Following up on yesterday’s post regarding credit losses, here is an interview with Carlyle’s David Rubinstein from Bloomberg. The article notes that while credit losses have totaled $329b worldwide, banks have been able to raise $247b to offset those losses. Such capital raises dilute the shit out of common shareholders, though to the extent that those shareholders risk losing everything in bankruptcy if banks DON’T raise capital, a smaller share of ownership in the banks’ continuing earnings is an acceptable price to pay.
Incidentally, I was at the Credit Sights subprime conference two weeks ago (had big plans to live blog it, but there was no WiFi connection!) and heard an interesting tidbit from a hedgie:
You may have noticed that banks forced to raise capital see a temporary boost in their share price. See the uptick in WM from $10 to $12 a couple months back, for instance.
I wondered why that always happens since common stock is clearly worth less after being diluted so substantially. Sure capital raises are positive to the extent they help banks survive, but the guys trading in volume aren’t betting that these banks are threatened with bankruptcy just yet. So why the huge (20%?!) uptick in price?
“Because it’s an elegant way to cover your short.” All the guys short the financials have an opportunity to cover their positions buying newly issued stock at a slight discount to market. Interesting.
When Rubinstein says he sees “enormous losses” ahead, that’s worth noting. Also worth noting that he’s optimistic about long-term investment opportunities in the financial industry. Private equity guys like him have cash to invest and the banks are opening their books trying to attract that cash. So guys like Rubinstein have access to info that the market isn’t seeing published in SEC filings.
May 12 (Bloomberg) — U.S. and European banks and financial institutions have “enormous losses” from bad loans they haven’t yet recognized and may have a harder time wooing sovereign-fund rescuers, Carlyle Group Chairman David Rubenstein said.
“Based on information I see,” it will take at least a year before all losses are realized, and some financial institutions may fail, Rubenstein said at a breakfast meeting of the Institute for Education Public Policy Roundtable in Washington. He didn’t name any companies.
“The sovereign wealth funds are not likely to jump into the fray again to bail out these institutions,” Rubenstein said. “Many financial institutions aren’t going to be able to survive as independent institutions.”
Rubenstein said sovereign wealth funds are becoming wary after losing $25 billion on their investments in struggling banks and securities firms worldwide.
Financial institutions worldwide have recorded $329.2 billion in credit losses and writedowns and raised $246.6 billion in capital since the beginning of 2007. Rubenstein said about $60 billion of that capital was provided by sovereign funds last fall, and their investments today are worth about $35 billion.