The Modern Day Financial Story of Passover

Jewish readers will already be familiar with the Passover Story - that of the Israelites' exodus from Egypt.  For those unfamiliar, here's a super brief summary:  Ramses II, the Pharaoh of Egypt, enslaved the Israelites.  Moses demanded that Pharaoh release his people (you know: "Let my People Go!") but Pharaoh refused.    Moses warned Pharaoh that he would incur God's wrath if he refused to release the Isrealites, but Pharaoh still refused, which brought on the ten plagues: blood, frogs, vermin, flies, cattle disease, boils, hail, locusts and darkness.  Before the final plague, God instructed the Israelites to mark their doors with the blood of a sacrificial lamb.   The Angel of Death passed over (hence: Passover) these marked houses as he carried out the tenth and final plague - the slaying of the first born - in which every first born male in Egypt was slaughtered. 

Pharaoh finally relented after this plague, and the Israelites fled Egypt in such haste that they didn't have time to let the bread rise as they evacuated Egypt and hustled through the desert - which is where the unleavened Passover "bread" Matzoh comes from.  Pharaoh had a change of heart and sent his army after the Israelites, who eventually came upon the Red Sea, which Moses "parted" with God's help.  The Israelites crossed the sea, and the sea closed in upon Pharaoh's army, killing the entire army.

Now, it has occurred to me that we can retell the Passover story in modern times, with new casting.  Some of the roles seem fairly obvious:  Obama is God, Ben Bernanke is Moses, and the banks are the Israelites.  Pharaoh is Nassim Taleb.    The plagues are the Government's interventions:  TARP, TLGP, TALF, ZIRP, Quantitative Easing, Ban on Short Selling,  Cash for Clunkers, Homebuyer Tax Credit, Extended Unemployment Benefits,  and the final coup de grace:  subsidizing mortgage principal writedowns.

The evil Taleb (Pharaoh) wanted to see the banks enslaved - nationalized -  but Bernanke (Moses) refused to let it happen, and, with Obama's (God's) will, set out to crush the will of the bank bears and free the banks to remain independent.    First he tried TARP - the troubled asset relief program, but Taleb was unimpressed, knowing that the banks wouldn't take the full level of writedowns needed to allow them to recover and thrive.

Bernanke went back to Obama, explaining, "Obama, my banks are still oppressed, we need more aid,"  and Obama's will enacted a ban on short selling, which of course did absolutely nothing to address the problem.  Bernanke then instituted quantitative easing, the TLGP, and the TALF, which allowed the banks to issue more debt, guaranteed by God - Obama - but still Taleb was unswayed, knowing that these debts would still need to be paid back, and that the Ponzi scheme could not continue forever.

So Bernanke again went back to Obama, who attempted to remedy the demand side by bringing the wrath of Cash for Clunkers, and the Homebuyer Tax Credit down upon Taleb's bearish view.  Taleb still refused to relent - accusing Obama of trying to pull demand forward, and recognizing that the policies resulted in paying people who would have bought homes anyway, and would ensure a temporary increase in car sales at the expense of future sales.

Taleb seemed to have the upper hand, as the economy sputtered, but Bernanke had Obama's will behind him, and unemployment benefits were extended from their original 26 weeks up to 99 weeks, in an attempt to maintain a level of demand in the economy.  Taleb was undeterred - knowing that extending the benefits did nothing to address the real problem - a lack of jobs.

Bernanke looked to have a chance at redemption with ZIRP - zero interest rate policy - but the banks were tired and weary from fighting Taleb's constant attempts to enslave them, and used the policy to refuel themselves (rebuild their balance sheets), rather than to make more risky loans to the populace that needed the credit most. 

As Taleb sat back on his throne and laughed heartily, Obama proved the strength of his will, telling the banks to mark their balance sheets with massive amounts of red ink to indicate that they were too big to fail.  These marked banks were passed over when the Angel of Death - Sheila Bair - came to seize the weakest banks, and enacted the policy of mortgage principal writedown subsidies for the surviving banks.  Taleb's will was broken by this brazen display of moral hazard which was a pure unnecessary gift to the banks, and finally relented, giving up any attempt to make sense out of the financial state of the country.

The banks desperately tried to recapitalize their balance sheets, but Taleb returned and declared that they were still insolvent and had many more writedowns yet to be realized.  As the banks frantically tried to escape from the wrath of the Black Swan of home mortgage defaults, Obama provided a crucial escape route, parting the seas of mark-to-market accounting and allowing the banks to liberally value the assets on their books with discretion.  Taleb and the other bank bears were crushed by the lack of real asset value markings, and puked out of their short positions, disappearing back into the shadows where they were never heard from again.

-KD

note:  This is a satire, and is not meant to reflect the exact views of Nassim Taleb.  He was a figurehead, as the story worked better with an actual person, rather than "The Evil Short Sellers" as Pharaoh.  I have no idea what Taleb's actual positions are, and they likely are nothing like I characterize them.  There are also timing incongruities with my story, which I am aware of, and have ignored for the sake of the analogy. 

also, I am short XLF.