So Cyprus has re-negotiated their bailout plan with the EU after the initial attempt failed so badly. Supposedly this is better than the previous attempt, which was going to fleece all those poor pensioners as well as the nasty Russian oligarchs. But I’m going to suggest to you that this is really a shiny penny trick. My guess is that, within two or three years, it will turn out to have been a gigantic windfall for the very offshore investors who are supposedly being punished right now for their dodgy behaviours.
Remember back in 2008 and all the screaming from investors about the bailouts of AIG and General Motors? How everyone was going to lose their shirt? Well let’s take a look at how things turned out. Note that all the banks, the auto companies, and AIG, have all repaid their loans. With interest. Ahead of schedule. Supposedly, they repaid ahead of schedule to show just how aggressively they were reforming themselves and how seriously they took the government intervention. But if you look closer, it turns out that all those investors who screamed so loudly about ‘government takeovers’, have actually made money. A lot of money.
And yet they repaid ahead of schedule. If they were in such dire straits how could they possibly repay ahead of schedule? When you are I get into financial trouble, we take every second of every minute of every hour of every day we can to pay our bills. I’m going to suggest that this is a key part of the shiny penny trick; to divert the eye from the fact that investors were actually making money on a completely pre-meditated deal; essentially borrowing money from the government and through some very clever accounting, letting the Corporation pay the interest while they reaped the rewards. Not literal dividends, In essence they were able to get new shares in their now supposedly ‘worthless’ companies and then watch as the companies made a comeback and their junk value investments went through the roof.
Investors with more than €100,000 in Cypriot banks, are taking a real hit in cash; something like 37%. But, and this is important, just like at AIG, they are getting shares in a new investment that is indirectly backed by a central bank. And just like AIG, they are getting these shares super cheaply, which seems like they’re really getting screwed. But remember your investing 101: you buy low and sell high. Since they’re getting these shares so cheap, but getting LOTS of shares, all it takes is a modest recovery in the Cypriot economy for them to make up high. In fact, they do not want expensive (Apple) shares. The junkier, the better!
This is not idle speculation. This is exactly what happened to a whole class of AIG investors when the company was bailed out in 2008 to the tune of $125 billion. The company has not only repaid the entire debt, but investors who took ultra-cheap shares as ‘a bone’ have made billions—with a ‘B’. In essence, they did the same thing with the bailout dough as with those nasty CDOs–using highly leveraged money (junk value). It was risky for them I suppose, but that’s what pros in every profession do: take calculated risks. And in this case, having the government working with you, makes it a pretty good risk.
I’m not saying that the fix is in all the time. But I am saying that you really want to look a little closer at all these so-called ‘crises’. There is a lot of kabuki theater going on. The louder the screaming? The more you should be skeptical.. Because, think about it, how can they possibly be losing their shirts –all- the time and still continue doing all these huge deals? The simple answer is: they don’t lose money. Screaming and moaning is just part of their job description. They do it in the same way that politicians kiss babies and make hyperbolic speeches. But at the end of the day, when you see all the mega-investor screaming, look a little closer. There’s almost always more to it than meets the eye.