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An Extended Vacation in Cyprus

Everyone spouting that the retail depositor was thought to be sacrosanct has clearly forgotten the mood 4 years ago when intelligent people were taking all of their money out of banks, in the US. In a crisis all bets are off. All rules can be broken.


Are our memories really that short? I was trading equity swaps at BNP Paribas at the time, or should I say pretending too, since all credit had dried up at any cost. Markets had been in turmoil, Bear Stearns had been bailed out by JP Morgan for $2 a share and Lehman Brothers was next. You have heard the joke how fast do you need to run to get away from a lion? Faster than your friend. The marketplace that was acting like a massive herd of lions chasing to maul the next weakest prey running away lining up Merrill Lynch, Morgan Stanley, Bank of America, Citigroup and even Goldman Sachs. There was panic clearly. I heard every possibility and every far out scheme. The most bizarre was that we would quickly turn into a zombie state so if you did not have gold bars to store wealth, a massive protective fence and lots of ammunition you would end up in a bread line like in the 1930’s. And among that panic was a growing number of supposedly intelligent people that were speculating that the Federal Government might take the drastic step of nationalizing the banking system. This gained credibility and fed on itself to the point where those supposedly intelligent people were taking all of their money out of the banks. Not just the amount to get down to the insured deposit level. But all of it. Sure you are saying that is because their bank might fail. But they did not put it in another bank. They thought the whole system was toast. 100% levy. Who was comfortable with the thought that when all the dust had settled that the little guy would be the winner? That is not how America operates. The little guy has no lobbying base. The main difference with today’s crisis, recognizing the failed liquidity of the Cyprus banks, is that we here in the US believe that the Cypriots and those with money there had no idea that a crisis was brewing because of the soothing words of their EU friends and would just sit on the beach and shrug when it happens. Do you really believe that? Have you read this from January 26th?

I do not espouse to know what is going on there or the implications for the world markets and economy with certainty. Yes the world is increasingly intertwined but we just brushed aside an $85 billion hit in the US right? I find it odd that some can be so certain that the markets will react with the EU down 3-4%, S&P down 1.5-2.0%, US 30 yr bond 3.05%( -15bp), Italy/Spain 10 yr +15 bps. They may be right. They may be wrong. But take it in for a moment that if they are worried these moves will impact their investment positions then they were clearly wrong about what would happen before Friday. Before this weekend the idea of an extended holiday in Cyprus would bring to mind the picture above. Please keep it real.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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