The U.S. Treasury has to be quite pleased with themselves. Their well constructed plan to create the appearance of strong banks has certainly succeeded. The reports that Citi and BAC need capital have barely phased the market and the Goldman Sachs stock offering was oversubscribed (what timing by GS who top ticked the market). Thus far, it looks like the banks will have no problem raising capital from the public. Imagine that – 8 weeks ago these banks were all on their deathbeds. But you change an accounting rule, create a recycled TARP plan (PPIP) that won’t work (again), funnel some funds via AIG to the banks and presto change-o, you have “healthy” banks.
This morning we got word that Northern Trust will raise $500 million in additional capital. This is a curious move for a bank that has been relatively unscathed by this whole crisis and says to me that the so called “zombie banks” are in much more trouble than we likely assume. I don’t want to read too much into Nothern Trusts capital raise, but it’s obvious they’re taking advantage of this “improved” operating environment to pad their relatively pristine balance sheet. It’s only a matter of time before the zombie banks like BAC and Citi hit their current shareholders with new dilutive actions.
I have to give it to them. This 8 week government concocted rally has been incredible. It wasn’t apparent at the time of our March 8th buy call, but this plan was well timed, well executed and has certainly done the job of injecting a huge amount of confidence into a system that was very fragile. I just hope it doesn’t backfire now. It appears that many of these banks are convinced they can earn their way out of this crisis after posting unsustainably strong earnings in Q1. In my opinion, this has actually derailed the PPIP (the banks have zero incentive to sell now) and has given the banks the impression that they might not need to raise capital. That might well be the case if it weren’t for a mountain of residential mortgage resets in 2010/2011, commercial real estate’s impending implosion and the ever growing credit card delinquencies. Let’s hope the government has another trick up their sleeve after the stress test results – if they don’t I fear we might see a repeat of last summer/fall.