fuel down to iron. Nothing can then stop the collapse. Nothing.

    September 2008 was the Event Horizon, and it occurred on Bernanke's watch- now there is no escape.

  12. Bernanke's plans and the plans of other central bankers so far have only made the 1% fabulously wealthy. And this was done in large part by destroying the savings income of all the American seniors and those closing in on 65. People saved for retirement outside the stock markets and Bernanke does not like that, thus he has let loose the dogs of war against savers. The near-zero interest you get on your savings has destroyed many prudent old folks who worked hard, put off consumption and saved hard earned money. This is HOW an economy is supposed to be capitalized, BUT not under the great "Money Printing Bernanke"!

    This system deserves to collapse full tilt. Bernanke is a friend of the banking class and an enemy of the people.

  13. The lesson in all this is to NOT get into a credit bubble in the first place by fostering capital misallocation through an artificially low cost of money.

    Sadly, all of us are paying the price for Ben's reckless money printing schemes.

    The Banksters are printing at will
    QE is a form of blue pill
    It gives the rich more
    While the middle gets poor
    And makes markets high when we're ill

    The Limerick King

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