I'm here with Kevin Duffy, who is on his way for international travels and only has a few
minutes, but it's a pleasure to have him here.
He's the president of Bering Capital Management and also...
I'm actually not the president, I'm one of the founders and one of the two principals.
My partner is Bill Wagner.
You're also known in the industry as one of the biggest bears around and I suppose you've
sent some sense of indication, not that it helps anything, I suppose.
Yeah, we've been bears for a long time.
We actually started a hedge fund about six and a half years ago, and we started, we were
actually a little bit early, we've been net short the entire time, and we actually
shorted Fannie Mae and Freddie Mac right out of the gate.
So we were early, but eventually, I guess ultimately, we've been vindicated.
You must have some sense of that it's rather silly that so many people seem to be taken
aback and surprised by all this.
Yeah, I mean we've been, anybody who's been on Mises.org or LewRockwell.com, I mean they're
not surprised in the least by any of this and so it's pretty surreal to watch this all
unfold.
What was your reaction to the massive bailout? What were your expectations concerning its effect on the market?
It was really fascinating to watch it kind of unfold. I mean, it was originally sold that the market would absolutely crater if it weren't for this bailout.
and we had the Monday about a week and a half ago, the market sold off over 700 points on
the house vote.
And actually the market had been down about 300 points and it just tacked on another 400.
And then later in the week as it was becoming clear that the house was going to cave in,
The Market, it tried to rally but it really never was able to get back where it was the
Friday before that vote.
And I think Friday was just a fascinating day because the market, it rallied into that
news and then as it became obvious that the bailout was going through, the market turned
around and it closed on the lows of the week and of course this week we've just had sheer
pandemonium.
So it's kind of fitting that this was supposed to stabilize the market and it's done anything
but stabilize the market.
Yeah, the conventional wisdom seems to be that the bailout didn't have any effect.
Is it something like trying to dye the ocean green with food coloring or something?
What is the effect relative to the size of international capital flows of a bailout of
this size?
really I guess it's a good point Jeff it's kind of a drop in the ocean but it still is
pretty significant I mean just watching the Fed's balance sheet expand from from what
900 billion to 1.4 trillion in the two weeks before this even was passed is pretty amazing
but I mean you're still looking at investment banks with trillion dollar balance sheets.
I mean it's a significant number but of course the effect is going to be just attempting to
transfer wealth and they will succeed to a certain extent transferring from the responsible
to the reckless and not even really the reckless but just the politically connected reckless.
Yeah, you've done some work tracing out where the dollars are headed.
Do you want to mention any specifics about that?
We did a little bit of work, actually just sent an article, hopefully it'll be on lewrockwell.com tomorrow,
but it's called Looting the Responsible.
And I'm in the airport right now, so I don't have the numbers in front of me,
but what we found was the initial effect once this was announced,
announced because you have to go back a couple of weeks ago and the market was selling off
and Goldman Sachs, we call it the chosen ones, five companies, Goldman, Morgan Stanley, Citigroup,
Bank of America and JP Morgan, which I suspect have a pretty good stake in ownership in the
Federal Reserve.
But the stocks actually rallied on the news.
This was on a Thursday.
The market was down quite a bit, had pulled off the previous day, and then at the end
of the day, that night, the package was announced.
Over the initial week or so, the chosen ones, those five companies added 50% in market capitalization.
I think they were at $360 billion and they added about $180 billion in market cap.
And of course, where did this money come from, or at least the perception, the discounting
that the market was, was that the real economy, this was the political economy that was getting
a boost, and it was the real economy that was paying for it.
So the $180 billion in gain to the five chosen ones translated into a roughly $600 billion
loss in market capitalization to the rest of the market.
Tell me, what has been the effect of the ban on short selling on you and on the markets generally?
Well, good question. I mean, for us, absolutely no effect whatsoever. We shorted financial stocks
years ago and nobody came to our door, put a gun to our head and said, you have to cover your shorts.
We just couldn't initiate any shorts in those 800 or so companies.
But I think it's sort of the law of unintended consequences.
And what we saw was after the credit bubble had peaked and it started to unwind, to us
that was the canary in the coal mine.
And that really started back in March of last year.
And once that happened, it was almost like you had the compulsive gamblers out there refuse
to leave the casino.
So you had the speculation in the credit-related area.
That craps table kind of shut down.
Nobody wanted to go there.
But they saw this commodities table and, of course, with the initial interventions by
the Fed, which people assumed would be inflationary, it really ignited.
It took a six-year, seven-year bull market in commodities and really lit a fire under
it.
So there was a tremendous amount of speculation that the gamblers, the compulsive gamblers
all went over to the craps table for commodities.
Getting back to the unintended consequences, I think the commodities bubble was in the
and the process of bursting and this just exacerbated it because instead of being able
to short the financials, people just went and probably shorted the commodity area and
we've just seen wholesale panic in commodities.
Hedge fund redemptions, fertilizer companies going down 40% in one day, that sort of thing.
I saw you on one of these television shows claiming that the collapse in fertilizer stocks
was an indication that we're all going to starve.
Did you see that guy?
I didn't see that.
So you don't think that that's true?
No, no.
The funny thing was in our fund, obviously we have the ability to sell short and we defend
the practice.
We were short a company called Mosaic, and the stock peaked at $160.
Now we didn't short it at $160, I think we shorted it at about $120, and the stock,
we covered some at $70, the rest at $50.
The stock actually yesterday went as low as about $33 a share from a high of $160.
Yeah, well that's really exciting in some ways, I mean it's a beautiful thing actually
to see the market working in this way, isn't it?
It really is and it's amazing how the interventionists are trying to arrest the, the market is desperately
trying to heal itself, heal the economy, liquidate the people that were reckless and irresponsible
and it is there's a certain justice to see that you know you go back to 1998 with long-term
capital and it was as if there really wasn't any justice because the interventionists won
or at least they temporarily won and then in 2001 to 2005 the interventionists tried
to contain the tech bubble and they're able to blow up an even bigger bubble and what
What is so fitting about this bubble is the tech bubble was not the political class for
the most part.
This bubble really got the political class levered to the gills and they're the ones
that are in deep trouble.
And at least with the technology bubble, people were to a large extent not using bar of money.
In this cycle, they're using a tremendous amount of bob money, and there's a certain amount of joy watching the political class just come completely unglued.
So you expect that these bailouts are going to have a temporary effect in rescuing specific firms, but long-term, I mean, the assets have to be repriced, and history has to move forward, right?
Right. It's funny, a friend of mine who's got his money at Merrill Lynch, he just asked
me to take a look at the balance sheet and of course he had no idea what was going on
and I just brought it up for the June quarter, $966 billion in total assets on top of $21
billion in shareholders' equity. And that's the shareholders' equity that the accountants
are telling us which we know is a complete fabrication. So it shows you that the investment
banks, especially the politically connected ones, the chosen ones, are just incredibly
insolvent. And look at all the money that they've been able to raise from sovereign
wealth funds and these people. And again, it is sort of fitting that they're part
of the political class. They came to the rescue right away and now they look like they just
are complete bag holders and even those people now are shying away, they realize that they've
been duped.
So in a free market, you know, people imagine what would happen absent the intervention.
I mean, you would see the big firms go belly up and then the smaller and medium-sized firms
that are more liquid, more sound, would come to replace them and you'd see a turnover in
Industrial Makeup of the Financial Sector, right?
Absolutely, and apparently the CEO of BB&T was complaining about this and he was saying,
look, we were responsible, we weren't as leveraged as everybody else and we should
now be in a position.
We did the right thing and here you are trying to bail out our competitors and keep them
around.
It's remarkable, isn't it? I mean, one of the biggest complaints about the market, you get it from left, right, every side, one of the first things people say, it's a terrible thing that the rich get richer or the biggest stay on top, the monopolists take over and dominate the market, and here you have an event that's, you know, you have the market attempting to clean the system up and create something of a, you know, a micro revolution and you have the political class trying to stop it.
It's amazing, the elites, I mean, I've talked to journalists and it's amazing to me how
they can't see what's going on.
I think they're a part of this elite class and they've been sort of corrupted by this
political class.
I think they're a part of it.
And yet people like my sister in Harrisburg, Pennsylvania, who was just unbelievably conservative
and Prudent the entire time. She sees what's going on. She sees it as just a blatant rip-off.
And people like that, they're starting to wake up.
Yeah, doesn't it seem, do you detect a lot of anger? I mean, I certainly do. Everywhere
I go, everywhere I talk to, it seems to be just, I mean, left, right, no matter what
your ideology, people really seem to be very upset about this.
Absolutely. In fact, my father walked his precinct, and just to digress a little bit,
he lives in Pennsylvania, west of Philadelphia, and during the primary, the Pennsylvania primary,
when it was already a walk for McCain, my dad walked his precinct, and his precinct had
the best, the highest turnover for Ron Paul during that primary.
What my dad did this time, he was absolutely livid about the bailout, printed out a one-pager,
walked his precinct, talked to about 300 people.
He said that just about unanimously people were opposed to the bailout and they were
even, he said there were older people who had money in 401Ks and they said, you know
This is just not right. Even if it means my 401k is going to go down, it's still wrong.
Yeah. It's a basic principle of justice that if you're going to take risks, you have to be prepared for the downside.
I think most people understand that.
Right. I think what's also fascinating, and it's a little bit sickening, is to see that, which is so encouraging,
and then to watch business media, CNBC and just the blatant attempts to spin all this.
I remember John Harwood who covers Washington DC and this is when we are right in the thick
of all the bailout news and he said, he reported that one third of the population was opposed,
One third was in favor and one third was undecided, which is a bald-faced lie.
I did notice that at the height of the bailout controversy that there was a sort of a dearth
of polling information, or that which you got online in any case seemed implausible
to me in any case.
I've never seen a reaction like this, I mean it's so intense right now, but you know when
the history of all this is written, maybe this will be a case that advocates of the
If the rich do stay rich and the fat cats do stay on top, it's only because the state helped them to do so.
Looking at this, we were actually a little bit relieved.
There was certainly this feeling of when the first House vote came out that this was a big victory for liberty.
for Liberty, and we lost the next round, but we were actually somewhat relieved about the
final vote, because what the political class really did was they told everybody that they
know better, that yes, we're taking this under consideration, but we're going to do what
we think is best, and this is to stabilize the markets, this is to save the economy.
They sold it as not a bailout for Wall Street, but this was to help the little guy, and now
this is all on them.
My concern was that had this been voted down, we've already baked the cake, the markets
would go down, there would be a collapse, and that the free market would somehow be
would be blamed or inaction would be blamed, and so I think maybe they did us a favor by
actually sticking their necks out even further on this vote.
Well, it could have some far-reaching implications in the future politically.
Most people I know who understand the market or understand politics are more optimistic
even than I am that, look, we have the means nowadays to communicate what's going on.
This is not like the Great Depression where lots of people were in the dark on what the
Well, I definitely share the optimism and I've just seen it since I got involved in this movement, which is really very fortuitous watching Lew Rockwell on, oh, what was, I forget the name of the program now, it escapes me, but he was debating Exxon Valdez.
in favor of Exxon and so it's been just tremendous watching this movement grow and that's what encourages me.
On the other side of that is the fact that we have this massive bubble and looking back at 1929 and the situation that we have today,
Today. 29 was really, and the depression, I think, was probably the first failure of
this bankrupt monetary system that was foisted on the American public in 1913. And hopefully,
what we're experiencing today is the end of that system.
We've printed up a shirt that says on the front, Stabilization is Chaos, and on the
In the back it has a quotation from Hayek.
So, thank you for agreeing to take time out on your way to your international travels.
I'm going to send one to you.
Okay, I enjoyed it.
Thank you so much, Kevin.
Okay.