Comments on: Banks Finding Access to Fresh Capital Drying Up

By: William Mitchell

William Mitchell — Mon, 23 Jun 2008 15:41:00 +0000

Compared to other industries (such as autos, mentioned above), banks are much more dependent upon public trust to remain solvent. The assets can pack up and go home anytime. Maintaining that trust, that perception of operational stability, is paramount to solvency.

If you watch the flow of new equity rights offerings with the SEC, note the recent flood of offerings by banks. This means they need cash and can't raise debt or deposits.

Worse, many of these recent rights offering registration statements say, "there will be a standby purchaser, but we don't know who it will be." Not clever. This is equivalent to saying, "we need cash immediately, and can't find anyone to commit."

This, in turn, invites a bear raid. Now that the short uptick rule has been eliminated, traders can pounce on a weak bank, and by driving down the share price, close off the only remaining avenue to raise capital. This potentially sets off a death spiral of asset withdrawals and declining share price.

But THAT, in turn, creates an opportunity for investing in hybrid securities like those issued recently by Fifth Third Bancorp and by Guaranty Financial Group. The terms of these hybrids are onerous; generally, they will convert into a ton of common stock, diluting out existing investors. But the alternatives are worse.

Great time to be a big investor in the hybrid securities. These guys may end up owning or controlling many of the surviving regional banks.

By: S

Mon, 23 Jun 2008 14:38:00 +0000

Minyan Peter, a former bank treasurer, of the Minyanville sight has been dead on about banks capital raising. He has been pounding the table, saying banks will bottom when they simply casn not raise capital.

http://www.minyanville.com/library/search.htm?search=Article&advanced=1&contrib_id=106

By: Anonymous

Anonymous — Mon, 23 Jun 2008 13:06:00 +0000

If banks are finding access to capital drying up, what about the automakers? Weren’t they riding the credit wave the same way, ie- companies that churned out loans with a parting incentive gift of an auto? Who’s going to give them cash?

By: eh

eh — Mon, 23 Jun 2008 13:06:00 +0000

This is related to the story about coming layoffs e.g. in investment banking. Revenue there has dried up, so it’s no surprise that these same banks are not finding buyers for equity.

By: fuguez

fuguez — Mon, 23 Jun 2008 10:54:00 +0000

I agree with “a”.
The profit of the IB model comes about from having large amounts of leverage and liquidity once the Fed Put kicks in. Just look at the commodity traders now making a packet. Even then this mostly delivers value to employees rather than shareholders.

What I have still failed to grasp is, similar to the monolines and Buffet, why would anyone want to buy a going concern when it makes more sense to start one with an unsullied balance sheet.

By: a

Mon, 23 Jun 2008 07:36:00 +0000

"They are gigantic rent-paying machines in a risky age."

They were, but will they continue to be?

Unfortunately, the IB model was not to generate large profits with value-added activities, but with value-destroying ones. Playing the yield curve only brings in so much money; really serious profits basically come elsewhere, by dumping risky products on unsuspecting clients and/or by taking advantage of the Fed put. I would presume any forward-thinking investor understands that this kind of economic destruction might finally be discouraged rather then encouraged, and the large rents of the IB may be difficult to obtain.