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The market takes no prisoners: M&I falls victim to financials sell-off

|Includes: Marshall & Ilsley Corporation (MI)

Financials have been selling off in reaction to the rumors that Bank of America is asked by the government to raise additional capital before it can repay TARP.  Extrapolating from that rumor, the market is selling off all financials indiscriminately, because if they need to raise more capital they are headed lower.  MI was very proactive in raising almost $800mm on 10/21 at $5.75.  It currently trades below its follow-on price, so it's a broken IPO and there are some sellers who cut their losses short.  However, assuming that the driver behind the recent sell-off in financials is their perceived requirements of additional capital raises, this should not apply to MI. 

The company raised $575mm -- also at $5.75 -- in June, and only 4 months later decided to raise even more capital, despite generally positive remarks on its earnings call (losses have peaked and are manageable).  One interpretation is that the government "forced" MI to raise capital, or the company decided to front-run the impending reviews by the government that would require many banks to go back to the capital markets.  The corollary would be that MI should have had a pretty good sense as to how much capital to raise to be completely off the hook.  It also took advantage of a frothy market, and now it should be able to clean up its balance sheet without worrying about capital levels. 

Therefore, banks are selling off because they are likely to need more capital, and along with them MI is selling off too.  However, MI was proactive and already raised its capital. At $5.20, you are buying a bank that probably went through a government review, is trading at a large discount to tangible book value, and has an investment by Paulson, who probably bought at the first follow-on offering at $5.75.

Disclosure: long MI