Op-Ed: Reports of Capitalism's Death Greatly Exaggerated
Banks' secondary offerings one vital sign.
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Celebrate dilution! Well - at least that's how the bears will probably snort at the Bank of America (BAC) deal and the other secondary placements (see State Street (STT), US Bancorp (USB), Capital One (COF), and BB&T (BBT)).
But as I pointed out in Are Equity Offerings Bad for the Market? and Are Secondaries Priced Right?, the glass is also half full.
Take the BAC example. Factoring in the dilution, applying the loss assumptions laid out under SCAP, the stock is worth $40. Once the stock is fully capitalized, with fears of insolvency and massive dilution past it, the stock will be able to realize that value.
The deal is clearly a win/win.
There are at least 5 other bullish elements to the BAC story from the point of view of the market:
1. A huge share overhang is removed.
2. A huge risk – ie backdoor nationalization under the CAP regime --for the financial sector is removed. (At least for now).
3. Clear evidence of massive cash availability + clear evidence of collapsing risk aversion.
4. Clear evidence of the restoration of functionality in private capital markets.
Let us recall that, in February, Roubini and a whole slew of influential commentators were outdoing themselves in their rabid calls for the nationalization of the entire US banking system. For example, Roubini literally recommended in a February 21 WSJ interview that all US banks be "taken over all at once," since "6 months from now, even firms that today look solvent are going to look insolvent."
I wonder if any of these eschatological prophets of economic apocalypse might be feeling a little sheepish right now?
The BAC deal, and the success of the other secondary offerings, are suggesting very strongly that the US financial crisis is essentially over. The patient has been stabilized and the healing process has begun.
More broadly, it's beginning to appear that variously giddy and manic depressive reports proclaiming the "death of capitalism" may, to borrow a phrase from Mark Twain, have been greatly exaggerated.
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