Financials Watch: AIG Brouhaha Distracts from Other Improprieties

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Includes: AIG, BAC, BCS, C, COF, FIG, GS, JPM, MS, XLF
by: Jim Delaney

Magicians and pickpockets practice the art of deception. In the first case we gladly pay to be deceived, in the second we would pay even more not to be. In order to perform their acts successfully however, both groups must understand the value of distraction; have quick hands and perfect timing.

It is not known whether Congress hopes to join the first or second group, but whichever book they are reading, it is obvious they are up to the chapter on distraction as the brouhaha they have sparked over the $167MM paid to AIG employees seems trifling when compared to the $170BN they pumped through AIG to settle that company’s seemingly ceaseless desire to continually double down on ever increasingly bad bets. If you stand back far enough it is quite a funny sight.

The rest of Wall St., and most probably Bank of America (NYSE:BAC), is enjoying the brief respite of having their own compensation plans under the arc lamps and microscopic vision of Congress. I would imagine Ken Lewis is sleeping for the first time in weeks.

To show their appreciation, the constituents of the XLF rallied 6.49% yesterday while the CDS for Citigroup (NYSE:C), Capital One (NYSE:COF), Morgan Stanley (NYSE:MS), BAC, Goldman Sachs (NYSE:GS) and JP Morgan (NYSE:JPM) all continued to narrow, with all but C and COF back below the levels seen on February 23rd and seeming to head for the end of February lows.

It has yet to be determined whether “what leads you down leads you up” or “new bull markets require new leaders” will win the battle of the adages but going into 1st quarter earnings season the one thing that can be said is that “hope springs eternal”.

Even further from the fray, Fortress Group (NYSE:FIG) received a double mention in the papers yesterday. The first was an announcement that its 4th quarter net loss was $140MM or $1.50 a share vs. $29.3MM or $0.43 a share for 4Q07. The stock closed last night at $1.59 after having closed as low as $1.08 on March 6th, so people must feel that the money they have refused to return to investors will produce enough fees to make up for the firm’s bad bets.

The other bit of news surrounding FIG was their interest in the TALF plan. That smart guys on Wall St. think they can beat the magicians, the pickpockets and the government at their own game is not news. What is interesting is how the banks have morphed their TALF oriented offerings for investors such as FIG.

Initially purchasing the TALF securities from a dealer would also give that dealer unfettered access to the customer’s books. This requirement was instituted by the Fed during the TALF creation process. It was not acceptable to FIG and its brethren, so a few banks, JPM and Barclays PLC (NYSE:BCS) specifically, have created investment vehicles which allow investors to circumvent many of the Fed’s restrictions.

JPM and Barclays have now set up trusts to buy the TALF securities, (to say these vehicles look a lot like CDO’s would be an understatement) with money borrowed from the Fed. The investors then buy the trust certificates earning TALF security type returns without all those messy Fed regs.

This all obviously helps the Treasury spend an additional $1 Trillion of Federal Reserve financed money. Given that the investors only have to pony up between $5 and $14 to buy $100 worth of returns means that it cannot be hurting firms like Fortress either.

While Congress is diligently practicing its distraction exercises it had better keep its timing sharp or someone will ultimately figure out that not only are they trying to get back from AIG’s employees 1/1000 of what they spent on AIG’s IOU’s but that the TALF plan is a thinly veiled bailout of the hedge fund industry.

Hey, if you’re going to increase taxes on the top 2% of wage earners you have to make sure the 2% is worth taxing.

Enjoy the week.