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Vampires

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Government is still quietly funneling money -- our money -- into banks.

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Some smart bank analysts are recommending that one not be short banks into earnings period. They know what's going on. They're right about large banks and dealers being fed money under the table by the government, though they may not be right about the forthcoming reaction of the stock prices. The market may have already seen through these scams (at taxpayer expense), and shorts may have already covered to a great degree.

Lots of these stocks have already rallied from their lows near 100%. This huge volatility isn't possible with an actually functioning stock market. It's all about ways the government can or can't print currency: Stock prices are the antithesis of currency at this point.

But I'm not here to talk about stock prices.

There are several ways the government is feeding money to banks. Every time you see a loss from AIG (AIG) that taxpayers have to foot, you're going to see a gain at JPMorgan (JPM), Citigroup (C), et.al. This is because, as AIG unwinds its risks in CDS and other derivatives, it's doing so at very beneficial prices for its counterparties.

The newest bailout plan (PPIP) isn't a partnership at all, which implies equality. The government is putting up money along with private investors, but then levering up the trade and providing a put to the private investor.

It just so happens that the "private" investors already own bonds in these companies, so they certainly don't mind losing a little money in a scheme that will temporarily increase marks on these assets. They're long a very cheap call option, and the resulting mark-up will generate great returns for them. If banks don't have to write down assets more for now -- or even get to write them up -- that will show great earnings. Again, at taxpayer expense.

Then we have the carry trades. Why should banks even think about lending money at risk when they can short treasuries at .8% (raise cash at 1%) and invest that money in Fannie Mae (FNM) paper guaranteed by the government at 1.5%? Then we now have FASB 160 which will allow companies to report investments in subsidiaries as Tier 1 capital. We don't know if this is going to be a big deal yet, but it's possible.

Taxpayers don't seem to mind too much. They're worried about today. Plus most people at low tax rates benefit much more than others at high tax rates. But the taxpayers who are going to really bear the brunt of all these schemes are our children.

All this is happening while Baa-rated corporate-bond yields are rising: They've risen 70 basis points since mid-February. Over $600 billion of corporate debt must be refinanced over the next year. These are the companies that are going to create the production to really get us out of this situation. Production, not lending, creates wealth. We're throwing the baby out with the bathwater.



In memory of our fallen friend and trusted colleague, Bennet Sedacca, 100% of the donations made to the RP Foundation through April will be channeled to philanthropic endeavors consistent with the RP mission, working closely with the Sedacca clan in the distribution of those funds. We thank you kindly for your support as we strive to effect positive change in the lives of children.
Positions in AIG, C, JPM, FNM
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