Free Money Good for Bank Earnings, says Faber

Sooner or later we will get around to recapitalizing the banks - while you might get to eat free government cheese, the banks get free money. And according to widely quoted pundit Marc Faber, it will keep this market aloft it appears despite the overbought stochastics and whiny bears:

The Standard & Poor’s 500 Index may rise 17 percent to 1,000 in the next three months as government spending boosts bank profits, investor Marc Faber said.

“You have essentially a government that gives financials free money at the expense of the taxpayer,” Faber said. “With this free money, they may actually have decent earnings in the near future.” Bloomberg

If you are keeping score, and trying to keep track, apparently Faber's call is a flip-flop from his position of a week ago, when he called for a 10 percent correction.

Party on. Of course, last time I saw Faber on Bloomberg, late at night, he was talking about spending time in the Thai countryside smoking hashish and walking around with gold and silver in his pocket.

Is he mercurial or just plain nuts? Speaking of crazy, if you trade on his reco's.....aw never mind.

Faber Says S&P 500 May Rise to 1,000 on Bank Earnings
Bloomberg
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Wells Fargo Romps as Bulls and Bears Square Off

Last week's holiday shortened trading week was full of drama - the recent equity raises for several REITs provided some hope for the bulls, who will need to see their favorite stocks and sectors recapitalized before adding to positions in the hat sized stocks in their portfolios. The rumors are flying and the dealmaking is fast and furious - see the latest on MGM Mirage (MGM-NYSE) here.

And tempers are running high. The bears mock the bulls for buying...but the bulls got the last laugh given the end of day ramp we witnessed Friday. Still, the better trade might have been to sell into the strength given developments after the bell. Goldman Sachs is now looking to do a secondary to raise capital to repay government TARP money, and I would expect the stock to soften on the chatter and in advance of the deal. A ten point pullback - and pricing the deal in the hole - might imply the deal goes off around $110-$115. A lot of "ifs" are embedded in that, however, including their earnings report next week. But Goldman sure did obtain a sweet deal, essentially getting a bridge loan, AIG funds, and ultimately a chance to raise equity at more advantageous terms than they would have gotten when they were on the brink, assuming they could have done anything but go begging back to Buffett.

Thursday's rabid rally did not provide much time to pick through the news flow and numbers, and when they do they might not like what they see.

Ratings Agencies to Cash in on the TALF

The ratings agencies no doubt love the attention that has been focused on AIG over the past week, but they could soon have their place on the hotseat when Main Street catches wind of this - a coming windfall from rating the government's TALF program....which might not exist if the ratings agencies had done their job in the first place:

Credit-rating companies, widely assailed for their role in fueling the financial crisis with overly rosy debt ratings, stand to make a billion-dollar windfall in the government's latest attempt to heal the credit markets....Under the so-called Term Asset-Backed Securities Loan Facility, or TALF, the Federal Reserve will lend money to investors who buy securities backed by such things as auto, student, small-business and credit-card loans. But the government, hoping to protect itself from losses, will allow its money only to be used to buy securities rated triple-A by the ratings services.

Rating services typically charge $40,000 to $120,000 for every $100 million in so-called structured-finance securities they rate. For the initial $200 billion portion of TALF, that translates to $80 million to $240 million. If the program is extended to $1 trillion as the government plans, those fees could skyrocket to anywhere between $400 million and $1.2 billion. WSJ

While blaming them for the entire mess we are in is a bit over the top, they could defuse this situation by doing a little pro bono work for the taxpayers.

Goldman Sends out B-Team to Answer AIG Questions

People have finally connected the dots between AIG and their counterparties, most notably Goldman Sachs. And Goldman is finally responding to the firestorm - although the answers are vague and their head pitbull, Lucas van Praag, who has defended the firm to every criticism the past few years, sent the B-Team out to deal with the interrogation. He is no doubt cowering under his desk.

QUESTION: If Goldman Sachs was collateralized and hedged on its AIG positions, why did it take $12.9 billion of taxpayer money?

ANSWER: "Goldman Sachs has maintained that its exposure to AIG was collateralized and hedged. The majority of Goldman Sachs' CDS (credit default swap) exposure to AIG Financial Group was collateralized. That means that Goldman Sachs had collateral. To the extent it wasn't collateralized, Goldman Sachs hedged its exposure via the credit default swaps market. If the government had allowed AIG to fail, Goldman Sachs would have received its collateral. A credit event would be triggered, and Goldman Sachs would receive a payout from the credit default swap insurance that it had. This is from other counterparties."

The NYT noted this week that Goldman was paid $6 billion above and beyond the value of their trades with AIG. Funny. Forget the AIG bonus chatter - this is the real scandal. And they are not answering the other big question - have they received more money in calendar 2009? That $6 billion would sure buy a lot of >F-22's and save a few jobs in Connecticut, or fund education and healthcare initiatives.

Q&A with Goldman Sachs over AIG bailout
Reuters

The Problem With AIG's Credit Insurance Payouts
CNBC

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