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Marketplace Scratch Pad

We get to keep the losers

Scott Jagow Apr 17, 2009

After four major bank earnings reports, it’s pretty clear what’s about to happen. The stronger banks, like Goldman Sachs, JP Morgan and Wells Fargo are going to pay back their TARP money and bolt free of the government. Taxpayers will be left holding the gooey remains of Citigroup, AIG, Fannie and Freddie and maybe GM and Chrysler.

The Wall Street Journal’s Evan Newmark tells it like it is:

On yesterday’s earnings call, CEO Jamie Dimon made polite noises of wanting to do “what’s in the interest of the United States.” But you can forget about Dimon participating in the Treasury’s big Public-Private Investment Program. He’s done with Washington.

And can you blame him? He doesn’t want to be hamstrung like Citi and Bank of America, the TARP dependent banks that the government is simultaneously saving and destroying.

And Newmark points out the weaker banks are losing their talent:

In the past few weeks alone, Bank of America Merrill Lynch has lost its chief investment strategist, chief North America economist, chief U.S. stock sector strategist, the head of the Americas M&A, the head of its global tech and media group, the head of CMBS trading and a score of other bankers.

Good luck competing against Goldman at the next IPO pitch.

Same problems at Citigroup. From Bloomberg:

“With Citi’s stock permanently diluted and the company deeply dependent on government assistance, we think it is among the most vulnerable to a flight of revenue-producing talent,” Kotowski wrote.

The government support and additional capital probably are enough “for now” to spare existing shareholders from being wiped out completely, David Trone, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, wrote in an April 9 note to investors.

That doesn’t sound very promising, but Goldman, Wells and JP aren’t in the clear yet either. They’re still making money off risky investment trading, and even though Dimon said yesterday “toxic assets aren’t the problem,” his finance chief told the New York Times this:

“Times aren’t exactly great as we speak,” Michael J. Cavanagh… Until home prices stabilize and unemployment peaks, we will continue to be under pressure for losses on our balance sheet.”

As I’ve been saying, the bad assets are still there. The stronger banks may be able to ride things out. The weaker ones might too, strapped to a life-support machine.

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