Will US bank stocks become worthless like GM?
Posted on 07 May 2009 with no comments from readers
General Motors has detailed a plan to issue 60 billion new shares to repay its debt mountain in a filing with the US Securities and Exchange Commission. This would leave existing GM stock almost worthless.
Such a swapping of debt for equity is a classic way out of debt, if the lenders can, or have no choice but to accept it. Of course, this is jumping the gun. Chrysler is in Chapter 11, GM has until the end of the month to save itself.
Caveat emptor
However, should bank stock owners not be looking to this example of how companies short of capital have to behave rather than rushing to buy more stock in an idiotic belief that the banking crisis is almost over.
Lest we forget the widely leaked government stress tests are likely to show that 10 out of 19 of the nation’s largest banks need to raise capital. At the very best that is likely to be dilutive to shareholder interests.
Why then are the share prices firming? Even if we see this as a simplistic division of the banks into the good and the bad, are they not all rather ugly? And is it not true that keeping them all going will slow the recovery of the good by supporting the bad?
Equity buyers are like turkeys voting for Christmas. This is just the first stage of the unwinding of a banking crisis. Banks have already seen their equity bases undermined by provisions, and for stock holders the price of recovery is almost certainly a dilution of the value of their holdings as a part of massive financial reconstructions.
Boom times
Besides business for the banks is hardly likely to recover to boom levels for many years to come. Global trade is locked in an economic slump. Asset values are deflating as leverage has collapsed. Many individuals, companies and government entities are struggling with loans they can barely afford to service.
In this environment can you really trust the good banks to deliver a steady upturn in profits, and not lurch back down again?
But the most important point is that the banking sector is going to have to consolidate and re-engineer itself just like GM and that shareholder interests will be last in the queue. That is not a cue to buy the sector.
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Banks are Great at Deception:
I find it quite amusing how the financial industry is deluding American people into thinking that they are solvent. About 2 months ago, they all said: “we’re well capitalized, and don’t need any more government help.” Maybe they said this, knowing that the government is politically “not able” to provide more capital to them, because of public anger.
Then Goldman Sachs issues more stock, so as to raise capital, in advance of all the other banks trying to dilute their existing stock by issuing more (brilliant maneuver, GS!!!).
Then we had the so-called “Stress Test”, which was deliberately engineered so that most all banks would pass (according to independent financial experts!).
Now the large banks are all issuing more stock (amounts shown are in billions):
GMAC: $11.5
BofA: $34
WF: $13.7
MS: $ 2
A host of other smaller banks (e.g. KeyCorp, PNC Financial, Sun Trust, etc.) are all coming out with new stock offerings of $1-2 billion.
Bottom Line:
What sane, rational person would buy this junk when there’s a very high likelihood that, by fall of 2009, it will be worth less than half of the offer price??? I guess the old saying applies here: there’s a fool born every minute.