The EU Needs a Bill Seidman to Save It from Itself: Cyprus and the “Reverse Toaster Theory”

By William K. Black
(Cross posted at

Everyone involved in financial regulation in modern times with any broad knowledge of the field will know of Bill Seidman, Chairman of the FDIC and the RTC.  In 1989, the newly elected President Bush (the First) had a very good idea that became the Financial Institution Reform, Recovery and Enforcement Act of 1989 (FIRREA).  FIRREA was one of the very unusual cases of enhancing financial regulation.  It was prompted by the lessons we had learned in containing the Savings and Loan (S&L) Debacle.  The original administration bill, however, had a very bad idea associated with the President’s chief of staff, John H. Sununu.  Sununu is a brilliant guy – who wants you to know how much smarter he is than everybody else.  His wiki biography page informs the reader that:

“Sununu has met the eligibility requirements for the Mega Society, the world’s most exclusive high-IQ society, which accepts only those who score in the 99.9999th percentile on IQ tests (Mensa, the world’s largest high IQ society, accepts scores in the 98th percentile).”

Sununu felt that being smarter than almost everybody in the world made his policy proposals indisputably correct and allowed him to transcend normal ethical and legal restraints on things like using government aircraft as his personal taxi service.  He became best known for one policy idea before his ethical blindness led President Bush to ask for his resignation.  Sununu became identified as the great defender of the proposal to tax small depositors to pay to resolve the S&L debacle.  Bill Seidman immediately derided the proposal in the media as “the reverse toaster theory.”  U.S. depositories once gave new depositors a small appliance such as a toaster as a gift as a means of evading Regulation Q’s limits on the interest rate a bank could pay savers.  Seidman said the plan to tax the depositors represented:  “the reverse toaster theory–instead of the bank giving you a toaster, you give them one with your deposit.”

Seidman’s quip killed the reverse toaster idea within 24 hours.  Nothing kills a brilliant idea by a transcendent genius like ridicule that punctures hyper-inflated egos.  Sununu, of course, never forgave him and sought to drive him from office.

Unfortunately, there was no Bill Seidman as a senior regulator with the guts and brains to ridicule the brilliant idiocy of Alan Greenspan and Timothy Geithner during the lead up to this crisis.  The EU and the European Central Bank (ECB) are run by self-described geniuses who have managed to and their latest display of brilliance is – “the reverse toaster theory.”  They decided to roll it out in Cyprus.  Instead of resolving the crisis in Cyprus they have managed to spook world financial markets.

The specific plan is to impose a supposedly one-time tax on depositors in Cyprus’ banks.  The tax was the price demanded by the troika to bail out Cyprus’ insolvent banks.  It is a “6.75 percent tax on deposits of up to 100,000 euros, a move that would hit ordinary savers” and 9.9% for larger deposits.

The EU imposed this tax, contrary to recent promises not to impose losses on small depositors under the 100,000 euro insurance limit.  Unsurprisingly, no one in the EU believes the EU’s brilliant leaders’ promises that (1) the tax on depositors will not be inflicted on other nations that need aid and (2) that it will never be repeated even in Cyrus.  Depositors in Cyprus’ banks have emptied every ATM of cash.  As soon as deposits are unfrozen many will withdraw their entire savings from the banks.  Cyprus is a money laundering center, particularly for Russian plutocrats.  Cyprus’ head of state’s principal negotiating demand was that the tax on even the largest depositors be kept under 10% lest the Russian oligarch’s remove their deposits.  His demands translated into a larger tax on small depositors.  The ordinary people of Cyprus are the prey of both their National and regional leaders.

So what will a rational large depositor with funds in a bank based in the periphery do this week?  The obvious answer is to withdraw your funds from the periphery bank and transfer them to either a U.S. or U.K. bank that is a systemically dangerous institution (SDI – the non-euphemism for a “too-big-to-fail” bank).

The EU geniuses who have thrown the Eurozone back into a gratuitous recession, and too much of the periphery into Great Depressions, finally figured out that the ECB could act as a pseudo-sovereign and stop the death spiral that the euro, austerity, and the Great Recession had caused in much of the periphery.  The euro, austerity, and the Great Recession combined to create a witches’ brew that was the ideal, perverse environment encouraging the bond vigilantes and credit rating agencies to create a fiscal death spiral.  All the ECB had to do was make a vague  promise that it would not let the system crash and burn and sovereign debt yields of the nations of the periphery fell by hundreds of basis points.

The Cyprus “reverse toaster” tax demonstrates that the EU and the ECB have not learned from their fundamental policy mistakes.  Causing deposit runs is a particularly demented public policy that only the EU’s geniuses – the ones who cause recurrent disasters – would inflict on the periphery.  Inflicting the tax on depositors is clearly the EU’s policy experiment.  Poor Cyprus – rather than being too big to fail it is too small to have the EU worry that their experiment might prove disastrous.  The EU’s geniuses are once again dismayed that no one believes them when they say that they will honor the insurance obligation to future depositors who are within the EU deposit insurance limit and who did not place their deposits in banks located in Cyprus.  After all, news reports are unanimous that Germany insisted on the tax on Cyprus’ depositors because the Germans were unwilling to support greater aid for Cyprus because such aid was politically unpopular in Germany.  That sounds like a German position that could never recur!  I’m sure that is what Italians and Spaniards are telling themselves this morning.

But there is a better alternative than self-deceit about the propensity of EU leaders to engage in deceit.  The EU needs to find its own Bill Seidman – a top financial regulator who has common sense, is not a creature of the banks, and who will skewer the pretensions of the troika’s savant-idiots.


Bill Black is the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. He spent years working on regulatory policy and fraud prevention as Executive Director of the Institute for Fraud Prevention, Litigation Director of the Federal Home Loan Bank Board and Deputy Director of the National Commission on Financial Institution Reform, Recovery and Enforcement, among other positions.

Bill writes a column for Benzinga every Monday. His other academic articles, congressional testimony, and musings about the financial crisis can be found at his Social Science Research Network author page and at the blog New Economic Perspectives.

Follow him on Twitter: @williamkblack