Posted by: Reilly | April 21, 2008

Please step into my office, Mr. Potter

In the 1946 Christmas Saga It’s a Wonderful Life, George Bailey famously refuses a buyout and job offer by Mr. Potter’s rival Bank with a sparkle and kick of American idealist oratory. Now if only today’s banking institutions could afford to be so magnanimous.

Capital reserves at most banks have been retreating over the last few months – so much so, that many banks are finding themselves in desperate need of capital to shore up their balance sheet and meet regulatory requirements. The tricky part in today’s market is that mergers, buyouts, and large-scale stock acquisitions, the once reliable three-car emergency capital train, has been all but derailed by the past year’s subprime mortgage debacle and the ensuing credit crunch.

And to make matters worse, it’s 1st quarter earnings week in banking country. To combat a $171 million quarterly loss, National City Bank (America’s 10th largest bank) reported today that it will raise $7 billion in additional capital by issuing 126.2 million shares of common stock and nearly 64,000 preferred shares at $100,000 each. It would have been more convenient for the bank to find a buyer (few Banks are large and hungry enough to swallow NationalCity, even in a good market), and no doubt its shareholders might be wincing at the dilution of their already volatile shares, which have declined in value from $38 to $6 in the past year.

Bank of America, while still in the black, reported a 77% decline in net income from last year. Citigroup, the largest American bank, reported a $5.1 billion loss this quarter after a $15 billion dollar write-down of similar sub-prime losses. The bank is expected to maintain a satisfactory capital position despite the losses, having raised $30 billion in recent months from a diverse cadre of foreign investors, including a $7.5 billion cash injection (taken with much hullabaloo) from Abu Dhabi. Domestic capital (while preferable) was simply not forthcoming, investors having fled the market like President Mugabe from democratic responsibility.

What does this mean for the credit market as a whole? With less capital to spare, Banks will become more finicky to whom they lend to – this has already occurred in the real estate market, and a continued credit tightening should be expected well through this year. Today’s Wall Street Journal reported a front-page article on Sovereign Bank, a large regional thrift that was hit particularly hard by a poor investment push into nationwide automotive lending (more on that later).

Smaller banks will also find it increasingly hard to maintain a strong capital base in the current market. Given the circumstances, it seems that cushy job working for Mr. Potter doesn’t look so bad right now.

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Responses

  1. Nice writing. You are on my RSS reader now so I can read more from you down the road.

    Allen Taylor


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