For the past couple of weeks, bank shares have grown in share price faster than a steroid-induced bicep. There has not been much reported by the media in terms of negative news about the US financial industry from Ben Bernanke, bank CEOs, or even the Federal Reserve, even though the bank stress tests resembled a public relations campaign much more than a stress test. Despite the rosy picture painted by the financial media of the US banking industry and the consensus that “the worst is behind us now” by financial executives, the 3-ring circus that is the US Federal Reserve, the US financial industry, and the US Treasury still can’t seem to get their stories straight.
Consider the following highlights (or lowlights depending on your viewpoint) from a story released by Bloomberg on May 11th:
“Bank of New York Mellon Corp., Capital One Financial Corp., U.S. Bancorp and BB&T Corp. will sell shares to repay U.S. aid after stress tests showed they don’t need additional cushion against a deeper recession. BNY Mellon, the world’s largest custody bank, said today it will sell $1 billion of stock in a public offering and may use the funds to repurchase preferred shares sold to the U.S. Treasury under the Troubled Asset Relief Program. Capital One said it would sell 56 million shares of common stock to raise as much as $1.55 billion, U.S. Bancorp said its sale would total about $2.5 billion and BB&T began a public offering of $1.5 billion of stock while reducing its dividend.”
“Regulators examining the 19 largest U.S. lenders last week said the four firms wouldn’t need more capital to survive a deeper, longer recession. U.S. Bancorp Chief Executive Officer Richard Davis and BB&T CEO Kelly King had both said they wanted to repay their $6.6 billion and $3.1 billion in TARP funds as quickly as possible. BNY Mellon got $3 billion from TARP.”
“This was something that was really hanging over the group, so a lot of peoples’ viewpoint on it is that, ‘Hey, the worst-case scenario got taken out, this group’s going to still be around,’” said Kevin Fitzsimmons, a Sandler O’Neill & Partners LP analyst. “
“Capital One, the McLean, Virginia-based credit-card lender that received $3.56 billion from TARP, said in a statement it would sell shares at $27.75 each, an 11 percent discount to the bank’s $31.34 closing price on May 8. The shares dropped $4.24, or 14 percent, to $27.10 at 4:03 p.m. in New York Stock Exchange composite trading.”
“KeyCorp, which the government deemed needed an additional $1.8 billion in capital after the stress test, today registered to sell as much as $750 million in common shares. The bank said it expects to raise about $739.4 million from the offering after expenses and commissions.”
“Cleveland-based KeyCorp, which last month slashed its dividend to 1 cent, said that because of the economic and regulatory environment the company didn’t expect to increase the quarterly dividend “for the foreseeable future and could further reduce or eliminate our common shares dividend.”
“We firmly believe this action is in the long-term best interests of our shareholders and our company because of the risk and uncertainty associated with being a TARP participant,” BB&T’s CEO Kelly King said in a statement. King said the decision to cut the dividend was “the worst day in my 37-year career.”
“Banks that accepted TARP money are subject to government oversight and restrictions on compensation that that they say put them at a disadvantage to competitors. Banks that want to repay the funds must get approval from the government and show they can sell debt in the public market without federal backing.”
“U.S. Bancorp also plans to sell $1 billion of five-year notes without a government guarantee as soon as today, according to a person familiar with the offering who declined to be identified because terms aren’t set.”
“Wells Fargo & Co., which the government said needed $13.7 billion in additional capital, raised $8.6 billion selling shares last week, more than planned. Goldman Sachs Group Inc. in April, before stress test results were released, said it would raise $5 billion to repay federal rescue funds. Principal Financial Group Inc., the Des Moines, Iowa-based life insurer, today said it would offer 42.3 million shares to raise funds for “general corporate purposes.”
“Morgan Stanley last week raised $8 billion by selling stock and debt. The stress tests found that New York-based Morgan Stanley needed $1.8 billion in additional common equity as a buffer against potential losses.”
So let’s analyze the most pertinent points from above:
Bank of New York Mellon Corp., Capital One Financial Corp., U.S. Bancorp and BB&T Corp. will sell shares to repay U.S. aid after stress tests showed they don’t need additional cushion against a deeper recession. If there is a better example of an oxymoron, I don’t know one. So if these four financial institutions don’t need any more capital whatsoever, why do they need to execute significant secondary offerings that will inevitably massively dilute shareholder value. If they are so well capitalized as the stress test results indicated, why can’t they repay the TARP money from operational earnings?
Banks that accepted TARP money are subject to government oversight and restrictions on compensation. BB&T’s CEO Kelly King stated that he was cutting dividends and diluting shareholder value by offering another $1.5 billion of stock to help payback TARP money more quickly because it was in the best interests of shareholders. US Bancorp is conducting a secondary offering of $2.5 billion of new shares as well as an additional $1 billion offering of corporate debt and Capital One is offering $1.55 billion of more shares. Since when is slashing dividends and diluting shareholder stock in the best interests of shareholders, unless the shareholders are the executives that have used this pump & dump scheme to dump stock at artificially high prices and now can begin the process of paying back TARP money so they can start raising their compensation levels to obscene, exorbitant amounts again?
To date, Wells Fargo & Morgan Stanley have moved the quickest of all financial institutions to use their artificially elevated stock prices to already complete respective secondary offerings of stock (& debt) of $8.6 billion and $8 billion.
Capital One issued a statement regarding a secondary offering of shares at $27.75 each, an 11 percent discount to the bank’s $31.34 closing price on May 8. An 11% discount to market prices at the time of a secondary public offering announcement is huge and always in the worst interest of current shareholders. It is not rare for well- run companies to issue secondary offerings that are even above market share price in the interest of protecting their current shareholders. A 2% or 3% discount is sometimes understandable, but by offering a huge discount through a massive secondary offering, executives reveal the belief that their shares are overvalued.
In a pump and dump scheme, there is always a phase II. Note the urgency of many financial institutions to complete their secondary public offerings of stock and debt as soon as possible. This urgency is a classic sign of a pump and dump scheme as it signifies that the rapid rise in current bank share prices have been built on zero fundamentals and is thus unsustainable. Now that the pump scheme is largely in play already or in some instances, has even been completed, get ready for phase II – the dump.
