Macro Tsimmis

intelligently hedged investment

Bank of America (BAC) update #4—bailout bill enacted

Posted by intelledgement on Sun, 05 Oct 08

Well, clearly the fix is in. After rejecting the bailout of the morally and financially bankrupt banks on Monday, enough members of the U.S. House rendered emoluments in the form of a reversal of their position to change the result on Friday and the U.S. taxpayer will soon be cleaning up the mess on the floor left by greedy Wall Street rocket scientists (that’s what they call the guys who dream up derivatives and other weapons of financial mass destruction) and the corrupt mortgage companies who provided the rocket fuel and ratings agencies who aided and abetted the excesses by labeling all the launches safe. (Not to mention the fact that the U.S. government mandated the Freddie and Fannie offer mortgages to folks who could not afford them in the first place.)

This is terrible, shameful, fundamentally dishonest public policy designed to prop up a irredeemably broken and corrupt system. One can only hope that there will be a change in administrations, and that the Obama people will take a different, more honest approach, having as they will the opportunity to blame everything on W. But we aren’t holding our breath waiting for that change, mindful as we are that it was mostly Republicans in the House who voted against the bailout…and Democrats who voted overwhelmingly in favor.

So far as we are concerned, tactically shares of all our bank shorts—Bank of America (BAC), Goldman Sachs (GS), and HSBC Holdings (HBC)—were crushed on Monday when the House rejected the TARP plan and then zoomed when it became apparent the bill would pass, and we are now significantly ahead only on GS. Strategically, it is clear that the government intends to attempt to keep all these companies in business. We believe that shares values are now extremely unlikely to go to zero, but it is not at all clear that government action will (or even can) guarantee everything will now get back to “normal.” The level of systemic risk here is still high, and even if the inevitable shakeout is delayed by government action, things here are unhinged enough that the odds we will have an opportunity to cash in our shorts at sharply lower prices are very good. So, still, we hold here.

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