Investors Hide as Banks Come Knocking
Investors Hide as Banks Come Knocking
Financial Firms Struggle to Get Capital
From Big Players Burned Once Already
By ROBIN SIDEL
June 23, 2008
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.
Before announcing plans earlier this month to raise $1.5 billion, KeyCorp, of Cleveland, quietly reached out to more than a dozen of its largest institutional shareholders to gauge their interest in participating in a transaction, according to people familiar with the matter. A number of those investors rebuffed the offer, expressing concern about their existing exposure to the poor banking environment, these people said. KeyCorp’s stock price fell 24% when it announced the capital-raising deal. It is down 3.8% since then.
A KeyCorp spokeswoman declined to comment.
Dozens of Wall Street firms and commercial banks have raised capital, and many more financial institutions are expected to follow the same path in coming months, particularly as regulators clamp down on these institutions to ensure they have adequate capital levels to withstand the credit crunch.
That is particularly the case for small, regional banks and mom-and-pop lenders just starting to be hit hard by losses in their real-estate and construction-loan portfolios. With so many banks already having gone hat in hand to shareholders, these financial institutions ultimately may be forced to deal with a limited pool of investors who still would be willing to pump in money.
Investors have good reason to be skittish. Most of the banks that issued new securities in recent months have continued to see their share prices slide, some by 40% or more. That means investors who bought into those transactions are far underwater. And existing investors who didn’t bite have had their holdings diluted by the issuance of piles of new shares.
“Investors are tired of trying to catch a falling knife,” says one investment banker who specializes in the financial-services industry.
Even the smart money isn’t looking so smart. In April, private-equity firm TPG and other investors agreed to pump $7 billion into Washington Mutual Inc. in a transaction that valued their investment at $8.75 a share. The deal represented a discount to the bank’s share price of about $13 at the time.
Not anymore. WaMu’s stock closed Friday at $6.38 on the New York Stock Exchange.
“Obviously, the investors who jumped in early are down materially, but I don’t feel by any measure that the market is closed or dead,” says John Duffy, chief executive and chairman of KBW Inc., a boutique investment firm in New York that is advising a number of financial institutions on the prospects of raising additional capital. Mr. Duffy attributes much of the recent decline in stock values to “the sentiment that the banks didn’t raise enough capital and will be back to the market at even lower prices.”
When Joseph Fenech went on the road with the management of Sterling Financial Corp. of Spokane, Wash., recently, the banking analyst at Sandler O’Neill & Partners LP in New York was surprised to hear a number of investors discourage Sterling executives from raising capital “on the basis that the marketplace does not seem to be rewarding the additional capital cushion.”
A spokeswoman for Sterling declined to comment, citing the pending release of the bank’s earnings next month.
In a report last week, Mr. Fenech attributed the slides in the share prices of banks that recently raised capital partly to skepticism as “investors began to assess the possibility that many companies would soon be back to the well for additional capital and/or began to more fully digest the massive dilution associated with these actions.”
The latest test of investor fortitude: BankUnited Financial Corp., a Coral Gables, Fla., bank announced late Wednesday a $400 million public offering. Terms of the deal weren’t disclosed, but BankUnited’s stock-market value is less than $100 million.
BankUnited shares plunged 19%, or 45 cents, to $1.90, in 4 p.m. Nasdaq Stock Market composite trading Thursday. Friday the stock fell an additional 12%.
Growing queasiness could force some banks to downsize their capital-raising ambitions. That is how some analysts and investors interpreted the actions of Fifth Third Bancorp, which on Tuesday said it would raise $1 billion through an offering of convertible preferred stock and sell $1 billion in assets. The Cincinnati bank also cut its dividend for the first time in three decades.
“The decision we made speaks for itself,” a Fifth Third spokesman said.
Write to Robin Sidel at robin.sidel@wsj.com
http://online.wsj.com/article/SB121417644960795349.html?mod=hps_us_whats_news
Toward a Transparent Financial System
By VIKRAM PANDIT
June 27, 2008; Page A11
If there is any consolation in the latest credit crisis it is the vigorous global debate now unfolding on regulatory reform. Regulators and market participants see an opportunity to reassess, and to get organized around guiding principles that can help financial institutions and financial markets handle the mounting complexities of global trends in business, markets and the economy.
In my view, three principles in particular – transparency, a level playing field and systemic oversight – are the essential elements we need to consider as we look at how best to frame these reform discussions. The goal of the debate should be to advance global coordination among central banks, regulators and financial institutions in ways that increase our understanding and ability to manage systemic risk.
Markets cannot clear without transparency. We all know that and yet we’re seeing again the consequences of a lack of full transparency. Fixed income and credit markets currently are among the most opaque markets. Transparency concerns can lead to illiquidity.
Yet transparency is difficult to achieve. It requires continual vigilance to standardize products when appropriate, introducing them to exchanges, creating counterparty clearinghouses and settlement systems and, finally, amassing accurate data on prices and transaction volumes. Transparency must also include public disclosures to investors about pertinent risk and financial information that give the market a chance to make informed judgments.
Moreover, transparency means that systemically significant institutions – essentially any institution whose uncontrolled failure would impact the financial system in a significantly adverse way – should meet robust information requirements set by the overseeing regulatory agency.
The next principle is a level playing field, which includes two distinct issues: standards and capital requirements. Rating agencies, independent monitoring entities and risk bureaus are all important if accredited correctly. Global coherence and consistency on accounting standards can also help, including clear guidelines regarding off-balance-sheet instruments.
In recent dysfunctional markets, we have seen different accounting standards applied that were based on an institution’s form and regulatory jurisdiction. Accounting based on a mark-to-model has been severely tested by unobservable inputs intended to estimate the market. This has fed into difficult, far-reaching decisions that impacted capital and other factors as one misinformed trade set off a chain of similar trades. This raises an important question: Are there alternative accounting approaches we should apply, particularly in dysfunctional markets?
We also need consistent capital requirements for systemically significant institutions. As we consider how to define a level playing field, we ought to ask what now constitutes a “financial institution.” When judging which institutions should be allowed access to the playing field, focusing on function, rather than form, seems a sensible answer. Financial services and parallel banking activities in many ways are becoming ubiquitous, and to some extent interchangeable.
The third suggested principle is a need for oversight for systemically significant institutions. We cannot and should not legislate away an institution’s ability to lose shareholders’ money. But none should have the right to impose externalities on the rest of the financial system. Does an institution warehouse risk? Does it borrow short and lend long? Does it leverage its investments? Once a company gets large enough to impact the financial system, shouldn’t it operate under the same systemic risk umbrella in terms of capital, liquidity and transparency?
In the U.S., we recently saw the unprecedented opening of the Federal Reserve discount window to nonbanks. By definition, unprecedented events set a precedent. And regardless of whether that window is officially opened or closed, the market now assumes that it will be open if necessary on an ad hoc basis.
Capital and liquidity speak for themselves. Systemically significant institutions need to be as transparent to regulators as regulated institutions are. Without this level playing field, regulators charged with safeguarding the world’s financial systems simply won’t have enough information to mitigate systemic risk.
An uneven application of regulations and accounting standards in an environment where capital and talent are mobile and where traditional classifications are being redefined has the potential to increase systemic risk. Applying rules partially is not the second best option to applying them consistently.
In order to realize all the possibilities in the global trends reshaping our world and our financial systems, we welcome a more robust regulatory architecture that embraces standards broad and clear enough to apply to all participants, but is flexible enough to be adaptable to unforeseeable changes in a dynamic market.
Mr. Pandit is CEO of Citigroup.
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