Friday, September 19, 2008

We'll Be Gone

In investment banking, some managing directors reassure their rookie associates with a saying: "IBG/YBG: I'll Be Gone, You'll Be Gone." It refers to the tendency of some hot-shot bankers to structure a high-risk deal - say an arbitrage position or credit swap- in the hope of squeezing out as much transaction income as possible before the deal explodes. If it does blow up, the bankers who assembled it will be gone, fired, kicked out, finished, but at least they got their one-time bonus and adrenaline rush.

I am now becoming concerned that Treasury Secretary Henry Paulson is trying to relive his investment banking glory days at Goldman Sachs, like an aging football player who thinks he just has to last one more season. The deal announced today won't be fully understood - let alone paid for - until after Hank Paulson is long gone from government service. We now have a trifecta of sorts:

I'll Be Gone: Mr. Paulson won't be around to see this bailout through.
You'll Be Gone: You, a specimen of Homo investus, will see your retirement savings decimated by asset deflation, dollar inflation, and surprise taxation.
They'll Be Gone: The preppie CEOs, bankers, and portfolio managers who agitated for this bailout will stick around long enough to collect a final severance check, and then stick the rest of us with their bill.

In a side note, Rolfe Winkler got it right today when he traced today's wild market rally to a short squeeze driven by the SEC's "temporary" ban on short-selling financial names. This one actually caught me unawares. I was a bit concerned about the rally upending one of my own positions, an uncovered short call on XLF with the strike price at 24. When XLF opened at a hair above 24 this morning, I decided not to push my luck. I closed it out today at a loss rather than risk the strike price being activated. Oh well, it's a tax loss. My long put on XLF remains in place. Thanks a lot, Plunge Protection Team, for screwing up the Alpha-D portfolio this month with your "timely intervention".

The stupidity of the U.S. government's bailout of all things financial - mortgage-backed debt, money market funds, investment bank shareholders - is staggering beyond belief. No need to repeat here what plenty of other commentators have to say. I will add my brief take: The success of this bailout depends completely on the willingness of foreign investors to swallow $500B-$1T of new U.S. government debt within the next several years, starting Monday. I simply don't see how that is possible without a massive increase in yields for any Treasury (10yr and up).

Uncle Sam has delayed The Crash by about a month. If the move to prop up money market funds sparks a flight from bank deposits, we'll see a run on healthy banks as well as sick ones.

It's still not too late to prepare for economic annihilation, if you're so inclined.

Otherwise, it's IBG/YBG/TBG and finally WBG: We'll Be Gone.

Nota Bene: Anthony J. Alfidi holds a long put on XLF and short calls on MER and BAC.