The World In Transition: Look What The Government Can Do For You!

by: John M. Mason


In a world where the government is trying so hard to "save the world," there are many opportunities for investors.

Timothy Geithner, in his new book "Stress Test," presents very explicitly one such situation.

There have been numerous opportunities over the past five years to benefit in this way, and the opportunities still exist.

I would like to add a note to my blog post, "The World in Transition," which was posted June 3, 2014. In that post, I referred to situations in which people in the private sector could make lots and lots of money from the efforts the government is making to stimulate or protect the economy.

The situation I am going to present comes from the book "Stress Test" by Timothy Geithner, former Secretary of the United States Treasury Department, which presents Geithner's view of his twenty years or so of dealing with financial crisis while working for the United States government.

The specific situation I am presenting comes from pages 311 through 314 of the book and deals with the effort made by Geithner and others within the US government to test the viability of the banking system in order to determine how much capital the largest 19 banks in the country needed.

The consequence of the stress tests was to have banks that needed capital either raise the capital from the financial markets, or, if this were not possible, to have the government use TARP money to provide the capital to the banks that needed capital but could not raise the funds in the marketplace. Geithner ironically relates that a colleague deemed this effort to be "the Geithner put."

Now, to quote from the book:

"The hedge fund manager David Tepper later told the press that in February 2009, while the world was mocking my (Geithner's) speech, his Appaloosa Management fund began buying bank stocks, because he read our public statements and thought our strategy sounded sensible. He continued to increase his investments in Bank of America (BOA) and other troubled firms after we announced the put, and in 2009 his fund reportedly enjoyed some of the best returns ever recorded on Wall Street."

Geithner then writes:

"Of course, our goal wasn't to help Tepper make billions of dollars for himself and his investors. Our goal was to get the economy growing again, and that required stabilizing the banks so they could start lending again. Tepper simply listened to what we said, watched what we did, and bet that we would succeed."

Note that Geithner writes that Tepper made "billions"... not millions or thousands... but billions!

This is exactly what I was writing about in my June 3 post. The United States government has created situations in which a large number of individuals and businesses have made an enormous amount of money. And it has not only been the Treasury Department that has done this. I have written about how the Federal Reserve can also produce these kind of results (see "Bernanke is Underwriting the Wealthy").

All I am saying is that in an environment like the one that we are in, the government creates opportunities for substantial investment gains. As I wrote in the first article above, not all these opportunities are available for the "middle class" investor. However, some are, and investors wanting to make the most out of the current market environment should be aware of the possibilities.

In most cases, however, as the one presented by Timothy Geithner, the beneficiaries most often are those that are in many ways helping to skew the income/wealth distribution toward the wealthy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.