C.M.O. 5.12.2009

Credit Market Overview
May 11, 2009

With the release of the “Stress Test” results last Thursday Treasury Secretary Timothy Geithner said that he was “reasonably confident” that the information would “make it easier for banks to raise new equity from private sources” while admitting that “we have a lot of work to do in repairing the financial system.” Concluding that “there is reassurance in clarity.”

There were a few bank CEO’s that questioned just how much “clarity” the tests actually brought with Richard Kovacevich, WFC’s CEO going out of his way to ingratiate himself with the powers that be by characacterizing the tests as being similar to the other word we use to describe a mule. Being the good CEO that he is, he got right to work and Wells was the first to issue stock after the tests were announced. And some good work it was too as WFC Wells sold $7.5 billion worth of common, above its originally planned $6 billion, or more than half the $13.7 billion indicated by the stress test.

Never one to be left too far behind John Mack jumped right on the capital raising band wagon and raised $4 billion in common equity, twice as much as planned and more than twice the $1.8 billion called for by the stress test.

One of the reasons these two firms were able to raise more than expected was that "A lot of money managers were underweighted in bank stocks relative to their benchmarks, and they've been panicked buyers because of what they see as an inflection point," says John McDonald, banking analyst at Sanford Bernstein.

Why the turn-around? “In February, some financial stocks were trading like insolvency was a foregone conclusion. The market now realizes these banks are going to survive,” said Jeff Harte, senior banking analyst at Sandler O’Neill + Partners.

Jeff’s colleague at SO+P, Brian Sterling who is co-head of investment banking added to the positive tone, “What we’re starting to hear from investors is a view that these companies were oversold and, although things are bad, they’re not as bad as was baked into the assumptions.”

Be that as it may there are others who are a bit more cautious. Joshua Seigel, managing principal at StoneCastle Partners thinks “there is some demand in the market to raise a certain amount, but whether you could find $60 billion in the next couple of months is highly unlikely.”

That is an interesting viewpoint given that “analysts at RBC Capital Markets estimate that 60% of the top 100 U.S. banks that weren’t included in the stress tests would need to raise capital based on the Fed’s loss assumptions.”
While the 19 banks that were part of the stress test have gotten most of the press they are a small portion of the 8,000 banks that exist nationwide not including the 33 that have already failed this year bringing the total to 58 since the beginning of 2008.

The goal for all of the institutions included in the stress test and the even broader category of those that received TARP funds is to pay those monies back and get back to the business of banking. Ken Lewis the ex-Chairman but still CEO of BoA is looking at a variety of ways to get Uncle Sam out of the guest room including selling business lines and other assets in addition to raising capital. “Our game plan is designed to help get the government out of our bank as quickly as possible.”

“As quickly as possible”, sounds fast; but will it be?

Enjoy the day.

Jim Delaney