From the March 01, 2009 issue of Futures Magazine • Subscribe!

Bailout paradox

A funny thing happened while the government was bailing out Wall Street. Yes, some of those firms had the audacity of dope to pass around big bonuses, and yes there was anger at them by the president, Congress and taxpayers alike, and yes that anger was matched by indignant bankers who couldn’t believe their behavior would be regulated. Yes, yes, yes, all that happened. But another thing occurred: people moved money out of non-TARP-bolstered firms to those with the government bailout money.

Perhaps this is one of those unintended consequences often talked about: firms that didn’t get or take taxpayer money actually lose business because, well, they didn’t get or take taxpayer money. And those who had been ailing and got a shot of government relief benefited from their prior, at least we hope prior, bad behavior. You can’t necessarily blame the customers. After all, with the Bernie Madoff sting still hurting, many customers might believe the best place to put their money is with a government investment, and with as much money as Wall Street is getting, I’d call those firms that got the TARP money a government investment.

I question that thinking. As anyone who has seen how much money the U.S. government “lost” in the “rebuilding” of Iraq knows, the government does about as much due diligence as some funds of funds. And you need only look at the Securities and Exchange Commission to see how a decade of being shown red flags on Bernie Madoff propelled them into action. Surely if a firm was foolish enough to make some of the decisions that occurred at the likes of Bear Stearns, Merrill Lynch, Citigroup, Lehman Brothers, et al., then the additive of government money doesn’t really improve the design. I mean, the new Secretary of Treasury Timothy Geithner goofed up big time on his own income taxes, so I’m not really sure he’ll be on top of his game with something less personal.

Nonetheless, in an interview with the Financial Times in February, MF Global CEO Bernie Dan noted that in the last quarter of 2008, his firm saw an outflow of customer funds by 12%, while firms getting TARP infusions had increased customer funds by 26%. Although he noted in the interview he believed the funds eventually will flow back to firms such as his, for now it seems people have more confidence in those government-backed firms.

I hope the money flows back because I certainly don’t like seeing bad behavior rewarded. It especially irks me to see arrogance, such as has been seen on Wall Street, rewarded when there is nothing to back it up.

The events of the past several months have been a global gut check. People are out of work (as I write this, almost 600,000 lost their jobs in January), banks are under water and many companies won’t survive this economic wildfire. It appears there are no bright spots. But having watched traders for a couple decades, I’ve learned one thing: someone is making money when others are losing. This is highlighted in “Top Traders of 2008” by Managing Editor Dan Collins, page 44). Commodity trading advisors (CTA) were definitely a bright spot on this bleak landscape. Those trading futures and options of every market fared well. Why? Because typically they are diversified. They understand both the long and short side of trading any market. They don’t add to a bad trade. They don’t try to come up with the latest, greatest idea, but “stick with their knitting.” Mainly they understand and practice risk management. They know the risk going into a trade and get out when the market turns against them. Finally, and maybe this isn’t a reason they succeed but why I especially like CTAs, they don’t ask the government for help when they take a loss.

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