Financial Sarcasm Roundup for 09/16/13

I'll lead off this particular roundup with a bizarre twist in the Fed-head replacement saga.  Larry Summers has withdrawn from consideration as the next Fed chairperson.  That means Janet Yellen is once again the heir apparent to Helicopter Ben.  I have two theories about this sudden pullout.  My first theory is that Summers' media game was a lot stronger than his real candidacy.  Old Washington hands are skilled at spinning the media even if they advocate a weak case.  If this theory is correct, Summers never had much of a chance and Yellen was always the front-runner, as I've long suspected.  Nothing negative in her background ever emerged in the media.  My second theory (which does not conflict with the first theory) is that Summers' public commentary on the limited effectiveness of QE was the dealbreaker.  Yellen's dovishness on inflation indicates she will continue QE-infinity, and that's ultimately what politicians want from the Fed now.  Bernanke likes Yellen because she'll continue his policies and thus take the fall for their eventual failure.  He's off the hook with the old "I'll be gone, you'll be gone" banking adage..

The reality of economic annihilation is filtering into the daily awareness of more Americans.  A record number of Americans self-identify as "lower class."  People receiving EBT cards and HAMP modifications have no illusions about their station in life.  That's why those programs aren't alleviating poverty.  Many of the working poor will simply give up on upward mobility if this class consciousness becomes permanently ingrained and they settle for a lifetime of collecting public benefits.  That may very well be what the plutocratic class wants the poor to do.  The country club's parking lot only has so many spaces and nobody wants to see a cheap compact car next to a Rolls Royce.

Emerging markets are on a debt binge.  This will end badly for markets that aren't export-driven.  It may be a blessing for markets that export hard assets and borrow in US dollars.  Hyperinflation will eventually destroy the dollar's value and leave hard asset owners feeling fine.  The Fed's hints of tapering QE have pounded emerging market equities lately.  Those hints will end once Yellen is running the Fed.  It's a great time to be a BRIC exporter.  

Bernanke's Pangs Over TBTF Bank Capital Adequacy

Is the Fed Chairman having pangs of conscience over regulation of TBTF banks?  His latest remarks in Chicago indicate a willingness to implement tougher capital controls.  The Fed's much-ballyhooed stress tests of big banks were touted as assuring their survivability.  Either the banks have taken on more risk since then, or the stress tests were rigged.  Reporting on the Fed's balance sheet expansion emphasizes how the Fed has bought impaired securities (MBS and such) from banks while extending them no-cost loans to buy long-dated Treasuries.  We also know banks aren't lending, with the exception of government-backed home mortgages and student loans.  If bank risk has been reduced, then the stress tests were fixed.  The Fed has used up all of its balance sheet tricks to keep banks solvent.  Now banks are exposed to interest rate risk on their Treasuries.  When rates inevitably rise, those Treasuries will drop in value and banks' balance sheets will be crushed again.  The Fed enticed banks to trade one risk for another.

More detailed reporting of the Chairman's remarks reveals concern over a run on money-market funds.  The financial crisis of 2008 almost achieved critical mass when money-market funds threatened to break below $1 of NAV.  Nothing has changed and the money-market fund your bank says is as good as cash contains nothing more than IOUs from counterparties who can still go bust in a heartbeat.  The best decision is to prohibit money market funds from owning anything other than cash but that won't happen because the Fed would rather "assemble data on repos" as a fig leaf.

Maybe Helicopter Ben wants out when his term expires because he knows the Fed, owned by its member banks, will not tolerate any changes to money-market funds that reduce their usefulness as off-balance sheet funding tools.  Tighter capital controls mean less lending but banks are hardly lending anyway without government backstops.  The Chairman is having his moments of clarity long after the political will to force real changes on banks evaporated.  The next crisis will be upon us with no advance notice.  Federal Reserve officials concerned about their place in history won't want to be around when it hits.  "I'll be gone, you'll be gone."

Success And Ethics Only Mix One Way

The NYSE Group's chairman wants us to think that career success in a large organization is compatible with high ethical standards of conduct.  I beg to differ.  The massive bonuses paid out to bank executives under TARP are proof of this incompatibility.  Those executives knew their financial sausage factories were selling mortgage backed securities whose valuations could never be supported by underlying property values.  Anyone raising a red ethical flag during that process would have been canned.  Go along to get along, and you'll get rewarded with big bucks.  Sell that garbage quick with big lies and collect that bonus.  Don't worry about the client getting hurt afterwards when "I'll be gone and you'll be gone."

My post's title hints that success and ethics only mix in one way.  That way is self-employment.  When your only boss is your own conscience, no one can order you to falsify documentation or misrepresent an investment product.  Say "thanks, but no thanks" to Wall Street's hucksters when they try to tell you otherwise. 

A Primer On Financial Career Archetypes

Careers in finance are fun and rewarding. If you want to win you have to arrive prepared and ready to roll. The specific type of job doesn't matter. You can be a banker, broker, analyst, manager, whatever, but in general you need to have "what it takes." Let's discuss the most common types of employee you'll find nowadays on Wall Street.

Here are three main types of people drawn to careers in financial services.
Type 1: The Angel. The conscientious, hardworking, intelligent person who insists on taking care of the client and delivering the highest quality service. This person is scrupulously honest and insists on strict adherence to laws, regulations, and the highest standards of ethical behavior.
Type 2: The Predator. The lying, thieving, conniving, backstabbing, manipulative, egotistical jerk. This person would sell their own mother down the river for a fast buck and epitomizes the "I'll be gone, you'll be gone" (IBG/YBG) absence of concern for the long-term effects of their actions on the health of clients and the industry.
Type 3: The Preppie. The spoiled, airheaded, condescending trust-fund baby who had their high six-figure first job handed to them after sleeping their way through four years in the Ivy League. This person is amused at anyone who has to work hard for a living as such things are so declasse for someone at their level.

Now that we've identified the three types of people you're most likely to meet in your Wall Street career, let's discuss their typical career paths.

Angels are immediately identified for eventual termination. They are given plenty of grunt work to keep them busy, the results of which will always be claimed by the other two types. They are widely viewed as weak and unfit for employment in finance, and will never earn anyone's respect with the way they do their jobs. Their honesty and devotion to detail quickly prove to be career liabilities because they pose a threat to the chicanery of their managers.

Predators are initially successful based on their ability to lie, bluff, and bully their way around clients and the office. The more successful ones will ally with a Preppie to network their way up the ladder and gang up on Angels for fun. They predominate in sales but can also be found in management if they can ride the coattails of a well-regarded Preppie. They earn the respect of others by abusing and firing Angels and by outmaneuvering other Predators.

Preppies are the most successful of the three archetypes. Their extensive family connections will steer huge amounts of business to their employer as a matter of course, with little to no effort necessary. They show up late to meetings and vacation for months at a time because they know there will be plenty of Angels back at the office to do their work for them as long a few Predators are left behind to yell at them. It's okay if they fall asleep on the job because they always have an Angel at hand to take notes for them and explain what they missed. Preppies intermarry primarily with each other to extend their bloodlines, but sometimes the more adventurous among them will deign to marry a genetically healthy Predator (based on looks and personality). They usually rise to the top on the back of work done by Angels and Predators. Preppies are the star performers of Wall Street and darlings of the social scene in major metropolitan areas.

If you are a Preppie, you don't need to read my blog. All of your career insights will come from family members. If you are a Predator, you'll probably read my blog just to claim my ideas as your own so you can score a promotion (go to hell, jackass). If you're an Angel, for Pete's sake don't spend longer than a year or two working for Predators and Preppies. Start your own business and outperform them in life.

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.