As those who are following the banking industry know full well, bank stock prices are so depressed that selling new shares is at best unattractive, at worst massively dilutive.
One of the big reasons for the campaign against evil shorts was that one a financial firm’s price falls below a certain level, it is in dire shape. it cannot raise needed new equity, and if it looks overlevered, the prohibitive cost of selling stock could lead to a downgrade, since rating agencies won’t see any way for the company to strengthen its balance.
But what regulators give, they also take away. The Financial Times tells us that the short selling ban may hurting the market for convertible debt, another favored way for banks to raise capital.
From the Financial Times:
Convertible bond arbitrageurs had the worst performance of any hedge funds, according to investors, as large portfolios of bonds were dumped into the market – probably, said several managers, as Lehman Brothers’ proprietary trading desks closed.
The heavy losses for convertible arbitrage, coupled with the removal of the funds’ ability to lower the risk of holding bonds by short selling the linked equity, could make it much more expensive for companies trying to raise capital through convertibles, managers said. Convertible bond arbitrage involves hedging out the equity or credit risk, or both, often trying to profit by trading the value of the embedded option to convert the bond into shares.
So far this year, banks and other financial companies in the US have raised more than $35bn, one fund calculated, as the convertible bond market – which is dominated by hedge funds – remained one of the few still open at a reasonable price.