Dec 13, 2013
Take, Don’t Make!
Posted on Apr 18, 2013
By Les Leopold
“It was crazy,” says Tepper, a Pittsburgh native. “In February and early March, people were in a panic.” (Wilson 2010)
If this report is correct, Mr. Tepper made almost as much as Apple by betting that we taxpayers would bail out, but not nationalize, Bank of America and Citigroup. And, of course, we did. Citigroup got the Federal Reserve’s rock-solid guarantee for more than $300 billion in toxic assets then rotting on the company ’s balance sheet. Without our bailouts, both banks would have folded—and a slew of other banks and hedge funds would have toppled like dominoes. (These two banks also took advantage of billions of dollars in hidden Federal Reserve loans provided at negligible interest rates.)
Yet Tepper was also shrewdly betting that the government would never play hardball with the big banks. Washington, he sensed, would not nationalize these failing banks, a move that would wipe out its shareholders. No, he saw that the political establishment was too afraid of another Great Depression—and of spooking global markets—to risk letting the big banks fail. Besides, the government’s perceived interests had become completely entwined with Wall Street’s. The revolving door between Wall Street and Washington was spinning fast, with all of the key economic positions in both the Bush and the Obama administrations held by Wall Streeters. These high finance recidivists temporarily running the government shared the same worldview as their Wall Street colleagues: big banks should not be nationalized. Instead, as Tepper apparently guessed, Treasury Secretary Henry Paulson (under Bush) and then Timothy Geithner (under Obama) would put the power of the government behind those banks so that they could go back to making sizable profits for their shareholders, who would be protected and bailed out.
As Tepper noted, many other investors panicked, either because they did fear nationalization, or because they’d been forced to sell securities to raise cash and cover other losses. Those wary investors dumped their banking securities, creating a delicious buying opportunity for Tepper. He jumped in with both feet.
Citigroup was a financial toxic dump in the fall of 2008, and Bank of America wasn’t far behind. Under idealized “free market” capitalism, both banks would have gone under, entirely wiping out shareholders’ equity. Bondholders probably would have received pennies on the dollar for their loans. Too bad. To paraphrase the drunken baseball manager played by Tom Hanks in the movie “A League of Their Own,” there’s no crying in capitalism.
Tepper’s big bets suggest that he knew this quaint form of capitalism was long gone. So, while most investors were fleeing financial stocks in terror, Tepper had the cojones to buy them up cheap. Cojones—literally. According to the Wall Street Journal, Tepper “keeps a brass replica of a pair of testicles in a prominent spot on his desk, a present from former employees. He rubs the gift for luck during the trading day to get a laugh out of colleagues.” (Zuckerman 2009).
Tepper reminds me of George Washington Plunkitt of Tammany Hall, who also had cojones. Said Plunkitt in 1905:
Let me make this perfectly clear to any litigators present: I am not suggesting that Tepper traded on insider information about impending government moves or that he received any “graft” of any kind. (You’re not going to make your next million off me.) I’m only saying that like Plunkitt of Tammany Hall, Tepper knew that business and government were of a piece. So when, on cue, Washington came to Wall Street’s rescue, Tepper cashed in on his bet. That’s how he alone earned almost as much in one year as Apple and its tens of thousands of employees did.
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