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Why the New Bank Issues Will Suck the Life Out of the Market

madhedgefundtrader's picture


Feed the ducks when they’re quacking.

That’s the refrain I heard endlessly on the trading floor at my alma mater, Morgan Stanley. If the clients want something, give it to them in spades, whether it makes any sense or not. So the sky must be darkened with uncountable flocks of our avian friends when I see three of the biggest equity issues in history hit the market at once, $25 billion for Bank of America (BAC), $25 billion for Wells Fargo (WFC), and $20 billion for Citigroup (C).

This new abundance of wallpaper is further proof that we still don’t have a functioning SEC. Besides diluting the daylights out of the existing shareholders, the great problem I have with these issues is the terrible fundamentals that still bedevil the industry. You know these guys are engaging in blatant window dressing to get these deals out the door, extending and pretending, until their noses grow to Uzbekistan. Sure, by borrowing at zero and lending at 5%, 6% and 7%, even bankers can make money. So on paper anyway, the cash flow looks great.

But as toxic waste dumps, their balance sheets put the Love Canal to shame. Their willing co-conspirator is the Federal Reserve’s Ben Bernanke, who used the nuclear option of zero interest rates to engineer one of the greatest stock rallies in history to get bank shares out of the toilet. Revenue quality is terrible, earnings visibility is nonexistent, home foreclosures are still accelerating, and commercial defaults may not crest for another three years. You know whatever capital they are raising now is already spoken for by imminent loan write offs, and more capital raisings will have to follow. Napoleon’s 1812 retreat from Moscow immediately comes to mind.

For me it’s deja vous all over again, because every time the Nikkei tried to rally in the nineties, it was slapped back down by a tsunami of new bank equity issues that sucked the life out of the market and left gullible investors choking to death.

If someone is pointing a gun at your head forcing you to buy bank shares on pain of death, only look at the small ones that couldn’t gain access to Ben’s exclusive country club, like Hudson City Savings (HCBK), Westamerica (WABC), and Bank of Hawaii (BOH). Given the dreadful fundamentals, you’d think traders would be flooding into the leveraged short financials ETF (SKF) by now, which is down a humbling 92% from its high.

I guess bank stocks can keep inching up until Ben runs out of Kool-Aid. With the stock market within spitting distance from the top of a multiyear range, I’m afraid that the investors in these big issues will end up as dead ducks.

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Tue, 12/29/2009 - 06:04 | Link to Comment Anonymous
Tue, 12/29/2009 - 04:35 | Link to Comment Mark Beck
Mark Beck's picture

This is a clear sign that these big banks are in trouble and need to raise capital before Q1 financials are released.


Without systemic risk, Treasury and FED will not bail these guys out again. However, they may come up with some creative FDIC quick bankruptcy strategies though. Perhaps they will not even mention the B word. Call it debt restructuring or some other FDIC spin-ocracy.

Treasury and FED are scrubbing bad real estate debt through the GSEs, they have made their choice. The banks are on their own.


So who will be first to threaten the Treasury and FED with insolvency?

Should be interesting. I would really like to hear the conversation.

Ultimatum from B of A CEO to Treasury and FED, for example; "Bail me out or I will file for bankruptcy". FED; "No problem here is the FDIC's phone number, good luck with that bankruptcy, and by the way Goldman may want to bid for some of your assets before you emerge.

Mark Beck

Mon, 12/28/2009 - 21:53 | Link to Comment Anonymous
Mon, 12/28/2009 - 19:33 | Link to Comment Anonymous
Mon, 12/28/2009 - 19:25 | Link to Comment Anonymous
Mon, 12/28/2009 - 16:21 | Link to Comment orangedrinkandchips
orangedrinkandchips's picture

Is it me or is this market being held up in a never ending fashion by Da Fed?? WTF?

Mon, 12/28/2009 - 22:13 | Link to Comment zhandax
zhandax's picture

Only on days they let the dollar up for air.

Mon, 12/28/2009 - 16:19 | Link to Comment orangedrinkandchips
orangedrinkandchips's picture

That is the kicker's spoken for already.


So much like getting paid and you have that time when the checks have not cleared yet (if you use checks still). Youre rich! nah. that money is spoken for...

Mon, 12/28/2009 - 16:15 | Link to Comment Anonymous
Mon, 12/28/2009 - 15:46 | Link to Comment Anonymous
Mon, 12/28/2009 - 15:37 | Link to Comment chinaguy
chinaguy's picture

Business as usual up on the Hill

1) Fed bails out banks with TARP & several trillions of USD of other hand out programs.

2) SEC encourages various fantasy accounting rules so the banks don't fail

3) Fed permits TARP repayment so bankers still get their bonuses...and then some

4) SEC permits huge bank equity issues knowing full well the bank's assets do not justify the issues.

Business as usual. Used to shock me...........

Mon, 12/28/2009 - 16:30 | Link to Comment Shameful
Shameful's picture

I hear you, it's the new "normal".  At least now they can no longer claim that they are doing it for the shareholders...well they can but to be met with a mix of stunned silence and laughter.

Mon, 12/28/2009 - 14:54 | Link to Comment Bruce Krasting
Bruce Krasting's picture

C at 3.35 looks like a wet sack of cement.

Mon, 12/28/2009 - 14:50 | Link to Comment Gimp
Gimp's picture

Let's all put our heads out of the nearest window and scream "Ponzi Scheme", maybe the investing public will get the message before it is to late.....

Mon, 12/28/2009 - 14:40 | Link to Comment Anonymous
Mon, 12/28/2009 - 14:11 | Link to Comment Anonymous
Mon, 12/28/2009 - 22:52 | Link to Comment dnarby
dnarby's picture

Good idea...  Except you're nine months too late.

Mon, 12/28/2009 - 14:10 | Link to Comment JR
JR's picture

Powerful! Says it all. This contribution by madhedgefundtrader makes you pause as to how important Zero Hedge is, i.e., to find such contributions.

As Cursive said December 22:

I LOVE the threats that we are constantly subjected to.  The market this, the market that… We live in a society, not a …market.  These shills and hucksters can't get enough of the market. It is the lens through which all stories most be viewed.  It is the all-seeing, all-knowing eye that watches over us.  I swear, I have a vision of Mordor, radiating from above the Masonic pyramid.

In the end, the economy rules

Mon, 12/28/2009 - 13:47 | Link to Comment Anonymous
Mon, 12/28/2009 - 21:34 | Link to Comment Paul E. Math
Paul E. Math's picture

Excellent point and I couldn't agree more.  You need look no further than Fannie and Freddie to see the depths to which the Treasury is willing to go to support the status quo.

F+F are where the biggest banks will be in 3 years.  The banks are now essentially GSEs.  They are just being bailed out by a different path.

F+F stock rose how much today, 20%?  Don't bet against the house - it always wins.

Tue, 12/29/2009 - 01:15 | Link to Comment Dr o love
Dr o love's picture

Paul, are you really the dumbass your post implies?  FRE was $68 the middle of last year.  It's $1.68 now after a 24% rise today.


FNM was $70 at the same time last year and closed today at $1.22 up a whopping 21% for the day.  If you call that winning, I'd hate to see what you consider losing.

Tue, 12/29/2009 - 01:48 | Link to Comment bonddude
bonddude's picture

Since things have changed a lot since last year I think you are being a little naive.

I don't claim to be brilliant but I certainly understand and agree with the party you think is a


"I am Spartacus" as well.

Mon, 12/28/2009 - 13:41 | Link to Comment besodemuerte
besodemuerte's picture

Sometimes I notice a guest on the television I can't help but easedrop on mention hints of this happening, then the current host immediately spins the guest to look like a bad person, a downer, anti-capitalist, or whatever.  It's so obvious the media is trying their hardest to hide this from the public.

Mon, 12/28/2009 - 14:53 | Link to Comment Cognitive Dissonance
Cognitive Dissonance's picture

"It's so obvious the media is trying their hardest to hide this from the public."

I agree the media are selling us a snow job, though so much of it is self censorship. We must always remember that the mass media are buffeted by the same winds money managers are. You can't be the first to break ranks or you'll look stupid and more importantly, lose money. It's all about relative performance; how well you do compared to the competition, be it another money manager, your peer group or the TV station across town.

So ya gotta dance until the music stops.

Mon, 12/28/2009 - 15:45 | Link to Comment Miles Kendig
Miles Kendig's picture

Ya, sooner or later folks just gotta recognize that the only tunes they're dancin' to are funeral marches and the birds singing outside of their window are buzzards. - Thanks CD, or as the author of this article would say; "Feed the ducks". 

Mon, 12/28/2009 - 13:19 | Link to Comment jmc8888
jmc8888's picture

To 175947


Any day, month, or years from now.

They're all dead, we just don't know WHEN the music will stop.

Of course when it breaks, how much will the gov't give the banks to prevent the derivatives collapse? All it takes is one of those in the derivatives circles to go bust, to ignite the rest. Of course, that's not the only way.  The other way is for the sick economy to drag a few in the circle from making their derivatives payments, which at this point could be anything.  Stock market reversal, CRE, probably not residential as Big Ben has Freddie and Fannie scooping all that up. 

So if you want to invest in ANY bank stock, just remember, one day it's at 200 a share, the next day it could be at 0.  This is the environment.  This is the reality.  The poison pills are everywhere and big ben is manufacturing even more and handing them out all around.  It will pop, when, who knows.  The next major event? possibly.  After 10 sequentially bigger events? Almost certainly.  Somewhere between the two is the most like scenario, and when it comes, last year will look like a good ol family reunion and good times.  It wasn't good times you say? You'll think so after the next one or few crashes. 

My personal advice is if you're going to trade Bank stocks, hell ANY stocks, just realize the crap could hit the fan at ANY time, and that you should watch your investment pretty much every minute the market is open.  If that's too much, don't buy 'em.  If you're not the first seller, good luck.

Great article.  The perpetually broke banks will need to do exactly this.  If they don't the derivatives trip wire is set off and kaboom goes the world economy, forever in it's current form.  Meaning big ben will have to keep printing to keep re-inflating the bubble, so these broke zombie by a million times banks can float another day or quarter. 

My question is, how long does it take before the people see this cycle and go, no, no bonuses, you'll be in hock by the middle of next year again and we'll be bailing you out.  Which could come form TWO areas.  Shareholders, and the general public over the bailouts/bailout mechanisms.

Or they can stop printing and everything collapses. 

There's no getting out of what we're in, and continuing down the same road.  No matter how long we wait, or how many trillions or quadrillions we throw at the problem.  It's broke, it's breaking down even further, and it will never return. Never.

Hamiltonian American Credit System, with the appropriate measures are needed.  All that needs to be passed has already been written, and already been shown to congressmen.  Why they don't act, and the people don't demand them to act, is all of our faults.  Glass/stegall, HBPA of 2007, LaRouche 4 powers plan.  Among many other pieces of legislation that need passed, and are sitting on our Congress's desks.

They think they can put humpty back together again.  Which is impossible.  But even now, after so much needed to flow upwards, and continues to, to keep things running, in a crappy fashion, is it even worth it? Of course not. 

If the powers that be needed every piece of wealth in the world to fix their problem, they would take it from you to do it.  Guess what, they're already 10x that with 1.4 quadrillion in derivatives.  If you don't own derivatives, you're a nobody.  I guarantee their 1.4 quadrillion trumps whatever you have and will get serviced first by congress.


big ben keeps the inflation machine going

stock market goes up

Broke Banks (all of em) issue new shares, shoring up capital base from continued declines of CRE and regular ol mortgages

Sending stock market tanking

Oh yeah, and this is the best-case scenario where nothing else curb checks the economy and allows the banks to do this.  Possible, sure, at least short term.  probable no, at least not long term. 

You can bet that everyone but the central bankers will either be caught off guard when this happens, or will be trying to make the fed look like idiots via other factors rates, gold, etc. 

Even if the fed could control what it's doing perfectly, the outside factor could destroy their goals.  Either way we're screwed as a whole because everyone is still rolling the monopoly dice when it's clear the whole game is over because the same person owns all the properties.  We should be looking into a new game, not still playing the already decided one. 

Mon, 12/28/2009 - 12:37 | Link to Comment Eternal Student
Eternal Student's picture

Has anyone looked at who's buying up this garbage? The top suckers (err, investors) on that list would be golden for those who want to make some serious money off of them.

Mon, 12/28/2009 - 12:12 | Link to Comment SteveNYC
SteveNYC's picture

Excellent post.

Mon, 12/28/2009 - 11:58 | Link to Comment JACOB5CD
JACOB5CD's picture


Mon, 12/28/2009 - 12:37 | Link to Comment El Hosel
El Hosel's picture


  After you hear the flushing sound, not a minute before.

Mon, 12/28/2009 - 12:36 | Link to Comment Cursive
Cursive's picture


Been asking myself this question since October.  You'd think the rise of foreclosures, the declining economy (yes, it's declining, the constant equity raises, and the prospect of having to comply with the new FASB rules next quarter would have had some effect.  Alas, no.  The equity markets operate in a world of suspension of disbelief.

Mon, 12/28/2009 - 14:26 | Link to Comment Anonymous
Mon, 12/28/2009 - 12:31 | Link to Comment Anonymous
Mon, 12/28/2009 - 12:31 | Link to Comment Anonymous
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