Accepting the Realpolitik That 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 realpolitik 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 as economic fundamentals, honest accounting, Citigroup's (C) 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 analyzes 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.

Comments

[BigJoe:]

I am glad you're so much smarter than everyone else. Can you please tell me your net worth, where you graduated from college, what your major was, your GPA, and your previous jobs in the financial markeplace prior to being a blogger?

May 11 01:40 PM

[Jasper M:]

There is a word for this: CAPITULATION.
Data-point noted.
Investment is aided by patience. And for shorts, a prerequisite for patience is a nice, wide margin.
I am currently short several financials, and buying puts. The Obama administration cannot delay their reckoning much longer.n In fact the euphoria over the banks that "did well" is Way overdone, given likely forward earning power. I think most will revisit their lows within the year.

May 11 03:09 PM

[Fd:]

it seems to be that is is easy to blame others when a mistake(i.e. the govt) is made. Even if your story is completely true (which really is open to debate at a minimum), you really led your "subs" to follow a gamble, betting on the vaguaries of a test upon which you really did not know the details of. I think you should accept your own portion of the failure for misleading them , and in the future try to adopt more long-term positions if you can't handle the consequences of speculation.

May 11 03:10 PM

[infp:]

I'm pretty sure that the men who led us into this financial crisis were rich, well educated and had impressive resumes. Unfortunately, that didn't stop them from looting the country.

May 11 03:42 PM

[James Wilson:]

When making any kind of reccommendation to the Public any one worth their salt know the Public does not read every line they skim for information.
So if you mention short and banks in the same sentence guess what !

Maybe it is time to do a Kramer. Have the free site where you advise people to buy some stocks and sell others then have you pay for advice site where you tell people to buy stocks the others are selling and to sell stocks into a run your causing.

At least 50 % of the People are going to hate you all of the time anyway. 25 % will hate you 100 % of the time and 75 % of the people are gullible enough to listen to you.

May 11 03:50 PM

[twitee:]

Unfortunately, the Greatest Country in the world has fallen into the hands of few greedy Wall Street mobsters with he FED and the GANG (JPM, BAC, GS, WFC, C, MS) members trying to keep it alive. The severity of the financial tsunami is so great that they have no choice but to resort to idiotic manipulation in an effort to save it, but they are only postponing the inevitable.

At the same time, it is all working toward destroying the dollar, which is in a way, is positive for US of A in a long run (devaluating the trillions in dept/deficit).

Gold will become the only valuable real currency (USA has the largest reserve in the world) and will cause the current financial system to collapse as we know it. The run on the market (minus the financial equities) is the indication of refaltion not in a distant future. Based on this scenario the equities (with cash and tangible asset) should go up 3x from where we are today.

Stay long with gold and anything tangible, run from the financials



.

May 11 04:02 PM

[Smackdown:]

Maybe you should have covered your shorts instead of continuing to screw that dead corpse. You would have done your subscribers a real service if you had proferred real advice instead on the tape fighting crap shoot you smart guys like to blather about.

My clients have made a fortune going LONG the preferreds and trust preferreds from those zombies you get worked up over. Real opportunity. Real big interest payments. Real big appreciation.

Any reasonably intelligent person could see the outcome. Why should these debt instruments have been trading as low as 15 cents on a dollar two months ago? Some like Citi preferreds, are up from 5 to 22. How is that profit?

I have been publically recommending preferreds and MLPs all year. I am not playing results.....

May 11 09:16 PM

[Trade Winds:]

Michael,

Just so you know, some of us got it.

As the saying goes, "It ain't what you don't know that hurts you. It's what you do know that ain't so." (Mark Twain / Will Rogers / Artemis Ward - you choose). Thank you - first for telling the story, and second for making it interesting.

May 11 10:24 PM

[InnocentsAb...:]

The whole notion of going short or long in a company that does not have accounting transparency is disconcerting.

But -- it does seem sometimes like absolute numbers are less helpful than relative numbers. Houses are less expensive.
Gas is a little less expensive. And short term loan rates are tiny.

A good time to borrow and start a business. However, fortune favors the patient.

May 12 10:29 PM

[Jasper M:]

Innocents,
Re opaque accounting, I agree about the long case - but not the short. If something is hard to see, it is likely being Kept that way, by someone's deliberate effort. And those invisible details are likely to favor the short case.
And I much doubt it is a good time to borrow, for Any reason. Wait a few years - interest rates will be higher, but costs will be Way lower.

May 14 03:45 AM