“If this particular broker had known exactly how far the bailouts reached, neither he nor his clients would ever have lost so much. But during the crisis it was decided, by people deemed more important than small-town investment advisers and their clients, that the full story of the bailouts didn’t need to be told.”

-Matt Taibbi

 

Most of the time, I am tickled pink at the brutal, no holds barred, Hunter S. Thompsonesque journalism of Matt Taibbi. (Full disclosure, I have been both a quoted and anonymous source for a long time). I tweeted and linked to his latest column, “Secrets and Lies of the Bailout,” which brilliantly depicted the ongoing long con of the bailouts.

But I have to lodge a formal disagreement with his latest Taibbiblog post about George Hartzman, a Wachovia/Wells Fargo broker who was “quietly killing it” in 2007-08, shorting financials as well as the market. He drank the Kool-Aid, and was short along with his clients. But like so many traders whose opositions are working, he got arrogant, overstayed his welcome, missed the bottom and reversal.

In other words, he and his clients got crushed.

It is a cautionary tale that raises many questions. The first I have to ask is this: What business did these mostly conservative clients (and their retirement accounts) have being short? That is a giant regulatory red flag, and a compliance problem. The second issue is the Broker/Dealer model — this guy was a salesman (literally, a kick about, lots of sales jobs including aluminum swimming pools, vinyl siding and even encyclopedias before finding finance). He does not appear to be a true “portfolio manager,” and certainly not a hedge fund manager. To my eye, he — apparently — lacked the skill set and discipline to be managing a large book of shorts positions. Indeed, he was less than an ideal candidate to be running such a risky and aggressive portfolio.

Most of all, he seems to have been a bad manager of risk.

There were lots of warning signs that the market’s enormous collapse was ending. Indeed, the biggest-since-1973 move to the downside was accompanied by all manner of signs that it had run its course. Every sentiment reading was pinned deep into the red: % of stocks below their 200 day moving average; new high/lows; insider buys/sells; market breadth; ARMS Index; downside volume; AAII Equity % of portfolios. From November 2008 to January 2009, Treasury yields dropped from 4% to 2%, then went negative in real terms. The VIX spiked to almost 90 late in 08; it was still over 50 in March 2009. Indeed, it was hard to find a rational reason to be short in March 2009 — except naked fear.

Talk about the Recency effect! Anyone shorting equities in March 2009 after a 57%, 8,000 point Dow drop was looking backwards, not forwards. 57% down is not where you want to press your shorts, its where you cover and go long.

Any student of market history could have shown you dozens of studies as to when you take short trades off the table. The chart below is just one such example of a typical secular bear market (it is a composite of 19 such bear markets). I am the last person in the world to be defending the banks, the Fed, Hank Paulson, Alan Greenspan, Ben Bernanke, Tim Geithner, et al, but Damn! Even if you didn’t get long, you must at least at some point cover your shorts.

This is not Monday morning quarterbacking — we were short Bear, Lehman and AIG (to my everlasting shame, I failed to ride the latter two down to zero). The massive capitulation in March 2009 was accompanied by indiscriminate panic selling. Bailouts or not, that’s when you cover shorts and buy, due to all of the aforementioned indicators — and I said as much at the time.

Forget the secret info; the bailouts, which I deplored, where at the very least short term bullish. Hartzman and his clients lost all that money because he made aggressive trades and ignored the overwhelming public data about market internals and sentiment, and ran unsuitable trades without the skillset to manage them.

 

 

Typical Secular Bear Market and Its Aftermath
secular-bear-markets

 

 

Source:
Secrets and Lies of the Bailout: One Broker’s Story
Matt Taibbi
Rolling Stone January 8, 2012  
http://www.rollingstone.com/politics/blogs/taibblog/secrets-and-lies-of-the-bailout-one-brokers-story-20130108

Category: Bailouts, Investing, Markets, Psychology, Really, really bad calls, Short Selling

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

20 Responses to “Bad Risk Management – Not Secret Bailouts – Killed These Clients”

  1. Lukey says:

    I like Taibbi’s “no holds barred” approach myself but he does tend to present a pretty one sided view in his reporting.

    And good lord man, don’t be ashamed of cashing out on your AIG short early – you are a money manager, not a speculating greedhead!

  2. Good chart! So we are now caught in the trading range.

  3. george lomost says:

    “The massive capitulation in March 2009 was accompanied by indiscriminate panic selling. Bailouts or not, that’s when you cover shorts and buy, and I said as much at the time.”

    Barry you are the pro and I’m a (mostly unsuccessful) amateur investor but I am unable to remember any “indiscriminate panic selling” in 2009.

    I remember staying up late to watch Nightline on Black Monday 1987 where all the panelists were in agreement that the world had changed, etc. Wasn’t that a classic “capitulation”?

    In contrast, in March 2009, with every drop of the market, someone would come on CNBC and proclaim the “bottom.” A bunch of people even proclaimed “a generational bottom, buy, buy, buy.”

    I can’t shake the feeling that we have to go back down deeper before there can be a meaningful move back up. But what do I know.

  4. Short Equities?

    gee, you mean Call Options aren’t, just, Lottery Tickets?

  5. george lomost

    I lived thru that period, having been very negative prior and making the call for Dow 6800. I recall saying to my partner ( a very good technician) don’t let me become that asshole who overstays his welcome to the downside. _

    At 6800, I could have declared vindication and went home, but there was still a little more down side. On March 9th, I had enough and said time for the long trade.

    I was looking at: % of stocks below their 200 day moving average; new high/lows; insider buys/sells; market breadth; ARMS Index; downside volume; AAII Equity % of portfolios. From November 2008 to January 2009, Treasury yields dropped from 4% to 2%, then went negative in real terms. The VIX spiked to almost 90 late in 08; it was still over 50 in March 2009.

    There was plenty of capitulation.

  6. AHodge says:

    i can relate
    after making a bag being short, 137% mid 07 to march 09
    i lost a third of it in a month
    same kind of hubris
    i followed excellent risk managment till nov 08
    mostly options positions mo more than 10% of total
    but went a little crazy, naked call writes etc

    having also advised clients– currency and derivatives
    there is always this grey area of fiduciary

  7. streeteye says:

    Dude went full Paulson. Never go full Paulson.

    As a retail adviser, you can talk an aggressive game, but you go full hedge fund, volatility is going to happen. Doesn’t matter whether it’s due to the government, crazy geopolitical stuff, animal spirits, your job is not to expose your clients to that kind of risk.

  8. The Yahoo site doesnt have the video — try this link

    Big Bear Market Rally Coming
    http://www.ritholtz.com/blog/2009/03/bear-market-rally-3/

  9. FrankInTheFalls says:

    I also can relate, albeit on a small scale. When during my father’s last days, he asked me to
    take over his accounts I reveiwed them & got just a little alarmed. The accounts were all
    income only & all in individual bonds. One of the larger ones was owned on margin.
    Owning bonds on margin, that’s clever. The account was closed.

  10. John Adamson says:

    If his clients were “accredited investors” I would have no problem with what he did with their money. They took a shot and lost but they should have known what they were getting into.

    However, his clients sounded like “civilians.” In other words, they were sheep he led to the slaughter. It was the equivalent of taking a kid and his piggy bank to a casino.

    In my opinion, the guy was a dirt bag.

  11. Livermore Shimervore says:

    The story’s premise is false.

    His clients didn’t lose the money because disclosure was lacking.
    They lost the money because they had no exit strategy.

    And they had not exit strategy because they didn’t know what they were doing.
    Which means they had no business placing bets instead of buying annuities or bonds.

  12. Livermore Shimervore says:

    Also, this broker guy failed to understand a simple concept about our economy.
    It’s not pure capitalism. It’s crony capitalism. A trader or PM, whatever… who is betting against one of the legs of the U.S. economic chair (Banking), must NEVER lose sight of the fact that treasury is ultimately run by politicians who are in pocket of the banks. If the banks are going to take an epic beating, then you must have enough sense to figure out that Wall Street will decipher a way to turn that into an huge payday. In a twisted sort of way, that’s why global investors come here in the first place each time Europe and Asia go into the toilet on one crisis or another. The U.S. banks and our treausury have become one entity. One will never wash the hands of the other if gets to the point of Armageddon. Which means a short position against the banks is lethal if kept on the stove for too long.

  13. DeDude says:

    I am kind of sensing the guy complaining that the government intervened to save the economy rather than just letting it collapse so he could have made a killing. I thought that part of the risk management clients pay for (you have to be a total idiot to hire someone just to draw the continuation of a straight line) is to understand and guard against the quit expectable counter-measures and “manipulations” from big players (USG, GS, C, etc.).

  14. [...] on Hartzman January 10, 2013 tags: George Hartzman, Matt Taibbi From Barry Ritholtz at The Big Picture: There were lots of warning signs that the market’s enormous collapse was ending. Indeed, the [...]

    ~~~

    BR: Monster rationalizations going on there!

  15. George Hartzman says:

    Not exactly how it actually went;

    “Whistle 1 9 2012.pdf”

    https://www.dropbox.com/sh/9ma6lp3kcllv46n/N-dj4w36TY

    Last item.

  16. George Hartzman says:

    Also please review at the above link;

    George Hartzman Asset Advisor Performance Reviews.pdf

    This show some account performance thru June end 2010.

  17. capitalistic says:

    Even “sophisticated” fund managers make nonsensical trades, i.e. LTCM.

    ~~~

    BR: This isn’t about bad trades, this is about blaming those bad trades on “Secret bailouts” . . .

  18. George Hartzman says:

    I believe, after considering the information at the above dropbox link,
    that you should correct your post.

    My phone number and email address are listed.

    Please contact me with questions, which you chose not to do before you wrote your post.

  19. George Hartzman says:

    Envision

    I believe most Wells Fargo Advisors Envision financial/investment plans created to earn ‘retention’ bonuses appear to have defrauded the government after Wachovia and Wells Fargo merged while in possession of taxpayer funded TARP and other bailouts. I believe Wells Fargo executive management defrauded the government by creating a illegal path to retain advisers after receiving government bailouts, by mandating a fraudulent path for advisors to acquire retention bonuses. I believe Wells Fargo’s executive management created a backdoor retention program that led thousands of brokers to violate fiduciary duties to the firm’s clients, by incentivizing the omission of investment fees in Envision plans subsequently reported on client statements.

    http://hartzman.blogspot.com/2013/01/envision.html

  20. MrPickle says:

    I heartily agree. Matt Taibbi has long been doing what the financial press has not but his sad tale about Hartzman was naive. There are too many variables in any market to make the kinds of bets that Hartzman was making especially considering the risk profile of his clients. Many stockbrokers were convinced that our economy was going to hell during that period but Harzman could have just as easily gone to cash or bonds instead of aggressively trading on that conviction. He was crying over spilt-milk and this is the first time I’ve seen Taibbi take the bait.