Tuesday, June 2, 2009

Bank Capital Raising Frenzy Continues

On the heels of its $8 billion capital raise last month, Morgan Stanley, perhaps stunned by how high its stock price has remained, is raising another $2.2 billion in equity. Gotta pay back that TARP so it can return to paying bonuses at the expense of shareholders. Interesting that shareholders are still willing to buy into that philosophy. Yesterday afternoon, JP Morgan and American Express both announced plans to raise more capital. This is the first time to the trough for JP Morgan, which is raising $5 billion. Meanwhile, AmEx raised a more modest $500 million yesterday.

If you don’t believe that paying back the TARP is primarily a compensation issue, then just check out Citi’s announcement today. The beleaguered bank is halting severance payments to five former executives that left last year. According to the WSJ article, Citi had promised roughly $100 million in payouts to these executives, and has already made roughly half of the payments but is halting the rest. The bank is betting that the executives will be too embarrassed to file lawsuits, as evidenced by the outrage caused by the AIG payouts. For evidence that Wall Street’s ideas about paying “talent” ridiculous sums of money for seemingly no reason, I present you with exhibit A: Michael Klein. Mr. Klein, a 23 year veteran of Citigroup, was the head of investment banking. He RESIGNED in last July. Funny thing is, I have resigned from a few jobs in my time, and I’ve never been granted severance. Severance is for people who are laid off, not those who resign. Despite this, Citi offered to pay Mr. Klein a “severance” of $42 million in return for not poaching any of the bank’s investment bankers. I know that Citi is on a huge cost cutting scheme, reducing the amount of money it spends on paper clips and copies, etc. But $42 million buys a lot of paper clips. Why on earth the bank, which is suffering from some serious financial problems, felt obligated to pay someone this kind of money when he was leaving the firm and would no longer contribute one iota of value to Citi, shows a complete and total lack of economic prioritizing. Citi knows that this kind of wanton flushing of money down the toilet no longer flies as it has no shot in paying back the government any time soon. The rest of the 19 banks don’t want to be subject to the same constraints next time they feel like paying someone $42 million for no good reason.

As I’ve noted before, I want the banks to pay back the TARP. I don’t think taxpayer money should be funding risk-taking. I don’t care what banks pay their employees, but I don’t think the government should subsidize outrageous Wall Street style compensation, especially when the unemployment rate is 9%. But my conditions for TARP repayment are the following: You pay back the TARP, and this whole government-backing-the -banks scheme is over. Going forward, no more TARP, no more FDIC guarantees, and no more pledging any collateral other than treasuries to the Fed for loans. No more Too Big To Fail. The government shouldn’t be bailing out risk takers.


mrbogue said...

In other news, Abu Dhabi is selling a nice fat stake in Barclays (obtained just in 2008):


All these hefty equity sales after a killer runup are alittle fishy huh? But the market just keeps going up, so its OK! This runup was pretty impressive though :-(

I gotta go now, to take my hourly dose of vicodin.

Mr Wrightwood said...

Yeah, you almost have to give the banks some credit - at least they're selling high this time around, unlike the 2007 purchases under their stock buyback programs.

K10 said...

I definitely give the banks credit for raising capital right now. If I were a bank, I'd be issuing debt, equity, converts, warrants, you name it... You raise money when you can, not when you have to. But it's amazing how willing investors are to dive in and assume that everything is just going to back to normal in a few months.

mrbogue said...

Awesome. Now Citi wants to up their common stock to 60 billion from 15 billion shares.


What the hell?

K10 said...

Zerohedge points out that Citi is preparing itself for "creeping equitization", or converting more and more of the lower tiers of debt into equity. Whether that is the case or not remains to be seen, but still, can't be a good sign...