Steer Clear of Banks Who Need New Capital

Whether or not the banks needed them, the Federal Reserve has completed the stressed tests. It has acted on pleadings from bank executives and will announce which major banks need to raise more capital late Thursday afternoon.

The stress tests imposed a severe economic scenario to test the capital adequacy of the nation’s largest banks, and they require that adequate capital only be in paid-in common stock.

To avert a hypothetical calamity and theoretical big bank failures, the Obama Administration will require banks found lacking in this fabricated financial tsunami to sell more common shares. If they can’t find enough buyers, TARP investments will be converted to common shares and additional government funds will be provided as may be necessary.

S&P has indicated it will downgrade about half the banks directed to raise new capital. Apart from the dilution, this downgrades immediately stocks and bonds worth less.

Investors would be foolish to purchase any common stock or bonds in a bank requiring additional capital if any uncertainty emerges about the bank’s ability to raise all the new capital from private sources. No one should want to own shares in a bank with even the prospect of partial government ownership.

After seeing the Obama Administration’s helping hand at Bank of America (BAC), Citigroup (C), Chrysler and GM, an investor would have to be nuts to buy shares in a bank that requires more capital according to the government’s criteria, because private investors will likely end up with Washington as a partial and dominant shareholder too.

At Chrysler and GM, President Obama is canceling the legitimate claims of private creditors, ignoring the clear requirements of bankruptcy law, and subverting private property rights without due process. Only a fool would buy common stock or bonds in a bank with even the prospects of partial government ownership.

After President Obama arbitrary treatment of private creditors at Chrysler and GM, I would just as soon take a beating from a prize fighter than buy stocks or bonds in a bank ordered to raise capital by the Obama stress tests.

Comments

[Ranchr:]

Sounds like the author still needs to buy some shares to give back to the people they borrowed the shares from.

Look at where stocks were at their 52 week high and are still significantly below 50% of that price. If you think they have a good chance to get halfway back, buy them.

May 07 11:49 AM

[8ft:]

I have heard so much about staying away from the banks. However, in the recent rally on wall street, banks are exactly the companies leading the way.

How interesting!

May 07 12:23 PM

[Smackdown:]

Great article doofus. I have made 50-200% returns buying the preferred stocks of the very banks you say to avoid. Why not look for opportunity instead of being a doom crying lemming. Converting TARP and/or preferred equity only makes my debt instrument trust preferreds stronger!

I do agree that buying the common shares is for idiots. Buy the debt for lower share prices and collect double digit payments.

Or be converted, ala Citi, and double your money that way.

May 07 01:24 PM

[jwheeler79:]

And what exactly is wrong with Government ownership? What? The banks won't be able to perform their parlor tricks and dump the economy with them? Sounds like a plan to me.

At any rate, I am glad we have irrational bears like you posting this propaganda, while I make a mint on the financials. America will succeed dumb ass.

May 07 03:06 PM

[Matthew Trahan:]

The banks parlor tricks were enabled by an interest-rate manipulating federal reserve and could have been easily punished (if not prevented, via advance knowledge of the possiblity) by simply letting the companies fail... we have plently of laws that cover fraud and everyone who lost money in stock/bonds/whatever investment should be well aware that at any time they can lose that money. The framework was in place to adequately deal with the problem via bankruptcy... government ownership/crony regulation/federal reserve system is exactly what has and is excacerbating the problem and will plague our economy for years.


On May 07 03:06 PM jwheeler79 wrote:

> And what exactly is wrong with Government ownership? What? The banks
> won't be able to perform their parlor tricks and dump the economy
> with them? Sounds like a plan to me.
>
> At any rate, I am glad we have irrational bears like you posting
> this propaganda, while I make a mint on the financials. America will
> succeed dumb ass.

May 07 07:27 PM

[Smackdown:]

Boohoo Matt..... Another crying short that things are not working out the way you'd like. Just admit you called it wrong. Stockpiling much SPAM for the coming anarchy and revolution?


On May 07 07:27 PM Matthew Trahan wrote:

> The banks parlor tricks were enabled by an interest-rate manipulating
> federal reserve and could have been easily punished (if not prevented,
> via advance knowledge of the possiblity) by simply letting the companies
> fail... we have plently of laws that cover fraud and everyone who
> lost money in stock/bonds/whatever investment should be well aware
> that at any time they can lose that money. The framework was in place
> to adequately deal with the problem via bankruptcy... government
> ownership/crony regulation/federal reserve system is exactly what
> has and is excacerbating the problem and will plague our economy
> for years.

May 07 09:03 PM

[Matthew Trahan:]

While not logically replying to anything i said makes it easy to attack me... it makes you look like a pusher with an agenda. Im not a shorter, i have no positions right now. I don't know what metrics you use to determine the value of a business or an economy but i think you should perhaps widen your horizons. I'm not doom and gloom, anybody can make money in any market and an economy with 300 million people doesn't just stop demanding and supplying goods... but plenty of wrenches can be thrown in the gears along the way... mostly by government.

May 07 10:39 PM

[Smackdown:]

Sorry....

I was getting frustrated that there are a plethora of posts on here that only harp negative that either suggest or imply things are going to crater and that one should be shorting. This is a crapshoot.

On the other hand, I have repeatedly offered specific advice to buy MLPs and preferreds. These have proven to be homeruns.

I'd take rational and well thought out investment advice with a real valuation metrics any day over the chicken little nonsense. Yield securities always revert to the mean. I identified and I was 100% correct. So if I have an agenda, it is to offer real suggestions to invest in this climate.


On May 07 10:39 PM Matthew Trahan wrote:

> While not logically replying to anything i said makes it easy to
> attack me... it makes you look like a pusher with an agenda. Im not
> a shorter, i have no positions right now. I don't know what metrics
> you use to determine the value of a business or an economy but i
> think you should perhaps widen your horizons. I'm not doom and gloom,
> anybody can make money in any market and an economy with 300 million
> people doesn't just stop demanding and supplying goods... but plenty
> of wrenches can be thrown in the gears along the way... mostly by
> government.

May 08 01:10 PM

[ifuwish2:]

i can not believe Peter Morici is really that stupid saying not to buy the stock,,well you big dummy i bought 1380 shares of FITB for 1.50 a share and still own it,,if i listened to you i would not have,,banks will never go under and you are dumb enough to think they will ,,your boss should fire your butt for plain stupidity..dumb,dumb,d... can guys like this keep a job someone tell me,,,,

May 09 12:18 AM

[Matthew Trahan:]

No worries... when dealing with a situation like this it's easy to let personal philosophy take over one's opinion. There is a difference between how you believe an economy should be run and how to make money in the economy in which you live regardless of the circumstances. It seems you have been managing that quite aptly and i commend you for it.


On May 08 01:10 PM Smackdown wrote:

> Sorry....
>
> I was getting frustrated that there are a plethora of posts on here
> that only harp negative that either suggest or imply things are going
> to crater and that one should be shorting. This is a crapshoot.<br/>
>
> On the other hand, I have repeatedly offered specific advice to buy
> MLPs and preferreds. These have proven to be homeruns.
>
> I'd take rational and well thought out investment advice with a real
> valuation metrics any day over the chicken little nonsense. Yield
> securities always revert to the mean. I identified and I was 100%
> correct. So if I have an agenda, it is to offer real suggestions
> to invest in this climate.

May 09 01:24 PM