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Good News in the Financial Space

Ten banks will be allowed to repay TARP funds and recommence building their businesses.
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The U.S. Treasury Department announced that 10 out of the 19 largest banks are officially allowed to repay the TARP funds back to the government. This news has been widely speculated, and it's why the group rallied yesterday (and is slightly selling off on the news today).

Goldman Sachs (GS) , JPMorgan (JPM) and State Street (STT) are the companies that I own that have announced they will proceed with the process. Although it's not a surprise, it's good news from the standpoint that the government overhang will be lifted and the firms can now focus on growing their business. Bank of America (BAC) and Wells Fargo (WFC) have not made an announcement, but I wasn't expecting either firm to do so (and neither were investors), although I have no doubt that both will do so over the next few months.

Bank of America has taken aggressive steps toward raising the needed capital through at-the-market purchases, equity offerings, preferred stock conversion and asset sales and will likely be able to repay TARP in the second half of the year -- quite a far cry from just six months ago. Wells Fargo may need to raise additional capital (although the company says otherwise). But the point is that the fear of bankruptcy is off the table (and has been for some time) and that each bank will do what is necessary to get out from under the government and to get back to basics of running their franchises.

Goldman is the best in the industry, JPMorgan has the strongest risk management team and State Street has exciting growth potential and remains the cheapest in the group. Wells Fargo's acquisition of Wachovia provides a coast-to-coast banking effort with a more diversified mix of business in mortgages and capital markets, which should lead to $4 a share in earnings power. And Bank of America's revenue mix of mortgages, depth in core deposits, and the Merrill Lynch deal will also lead to strong earnings power with over $3/share.

So this news is a positive development today, and I remain bullish on the financial sector with a position in the group 1.5 percentage points overweight relative to my benchmark. On weakness, I will continue to add to WFC in the low $20s and BAC around $11.

Regards,

Jim Cramer

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DISCLOSURE: At the time of publication, Cramer was long GS, WFC, STT, JPM and BAC.