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.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.
Eventhough I disagree with what they are doing, whoever came up with these plans is pure genius. They had to know a lot about accounting, market mentality and how to manipulate things (through the fed and media) to pull this off.
It’s amazing how well organized the government has been over the last few weeks. Each of these events has kept the sellers at bay. How come they can’t seem to manage anything else with such precision?
It was well devised. They knew they had 4 or 5 pieces of ammo that they would pile on over the course of 8 weeks. Combined with the horrible sentiment in early March and you had the perfect set-up for a sustained short squeeze.
Unfortunately, I don’t think the fundamentals have changed at all….
An even more cynical look at this would lead you to believe that they engineered the steep downrurn in the market too. They talked it down to deep oversold levels to create an environment for a powerful bounce that they could then feed on the way up.
They needed to get more private capital into the banks, but they couldn’t sell more issues into the Jan market. It just wouldn’t have worked. Who knows? It could be. Either that or they were very lucky.
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