Thursday, January 21, 2010

Long TBTF/Short Regional Banks Pair Trade Blowing Up

One of the more popular trades - pushed by too big to fail firms like Goldman Sachs -has been to buy money center banks and short regionals due primarily to the TBTF funding advantage and concern about CRE exposure at regional banks. The trade is totally unraveling as we speak. You can be sure this move is creating major P&L dislocations at hedge funds and prop desks that have been piling into this theme. The trade is down 10% in a few hours and the correlation between regionals and TBTF banks has plunged. JPM, JPM, GS and MS have been the favorite longs in this trade while STI, FITB, HBAN, CMA, HBAN, RF, NYB have been among the favorite shorts. Like I said on Tuesday, Wall Street should have been careful what it wished for related to the Mass. Senate race as the death of healthcare made Wall Street an easy target and complicates the political and legislative landscape. A second stimulus package is less likely to pass without a Democratic Supermajority and what congressman is going to want to vote against restricting risk-taking at the major banks? This type of move in a "risk averse" pair trade strategy will dampen the risk appetite on Wall Street trading desks even if you are not exposed to the trade or even on the right side. Significant correlation breakdowns like this usually empower the risk managers.

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