This is an interesting story because I blogged rapidly about the 2008 financial crisis. David Tepper, who runs $12.4 billion hedge fund Appaloosa Management, which made investors a 30% compounded annual return since 1993, explained on CNBC how easy it was to make $7 billion buying distressed financial securities (stock and debt) during the 2009 bank bailouts. He's right, it was free money. From what I remember, there was no way in hell the Treasury/Fed would have let more "too-big-to-fail" banks go under after the Lehman bankruptcy disaster.
Look back at blog posts from 2/9/09 to 3/16/09 during the market bottom and bank "stress tests". They were mostly on Geithner and Bernanke assuring the American people that everything was cool while call option activity was everywhere. In February of 2009, the big banks were hitting all time lows, implied volatility was spiking and calls over puts were active. BAC reported a huge Merrill Lynch loss and Roubini was touting nationalization everywhere. The financials were essentially call options and the debt was a sure thing. Tepper explained that he knew from a Treasury whitepaper that the Government would step in and buy Bank of America at $6. So even with dilution risk, Tepper bought Bank of America (BAC) under $3, Citigroup (C) under $1 and debt at 15 cents on the dollar. It would've been more interesting if Paulson & Co. returned 132% after he made billions shorting the subprime mortgage market.
Now Tepper's converted debt is riding the Federal Reserve quantitative easing put option on the economy until it turns around. It's that easy folks, kind of frightening, but it's that easy. Hopefully the spread between wall and main street doesn't widen too much because of all this. Tepper doesn't see a Japanese-style deflationary scenario in the U.S. Bernanke said he will fight deflation to the death. Tepper also mentioned the relationship between M2 money supply and the market. I posted a chart of M2 money velocity a few days ago.