Macro Tsimmis

intelligently hedged investment

Bank of America (BAC) update #5—covered by the TARP

Posted by intelledgement on Tue, 14 Oct 08

Actually, this is a general update for all four banks we are short: Bank of America (BAC), Goldman Sachs (GS), HSBC Holdings (HBC), and Wells Fargo (WFC). The Federal Reserve announced today that they were using TARP funds to purchase preferred stock in three of these four—BAC, GS, and WFC—along with six other large banks. Theoretically, “[t]hese healthy institutions have voluntarily agreed to participate” in order to minimize any stigma that might be attached to taking TARP funds. In practice, the market is interpreting it to mean that while these nine big banks may be in trouble, the cavalry has now arrived and the day has been saved. The three participants were each up sharply—BAC +16%, GS +29%, WFC +10%—and even HBC was +2% in the general euphoria.

While we deplore this policy—because we think it is akin to sweeping dust under the rug rather than cleaning it up—we concede that the government has determined that these banks should not be allowed to fail, and we stipulate that there is a good chance that the Fed can throw enough money at the problem to keep them in business for now. However, we believe that neither the proximate problem—huge losses by the banks on toxic assets—nor the underlying issue—the bursting of the real estate bubble—have been addressed by this manna from helicopter Ben. It is indicative of the cluelessness of the authorities that the TARP funds, which were expressly earmarked for the purchase of toxic assets, are now being used for something else entirely. (As we predicted, buying the toxic assets is a non-starter because effecting such transactions would require the banks to revalue them at a fair market price, thus recognizing huge losses and potentially rendering many insolvent.)

Consequently, we are holding all four short positions here, despite today’s huge share price gains (which are losses for us). We are still substantially ahead on GS and BAC, and essentially even on HBC and WFC. We still like the odds that we can do better here.


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