Investors finally balk at giving banks more capital

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It’s about time! I’ve been saying this day was sure to come and it couldn’t arrive soon enough. After pouring over $300 billion of good money after bad, investors are perhaps saying enough is enough.

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The Wall Street Journal is reporting today that investors are:

Once bitten, twice shy.

As banks rack up billions of dollars in losses from bad loans and blundered investments, large investors are becoming skittish about pumping more money into them.

In the past several weeks, bank executives have encountered unexpected resistance from investors, who have expressed reluctance to participate in the capital-raising transactions sweeping through the industry, according to people familiar with the situation. Already bruised by big losses and fearing that bank shares haven’t yet hit bottom, some of these investors are choosing to tighten their purse strings.

“The window for capital-raising is closing,” says Brad Evans, a portfolio manager for Heartland Advisors Inc., a money-management firm in Milwaukee that invests in small, regional banks. “Investing in a bank right now means investing in a large portfolio of loans that are essentially a black box.”

The change in sentiment could have sweeping implications for financial institutions that are trying to shore up their balance sheets by issuing stock and other securities to their investors. Some may be forced to lure investors with sweeter terms, further raising the costs of doing these deals.

WSJ, 23 Jun 2008

I can’t say I’m surprised. After the Bear Stearns collapse and the following reporting season in April, Wall Street rallied as if we were over the hump. Then, just as quickly as we forget all about the credit writedowns, they reared their ugly head again in the form of U.S. regional banks and Lehman Brothers.

It is now apparent to everyone that we are nowhere near the end of this and many more writedowns are to come. With the debt markets closed and equity markets becoming harder to tap, the funding sources for cash-strapped financial institutions are running out.

When individuals, sovereign wealth funds and institutional investors stop giving these institutions more capital, the bottom will fall out of the financial services sector, and we will reach capitulation. As a result, some institutions will fail. But, at that point, the surviving institutions will be very cheap. Then, the financials will be screaming bargains and that is the time to buy.
-Credit Writedowns, Investors in Financials lose $10 billion, 16 Jun 2008

I expect to see some bankruptcies in the financial services sector soon. Let’s see where we go from here.

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Hundreds of U.S. banks could go under, Sydney Morning Herald, 23 Jun 2008

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