N+1 Magazine returns with another interview from Anonymous Hedge Fund Man. He talks about the economy, hedge funds, Bear Sterns and bathing in sub-prime in real non-finance English.
If you really look at what the Treasury and/or the Fed was doing, they know that they have to protect the financial system from grinding to a halt, but they don’t want to create a moral hazard as a result of people thinking they’re going to get bailed out no matter what. So yes, there was a bailout of the counterparties, but they needed to take Bear out and shoot it in front of everybody. So they took it out, at a 2-dollar offer, all the senior management is gone, and that’s the financial equivalent of taking the shareholders out and shooting them.
From time to time you have to kill a management team to encourage the others. So now Citibank and Merrill Lynch realize that it’s unlikely that they’ll be allowed to default. But at the same time the people who are actually taking risk, the senior managers at Merrill Lynch, know if a blow-up happens, regardless of the fact that the institutions may be saved, their shareholdings will be worth zero, and their job tenure will be—done.
