Financials in Trouble, Part 1-Minyanville

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Financials in Trouble, Part 1

John Mauldin Aug 25, 2008 9:45 am


		Bank failures could total $850 billion.

That only prolongs the recession and the muddle-through economy, which hurts consumers and corporate profits. That, in turn, puts more pressure on banks.

Ultimately, banks are going to have to raise a lot more capital than anyone who's buying financial stocks today imagines. And it's largely going to be expensive capital. Professor Bennet Sedacca wrote about this last week, in No Credit for Financials:

Financial entities like banks, broker/dealers, regional banks, finance companies and insurance companies need credit at reasonable rates in order to finance themselves. I’ve been concerned for many years that the door to raise new capital in debt markets would finally shut on banks, brokers and others.

For many regional banks like KeyCorp (KEY), Zions (ZION), Regions (RF) and National City (NCC), the door is already shut; if they wanted to raise capital in the debt market at the levels at which their outstanding issues regularly trade, they would have to pay 12 to 15% - hardly economic levels. GM (GM) bonds trade near 27% yields. Washington Mutual (WMU) trades north of 15%.

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Then there are the “good banks,” like JPMorgan (JPM) and Wells Fargo (WFC). JPMorgan recently sold $600 million of preferred stock at 8.75%; Wells Fargo sold $1.3 billion at 8 5/8%, plus underwriting fees.

Below, I offer up a few guesses as to what other issuers would have to pay to issue preferred stock.

Lehman Brothers (LEH): 11-13%
Merrill Lynch (MER): 11-12%
Morgan Stanley (MS): 9-10%
Citigroup (C): 9.5-10.5%
CIT Group (CIT): 12-15%
Fannie Mae (FNM)/Freddie Mac (FRE):15%
Keycorp: 11-13%
National City: 13-15%
Wachovia (WB): 10-12%
Zions: 13-15%
GM/GMAC: Not possible.
Washington Mutual: Not possible.
Ford (F): Not possible.

Professor Sedacca makes a good point: Banks that conserved capital and managed their risk well will be in good shape to take over weaker brethren. They'll have access to capital markets - and the money they need for expansion. My own bank was acquired recently by another small regional bank. Deals are getting done.


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