The losses at major banks recently have tended to be accompanied by announcements that the bank was going to seek fresh capital. This is sort of reasonable--the banks desperately need to relever--and sort of not, because right after you've announced that you took a bath on gigantic overinvestments in mortgage bonds is not really the best time to ask people for more money to lose on the market's next fur-bearing trout farm. I certainly wouldn't be rushing to hand over my hard-earned savings.
Turns out investors feel the same way I do.
Dozens of Wall Street firms and commercial banks have raised capital, and many more financial institutions are expected to follow the same path in coming months, particularly as regulators clamp down on these institutions to ensure they have adequate capital levels to withstand the credit crunch.
That is particularly the case for small, regional banks and mom-and-pop lenders just starting to be hit hard by losses in their real-estate and construction-loan portfolios. With so many banks already having gone hat in hand to shareholders, these financial institutions ultimately may be forced to deal with a limited pool of investors who still would be willing to pump in money.
Investors have good reason to be skittish. Most of the banks that issued new securities in recent months have continued to see their share prices slide, some by 40% or more. That means investors who bought into those transactions are far underwater. And existing investors who didn't bite have had their holdings diluted by the issuance of piles of new shares.
"Investors are tired of trying to catch a falling knife," says one investment banker who specializes in the financial-services industry.
Sure, but there's still a lot of money out there, much of it in countries that produce a black, oily liquid, which is why they have all the money at the moment. That money has to be put to work.
Any thoughts on AIG?
If you think it may be five or ten years or longer before financial stocks return to their peaks, you're not going to want to mess around with falling knives and bouncing safes. The high-leverage boom is over for now.
Megan,
you state: "This is sort of reasonable--the banks desperately need to relever"
raising additional Capital, effectively, deleverages their Balance Sheets. It is why they Have To do it.
and, seeing this: "Investors are tired of trying to catch a falling knife," says one investment banker who specializes in the financial-services industry.", with banalities like that, I'd want to remain anonymous, too.
probably the Idiot who told you Banks were "re"-levering..
If you're looking page-filler, you might consider going back to Recipes.
Just plain greedy. Everyone trumpets Goldman Sachs and the fact that they haven't been hit half as hard. But it wasn't like they were geniuses foretelling the mortgage crisis. They just saw the way these entities were playing the game and said, "thats a bad way to do business." Banks keep trying to bring their sheets straight, but bottom line is after Bear Sterns they know regulation is inevitable. And it is going to be worse than a Colonoscopy.
Investment firms for the most part seem to be staffed with some pretty good and intelligent individuals. They also have enough of a pirate mentality, and characters running around that its a problem waiting to happen. Causing them to repeat the cardinal sin of lending "never get overextended."
Yes, that should have been delever. Thanks.
So where exactly do I find these furbearing trout? I want one!
It's important to separate the investment banks from the community banks here. Community banks are going to represent the next major wave of capital raising, and while they don't need to re-lever, the rest of your point still holds (except substitute poorly designed construction and land development loans for MBS investments).
I'd like to posit that when you see the term "catch a falling knife" a couple of times in the financial paper of record, the yogurt has truly hit the fan, financially speaking.
While current stockholders are certainly getting burned as financial firms seek capital from Asian and Middle Eastern sources, this can also be a plus for new investors and I don't think that's a 5 or 10 year proposition.
I think on an individual bank by bank, firm by firm basis, you will begin to see those that have cleared out their portfolios, acknowledged their losses completely, and added clarity to their balance sheets, present an opportunity.
The trigger point for some of these will be when bank dividends stop going down. Almost betting that your not going to see restrictive legislation no matter who is in office; it will be some sort of compromise that let's Wall Street continue to be Wall Street. (After all, we are competing against the world and financiers in London, the wider Europe and Asia).
If anything the big focus should remain on the mortgage industry and those firms directly responsible for making loans and designing loan products.
I agree with Finn that improvement in financial stocks from where we are now is probably not 5 or 10 years away. However, I don't think huge gains in the commercial bank and investment bank stocks are likely any time soon, such that I am not in any hurry to try to catch the falling knives or bouncing safes.
"That means investors who bought into those transactions are far underwater. And existing investors who didn't bite have had their holdings diluted by the issuance of piles of new shares."
Existing investors have been hurt by the fall in stock prices, but the 'dilution' from a new issue works in the favor of existing shareholders if the shares are sold at too high a price. After all, the money goes into the company (unless it's all secondary shares, in which case only the selling shareholders benefit). Relative to current prices, the new shareholders paid too much per share into the firm, with the surplus going to the existing shareholders.
Well,
One problem with the first post claiming that there is a lot of foreign capital ready to invest is that the United States is suddenly losing its appeal. After the first waive of investment, foreigners jumped in assuming that they were getting a deal. However, after that proved wrong (think of those who pumped in money into Citi in Nov/December).
Suddenly, foreign investors are realizing that the housing market has not yet hit the proverbial fan.
As an aside - I love Jim Cramer telling people to jump into the housing market...this guy really is something - he will do anything to try to save his buddies on Wall Street..this time thinking he alone will have the power to turn around the housing market. Please tell me the last time a sector turned around when:
A - Credit tightened; B - Credit worthiness of the population as a whole declined; C - Jobless rate increased; D; Energy prices increased.
Folks - we are heading towards a hard, hard recession like one no one has seen except people in nursing homes and Dick Clark who was alive during the Tulip Boom in the Netherlands.