Another week, another sign that the financial sector is in deep trouble. In a desperate effort to raise badly needed cash, banks are issuing stocks at fire sale prices.
National City Corp. joined Wachovia Corp. and Washington Mutual Inc. to tap what KBW Inc. calls “an abundance” of capital, after losses tied to the slumping housing market made U.S. financial companies a bargain for investors.
National City, Ohio’s biggest bank and subprime lender, agreed to sell a $7 billion stake to a group led by Corsair Capital LLC yesterday, at a discount to market price. The move, which would dilute existing shareholder value, sent the stock plummeting almost 28 percent.
“There’s an appetite out there for risk, but at a price,” Jason Arnold, an analyst at RBC Capital Markets in San Francisco, said yesterday in a phone interview. “Companies themselves are really desperate to get capital.”
Banks and securities firms have raised or announced plans to seek at least $163 billion in capital since July amid losses on subprime-related securities. As capital dries up, private equity and sovereign wealth funds are negotiating deals at discounted prices, driving down the value of shareholders’ investments.
National City Chief Executive Officer Peter Raskind said the company increased its share sale after finding “strong” demand. Once ranked among the 10 biggest originators of loans to people with poor credit histories, the Cleveland-based company plans to raise $6.37 billion selling convertible securities. The sale of common stock accounts for the rest of the capital infusion.
Shares of National City rose 47 cents to $6.50 in German trading today. The stock dropped 84 percent in the past 12 months.
Now, this doesn’t make sense to me. Your company’s stock value has lost 7/8ths of its value in 12 months, like National City’s stock has here in Ohio. You badly need money to stay solvent. Takeover rumors are swirling around the company and you’re deep in the hole from writing off billions in bad subprime garbage in Cleveland and Dayton.
Your way out is to issue more stock?
Doesn’t somebody need to buy this stock in order for you to make money off of it? Would you want to buy a bank stock like National City right now, Ohio’s biggest subprime player in one of the worst mortgage markets in the country, a stock that has lost almost 90% of its value and now valued at $5-6 a share?
And yet Corsair Capital is doing just that. Talk about throwing good money after bad! Banks are coughing up blood and billions and yet everyone seems to think this is normal SOP for banks these days, raising billions in order to stay afloat by selling huge stakes in itself?
Other banks are following suit. Sovereign Funds, the Fed, now capital groups are pouring money into the banks in 2008 and nobody saying what should be on everyone’s mind: the financial sector is not long for this Earth.
It’s not just in the US either. Royal Bank of Scotland is issuing even more in stock rights.
Royal Bank of Scotland on Tuesday unveiled emergency plans to repair the damage the credit crisis has wrought on its balance sheet by raising £12bn from shareholders and £4bn by selling assets, including its insurance arm.
Unveiling the largest rights issue in Europe, RBS said it had ditched its strategy of operating a more thinly capitalised balance sheet than rivals.
The heavily discounted and fully underwritten rights issue will allow RBS to rebuild its capital reserves, which have been stretched by the bank’s role in leading the €71bn (£56bn) break-up bid for ABN Amro, the Dutch lender, and the turmoil in the credit markets.
The move is an embarrassing U-turn for Sir Fred Goodwin, RBS’s chief executive, who pushed ahead with the ABN Amro deal even after the markets froze up last summer, and who had consistently argued that bank did not need additional capital.
Sir Fred denied on Tuesday that he would step down, but admitted the decision to dilute shareholders with a record rights issue had been tough. “The world has changed and when the world changes you have to revisit all the bases of your assumptions,” he said.
He denied that RBS had faced pressure from regulators to raise capital. “This is very much the board’s decision,” he said. “It represents a shift in strategy as historically the bank has been run with a very efficient balance sheet.”
RBS also unveiled a dramatic increase in the expected losses it faces on its portfolio of poorly performing loans and assets, such as US subprime mortgages and leveraged loans to private equity deals. It said these additional write-downs would reach £5.9bn before tax – three times the losses the bank has already recorded.
New losses keep popping up every few weeks for these major banks. Every quarter brings a fresh round of write-offs and billions in additional losses, and more losses are expected. More bailouts, more stock issues, more capital raising just to stay solvent. This is not a group of healthy, growing companies. These are sick entities that don’t know how bad the damage truly is.
Meanwhile, March home sales numbers are in and they continue to be dismal.
Sales of previously owned homes in the U.S. fell in March as loan restrictions and the prospect of further price declines kept buyers away.
Purchases dropped 2 percent, less than forecast, to an annual rate of 4.93 million, from 5.03 million in February, the National Association of Realtors said today in Washington. The median sales price fell 7.7 percent from a year earlier.
Defaults on subprime mortgage loans have led banks to tighten borrowing rules, while home values are decreasing as foreclosures add to the glut of unsold properties. The housing slump, now in its third year, is one reason some Federal Reserve policy makers are concerned the U.S. is heading into a recession.
“There still is an imbalance in the existing housing market that needs to be corrected through lower inventories and higher sales,” said Michelle Meyer, an economist at Lehman Brothers Holdings Inc. in New York, which correctly forecast the sales level. “The market will remain out of balance this year and most of next. As long as the housing market remains weak we think the economy will remain weak as well.”
Another 12-18 months of falling home prices, jingle mail, foreclosures, lost equity, bad mortgages…how many banks will survive? How many of us will? Things are bad now, another year of this and where will we be at?
Will the damage be enough to trigger systemic failure? Remember, the real estate market is the core of the problem. As long as that remains bad, as long as the housing depression continues, no real headway can be made in repairing the economy. Everything’s out of balance, and things that are out of balance tend to fall. The only real source of increasing income many Americans had were rising home values. Now the opposite is in effect. Trillions in equity value are vanishing.
How bad will the fall be? How bad have things gotten just since late January, three months ago? How much worse can things get given another 12 months or more of this?
Be prepared.
