The problem with saying things is that you can’t “un-say” them afterwards. Words can hurt and saying sorry doesn’t make the pain go away as though it had never happened. Or as Warren Buffett put it (typically much better than I have) “It takes 20 years to build a reputation and 5 minutes to ruin it.”
It is a shame that the Sage of Omaha was not guiding the hands of the IMF/Cypriot government/ECB (aka ICE) this last few weeks after they announced that the cost of bailing the Cypriot banks would not only be paid by shareholders and taxpayers but by depositors too – just imagine if you are unlucky enough to be in all three categories at once.
Their timing was impeccable. Recently, we saw the second instalment (the CCAR) of that dangerously vacuous exercise known as the Fed annual US bank stress tests, whereby in the first part the Fed does a risible imitation of Horatio Nelson holding his telescope to his bad eye and declares that the US banking system is just fine and dandy to be followed by the sequel in which the bank CEOs simultaneously suffer the onset of Alzheimer’s and conveniently forget that when times turn rough (like they did back in 2008) banks need more capital than they had imagined. This makes the markets believe that the banks, which underpin the real economy, are in good shape while encouraging the bank CEOs to act with complete insouciance towards risk. This should have sparked another party on Wall Street. Yet the Cypriot crisis (Cyprus’ banks are both over-leveraged and, relative to the size of Cyprus’ tiny economy, too big to be allowed to fail) was a stark reminder of a few facts that everyone from Wall Street to Wallsend was trying to forget:
1. The banks are still in brittle shape globally (none worse than the Eurozone banks)
2. Governments will (as they always have) continue to go to any lengths to secure their own survival (including confiscation of private property, whether it be gold in the form of Executive Order 6102 or cash in the form of the ICE decree)
3. Money held in banks is not safe (see 1 and 2 above)
4. Money is not safe (see 2 above)
Lame attempts at backtracking now might paper over the cracks – but the heist that the ICE conspirators tried to pull has backfired badly and any attempts to renegotiate the deal now might succeed in stirring the animal spirits of the markets once again for a little while longer BUT the seed has been planted, the genie has escaped the bottle and the damage has been done. The fiscal experiment of the last few years has been laid bare for the smoke and mirrors exercise with financial models that it really is and the world won’t be the same again. Once trust is lost, it’s much harder to regain. Any actions by policy makers will now, thankfully, be subject to much closer supervision and the financial trickery, jiggery and pokery that has been so accepted in the last 5 years will be much harder to pull in future.
Students of the classics might see an irony in that the birthplace of Aphrodite, goddess of beauty and love, who emerged fully grown from the sea, could be the rock on which perishes the ugly sleight of hand of Super Mario & Co. Just as Aphrodite betrayed her lame, ugly husband with Mighty Aries (the God of War), the policy makers seduced the Cypriot banks into betraying investors. Like Aphrodite’s husband, Hephaestus, Cypriot depositors do not have a lot going for them – many are non-residents, including a goodly proportion of Russian money, behind whose back the ECB felt as little compunction about going as Aphrodite and Aries had. In mythology when Hephaestus caught Aphrodite and Aries in flagrante delicto, Aries managed to get a 3rd party (Poseidon) to pay the statutory fine for this behaviour on Aries’ behalf. In the modern version, the ECB and IMF seemed to think that they could actually get the husband himself to pay – but they have already fleeced most 3rd parties already.
Speaking of Warren B, he has been commenting lately on the US banking system, saying that “Our banking system is in the best shape in recent memory” – perhaps this comment is motivated by his ownership of so many of them? Or maybe it is just that when you get to the age of 82 your recent memory doesn’t stretch back as far as it used to? Or maybe just that when you are referring to the US banking system “in recent memory” you are not actually setting the bar that high.
I admire Buffett immensely. He has got a very sharp mind. The method that he devised of generating excess return through cash flow at Berkshire Hathaway is something that no-one else had ever previously devised.
There are ways to keep your deposits safe but they do not involve Cypriot banks and there are ways to generate reliable consistent returns but they do not involve stock picking. They do involve judicious choices of institutions and jurisdictions, asset backed fixed rates of return and intelligently and pragmatically diversified portfolios – but that does not really make for such entertaining one liners. We know our pace – rock steady, not rock stars.
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