The resolution of the Cyprus crisis has begun to have the expected consequences. Other Europeans are getting concerned about their deposits, and some funds have begun to move to safer havens than Italy, Spain, Portugal. With the number three bank in Italy now essentially capital constrained, and possibly in need of a bailout, the flight of deposits could take it down. Maybe that is just the canary in the mine. How Italy and the ECB and the EU handle Italy and its banks will be crucial. With no functioning government, and a convicted felon and a comedian vying for power, one cannot hold out a lot of hope the Italians will get it right. Although Italy changes governments like changes in fashions, this time it is far more critical to get a real functional government that understands the extent of the crisis and the risk to banking. It is hard to be hopeful after the last election and the tragic comedy that is occurring. The fact that a convicted felon and one who chases 17 year old hookers can garner a sizable portion of the vote, is pretty astounding. Besides the fact that neither Italy nor Spain has yet come to real grips with their banking problems, the risk for investors is that there will not be a satisfactory resolution and Europe will fall back into serious crisis mode again in the next several weeks or months. The IMF and ECB can try to do the right things, but if the politicians are unwilling to agree in countries the size of Italy and Spain, then only bad outcomes can be expected.

While all of that continues to play out, there is little to no hope that Washington will get even close to any sort of bargain on entitlement or tax reform, and Dodd Frank continues to spew out more and more regulation which is not going to help in several cases it is proposing. Here we are, fully five and a half years since the capital markets began to crack in late July 2007, and the politicians are still trying to figure out what the rules should be. In the meantime, major US banks are stronger than ever, and are probably as strong as any in the world as a group. While Senator Levin continues to want to have his usual political theater on TV over the Whale, JP Morgan cleaned it up and moved on as has the market. JPM stock continues to move up and people who understand these things (not the politicos) forgot about it. Jamie did what he needed to do.

Now we are getting closer to the day derivatives will be handled in a whole new way, and there are major concerns among professionals in that market that the fix will be much worse than the disease. There were surely some who did wrong in that market, but taking a sledge hammer to the tack is not the best solution. AIG fixed its problem and is on its way to a very strong and bright future now that it has shed the government. Just compare it to Fannie and Freddie which are both still problematic and subject to full government political controls.