Willie Suttonomics

By: Michael Ashton | Sun, Mar 17, 2013
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I am sure that the Eurozone finance ministers have never heard of Willie Sutton. But they are engaging now in Willie Suttonomics.

Willie Sutton was the bank robber from the early part of the 20th century who, when asked why he robbed banks, reputedly answered "because that's where the money is!" This weekend, the Troika agreed to extend a critical loan to Cyprus in order to stave off a default for the small Eurozone nation. The €10bln loan was extended on condition that bank depositors be levied 6.75% or 9.9% of their deposits (the lesser amount if under €100,000) as part of the solution, and the new president of Cyprus said he accepted because he was given no choice.

I fail to see how this differs from what Willie Sutton did, except that Sutton at least went to prison - multiple times - for the crime. You went into the bank on Thursday and your deposits read €20,000 as you were saving for a new car, or a house, or college; on Monday, you have €18,650. It is being called, disingenuously, a "tax," but considering that no Cypriot body approved the "tax" it is hard to see how that appellation fits. The money vanished from the vault with no warning. That seems more like a bank robber's job...except that ordinarily, when a bank is robbed the depositors are protected. The depositors would have been better off if the money had been stolen by Willie Sutton!

My son, who is 9 years old, saw it the same way when I explained the basic facts of what happened to the depositors. He said "that sounds like something Lex Luthor would do." From the mouths of children...and I don't judge him wrong on this.

On Monday, I imagine that markets will try and behave as if this "puts the crisis behind us" again. But also on Monday, I imagine that every corporate Treasurer who has money in a bank in Europe will be trying to diversify those deposits to other jurisdictions. Perhaps, if I am such a treasurer, I will pull money from Italy to put into Germany or perhaps I will put it into UK or US banks. But one thing I certainly will not do is leave all of it in a bank in Italy, or Portugal, or Hungary, or Spain.

It is possible that nothing will happen, or at least not right away as stunned European depositors wait to find out if it's really true, and some dwell in denial. But it's also possible that we could see the mother of all bank runs, because it's no longer necessary for depositors to stand in long lines to withdraw their cash, as happened in every major banking crisis that happened before deposit insurance. This is exactly the opposite of deposit insurance - instead of the government protecting depositors, the government is opening the vault for the robbers.

Now, it's not completely approved as of this writing. According to Reuters, the Cypriot parliament will vote on Sunday whether to mug depositors for the levy. But, since the alternative is that Cyprus will have to default on Tuesday, the odds are good that either they'll approve the levy (which banks have already sequestered, without any law to tell them to do so), or there will be some 11th hour brinkmanship with the Troika and Cyprus on Monday. But by Tuesday, you will either have the disorderly default of a Eurozone member, or confiscation of deposits held in banks of a Eurozone country. Now that's a Hobson's choice if ever there was one.

Here are some stories elsewhere about the crazy Troika scheme: here, here, and here. And I rarely cite Zerohedge but here is a good summary of some quotes from well-placed individuals in Europe. Comfortingly, the response so far has been shock and anger. Most observers are, rightly, dismissing the soothing statements that this action is an "exception." Yes, it is - a confiscatory exception, and one that was completely random and unforeseeable by the depositors. Does it make one feel better that the crazy man on the street just set his neighbor's car on fire, if he says "but it's just his car - no one else's." No, because you know he's a crazy man, and now you know there is nothing he won't do. Random injustice is worse than systematic injustice.

Hold on to your assets, folks - I have no idea what happens on Monday but I have a feeling it will require more liquidity. But then, doesn't everything these days?


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Michael Ashton

Author: Michael Ashton

Michael Ashton, CFA

Michael Ashton

Michael Ashton is Managing Principal at Enduring Investments LLC, a specialty consulting and investment management boutique that offers focused inflation-market expertise. He may be contacted through that site. He is on Twitter at @inflation_guy

Prior to founding Enduring Investments, Mr. Ashton worked as a trader, strategist, and salesman during a 20-year Wall Street career that included tours of duty at Deutsche Bank, Bankers Trust, Barclays Capital, and J.P. Morgan.

Since 2003 he has played an integral role in developing the U.S. inflation derivatives markets and is widely viewed as a premier subject matter expert on inflation products and inflation trading. While at Barclays, he traded the first interbank U.S. CPI swaps. He was primarily responsible for the creation of the CPI Futures contract that the Chicago Mercantile Exchange listed in February 2004 and was the lead market maker for that contract. Mr. Ashton has written extensively about the use of inflation-indexed products for hedging real exposures, including papers and book chapters on "Inflation and Commodities," "The Real-Feel Inflation Rate," "Hedging Post-Retirement Medical Liabilities," and "Liability-Driven Investment For Individuals." He frequently speaks in front of professional and retail audiences, both large and small. He runs the Inflation-Indexed Investing Association.

For many years, Mr. Ashton has written frequent market commentary, sometimes for client distribution and more recently for wider public dissemination. Mr. Ashton received a Bachelor of Arts degree in Economics from Trinity University in 1990 and was awarded his CFA charter in 2001.

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