The Next Phase Of The Financial Crisis

U.S. banks are now struggling to raise capital, according to reports from the Wall Street Journal, investment managers such as Sprott Asset Management, and financial blogs such as Naked Capitalism (see links below). This shows up in the concessions being made to get deals done and regulators' efforts to increase inflows.

Of note: i) stock and rights offerings at substantial discounts to market prices, ii) offerings with ratchet clauses entitling new investors to be compensated with more shares if a subsequent share issue is done below their purchase price, and iii) Federal Reserve pushing to remove limits on stakes taken by private-equity investors.

That brings the financial crisis to a new and scarier phase. If regulatory capital requirements can’t be met through capital infusions, then it may be necessary to cut more deeply into loan portfolios – and that would have serious consequences for the real economy, i.e. lower business profits, more business bankruptcies, less investment, greater job losses, etc. The recession watch is by no means over.

One might suppose enough capital has been raised given the billions of dollars of paper already floated. But just as leveraging magnifies the upside, deleveraging magnifies the downside. For example, if capital requirements are 5%, then a bank can leverage $50 million of capital into $1 billion of loans; just having $25 million of those loans (2.5%) go bad cuts a bank’s capital in half. If that capital can’t be replenished (or assets sold), then, in theory, loans could be cut by as much as one-half to $500 million.

Investors Hide as Banks Come Knocking
Lack of Transparency = Investors Get Ratcheted
Will Ratchet Rights Produce Zombie Banks?

Comments

[Pauly B]

These banks must be hurting!

I get at least three calls a week from my bank offering to sell me everything from travel insurance to disability insurance. I have told them to stop calling but that only increases their calls.

Its interesting I didnt get these calls a year ago.

[francis schutte]

Once you sees that Khadaffi buys into a large EU bank (Fortis) and this bank and others start to yell that the worst is over, you are advised to keep your breast wet...Also, the Royal bank of Scotland, Barclays, the IMF and the BIS (bank international settlements) have all issued warnings!

[the final horseman]

im hawking tickets to a titanic lifeboat.....anyone interested?

[iThinkBig]

I was gone for two weeks on business. My cable and phone was shut off. I had to call and they tracked my check into accounting and turned them back on. My regional bank shut of my credit card and called my house literally 23 times in a two day span. When I called, the regional manager apologized. I cancelled my card and told them I will pay the entire balance in 90 days. Good excuse to shut down the wife's wasteless spending!

I had always paid my bills like I run my business, two check cuts per month. It's not only banks getting desperate, it's the utilities as well. I would at least thought they had enough technology to flag paying customers within a week of bill date vs. ones whom haven't paid in two months. The writing is on the wall but the deniability and lack of accountability still exist. But I will be prepared.

Good luck to you all these next few short years. We will have much rebuilding to do and with honor and knowledge of fundamentals, I believe we will rewarded very well for our efforts. However, if we really care about our little freedom project called America, we must be also prepared to serve.

I have decided to stay in America. Sure I will accept loot from UAE and sell them things, what do you think, I am the U.S. Senate?!?!

However, I will not take the easy way and simply move out of country. It's my nation and my relatives perished earning it for me. At least I can do is put up some sweat equity. My hedge? Caffeine, I will need endless amounts of it to laugh at the gods of sleep.

[Danny L. Newton]

If the government was is allowed to attack wicked windfall profits with even more taxes or carbon taxes, I don't see how any kind of recovery is in the near future.

[carey_jim]

As I said before, if Naked (International) Capitalism really worked, we would allow the Arabs to buy all of our banks.

That would solve the problem with an invisible hand but since no one really believes in Naked Capitalism, unless they are on the winning side, it's a moot point.

The solution is probably to allow Domestic Naked Capitalism (or at least (relatively?) friendly market forces) to solve the problem.

It isn't clear, however, that the American people would prefer facing very tight economic conditions for a long time, to a New Deal any more than they did the last time around.

Socialism makes everyone feel better, in the short run at least.

Given that most of us would rather feel good than do the right thing, well ....

Grit your teeth or have another drink. It's your choice.

[icandoitdon]

danny, i'm afraid your idealogy is misplaced. the source of this problem was unregulated capitalism itself and it happened primarily because the chief regulator...the federal reserve...was asleep at the controls.

for those few who don't think it was the fed's fault, maybe i just don't understand the meaning of their mission statement, which includes the stated mandate to safeguard the stability of the banking system.