Banks: Too Big To Fail. Too Big To Save?

Apr.21, 2008 in Market Outlook

Posted by Heidi N. Moore

Note to U.S. banks: Get your bailouts while they are hot. There are a heck of a
lot of people scrambling for a piece of that pie.

“We can conclude that the financial services sector is ripe to receive capital,”
wrote Keefe Bruyette & Woods analyst Melissa Roberts on Friday. That is an
understatement. Large-cap banks and investment banks have accounted for nearly
$33 billion of equity raisings this year, or 71% of the total capital raised by
all U.S. companies this year, according to KBW - and that doesn’t include the $7
billion cash infusion to Washington Mutual Inc. (WM), which was a private
placement to a few big investors, or a $500 million offering of convertible
preferred stock by Huntington Bancshares Inc. (HBAN). Nor does it include what
was essentially a $29 billion cash infusion by the Federal Reserve into J.P.
Morgan Chase & Co. (JPM) for the Bear Stearns deal - which may put to bed the
whole idea of “too big to fail.”

It doesn’t end there. Roberts figures about 42 U.S. financial institutions may
need capital infusions this year. The breakdown: 20 regional banks, four
large-cap institutions including Bank of America Corp. (BAC), as well as
Sovereign Bancorp Inc. (SOV). The list includes 11 real-estate investment trusts,
two mortgage insurers, and Fannie Mae (FNM) and Freddie Mac (FRE), who might each
need $7 billion, according to KBW. Bank of America may need another $7 billion
and Sovereign Bancorp anywhere between $500 million and $1 billion.

Given the scale of the problem here, though, are the banks also too big to save?
Roberts is actually pretty optimistic that private-equity firms, government
investment funds and special purpose acquisition companies are going to cough up
the cash. Private-equity firms alone have more than $800 billion of uninvested
capital, SPACs have raised $13 billion they have yet to invest and government
investment funds might have as much as $2.6 trillion under management.

Of course, matching up the money with the banks that need it will, by nature, be
an inefficient enterprise. For one thing, it is unlikely that every red cent of
investors’ money will go toward troubled financial institutions; National City
Corp.’s (NCC) finances, for instance, scared off at least five potential buyers
before gathering a $7 billion investment. And if another investment bank were to
fall like Bear Stearns, there are no more J.P. Morgans to pick up the pieces. In
addition, counting on foreign countries’ investment funds may be problematic, as
many politicians balk at the fact that all but one of sovereign wealth funds are
from countries without a democratic system. That is assuming the sovereign wealth
funds want to get involved: China Investment Corp. bought a big stake in
Blackstone Group L.P. (BX) at the time of its IPO, and the private-equity
company’s shares are now trading at $18.74, or less than half of the $38.00
year-long high.

One thing Deal Journal has to note: Roberts nostalgically headlined each of her
conclusions in the report with hits of the ’80s and ’90s, including “Don’t Dream
It’s Over,” “Takin’ It To The Streets” and “I’ll Be Watching You.” They are
inarguable classics, except for one: Richard Marx’s big-hair schmoopy love
ballad, “Right Here Waiting.”

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