Realpolitik Killed The Bank Shorts
Elizabeth Kubler Ross' classic work, On Death and Dying, is a misused and misquoted book - it is about a topic far more serious than making money - but she has provided a great framework to evaluate and accept the realpolitik that destroyed many short positions in the banks. These positions were killed by stress tests that were somewhere between worthless and fraudulent - at least to people who passed fourth grade math - although very useful to the psyche of the market and the American public. So good job Mr. Obama - Roosevelt did the same thing when he closed and then re-opened the banks in 1933. Of course, the system then went on to see many thousands of banks fail and it took a world war to pull the country out of a credit starved depression.
Denial: As it first began to dawn on the Street that the stress tests were going to be meaningless puff, I kept telling myself this could not happen, Obama and Bernanke are too smart to hand the country a zombie banking system. I overlooked the political reality - the realpolitik of the situation - Congress was not going to be forthcoming with more money should the stress tests be truly rigorous or objective when there was no money to re-capitalize them. How could they given the reckless behavior of the banks and their craven behavior since the fall of Lehman. I was in denial of the real politik of the situation.
Anger: I then stormed around my house, boring my children and thoroughly annoying my overly patient wife ranting about such untimely concepts such as economic fundamentals, honest accounting, Citigroup's off balance sheet debts and so on. I wrote a great - I mean terrific - piece for this blog while riding back from a Fox Business television interview about my book, Sell Short, and, appropriately enough, we hit a bump, my hand did something stupid, twice, on the keyboard and the piece evaporated into the digital heather. But it did dissipate my anger.
Bargaining: I then got cute and tried to bargain with the fates. I picked apart the guidelines for the stress tests when they were released and wrongly concluded Citigroup was a great short because the Fed's guys were going to include analyses of off balance sheet assets. As far as I can tell, Citi has more than a trillion of them as of November of last year they had more than $1.2 trillion of them) and off balance sheet assets are off balance sheet for a reason, usually not a good one. So I told my subscribers to consider shorting, short term, this month, Citigroup, through the use of puts. I never recommend that an individual actually short a stock.
Depression: The stress tests results were leaked - brilliantly - and then reported out - a non-event--and I got depressed. As an advisor, I had let my subscribers down; as a citizen with many friends and family out of work or having their businesses foreclosed, I now knew that realpolitik had condemned the country to several, perhaps many years of zombie banks, generating capital through obscene credit spreads and writing off bad debts over too long a period of time.
Acceptance: You cannot fight the tape and since Wall Street right now is dumb enough to trade headlines and run when the news turns bad, you cannot short the banks short term. I accept this, accept we will have zombie banks and we may even need another financial crisis to fix the problem. I even accepted how the Feds originally wanted Citi to raise $35 billion in capital, as reported this weekend in the Wall Street Journal, and punked out, costing my subs a lot of money. Longer term, the banks have little real earnings power, many may yet require TARP II or its equivalent and with a zombie banking system the recession will last much, much longer - and corporate profits will be much, much lower - than Wall Street expects, setting up great long term short positions. Maybe we can use the money to put real people back into real jobs rather than have them suffer due to realpolitik.
Forgive my cynicism - there is a bright spot to all this, and that is the realization that despite my harsh words we do live in a civilized country regardless of what you may think of Congress and politicians. If we truly lived in a country driven by Bismarck's definition of realpolitik - like Russia or China, perhaps Venezuela - you would not see many bankers complaining on Fox Business or CNBC, you would be seeing their widows at memorial services on the evening news. And those of short sellers as well.
