The Wall Street Journal-20080114-breakingviews-com - Financial Insight- Banks Still Seeking Capital- Those That Move Quickly May Secure the Best Deals- A Chance for the Cashed-Up
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breakingviews.com / Financial Insight: Banks Still Seeking Capital; Those That Move Quickly May Secure the Best Deals; A Chance for the Cashed-Up
Banks have been raising capital left and right. But they may need more. Merrill Lynch and Citigroup reportedly need an additional $14 billion, at least, between them. Even this may not be enough. They have used the cash already raised to cover past missteps, largely in mortgage markets. Banks also may need to shore up their balance sheets against future losses -- in credit cards, bridge loans for busted buyouts and commercial real estate.
Citigroup, for example, is understood to be finalizing new injections from investors including a Chinese bank and Saudi Arabian Prince Alwaleed Bin Talal, long a substantial investor in the U.S. bank.
It wrote down $6 billion last quarter, and it may have $18 billion of additional losses this quarter, analysts estimate. It has locked in $12 billion of new equity already and could raise a further $10 billion or so. It could scrape up an additional $7.5 billion by halving its dividend and selling its stake in Brazilian credit-card company Redecard. Add it all up and the resulting $5.5 billion boost may be enough to get above Citigroup's targeted 7.5% tier-one capital ratio, but it leaves little cushion for future problems.
And there are plentiful signs the economy is worsening. Increasing numbers of consumers are falling behind on credit-card payments. Unemployment is rising. Retail sales in December were disappointing. An increasing number of economists, including forecasters at Morgan Stanley and Goldman Sachs Group, predict a recession.
If conditions deteriorate, a host of institutions may need to strengthen their balance sheets. Those that act now to beat the rush probably will get better terms. There is less competition, and their stock prices won't have been as battered by the market downturn.
Banks wouldn't want too much capital. Still, it is prudent to be prepared for the worst. Moreover, there could be opportunities amid the carnage. Some are already emerging: Bank of America has agreed to buy Countrywide and J.P. Morgan Chase is reported to have approached Washington Mutual. Strained balance sheets prevent the likes of Citi, Wachovia and SunTrust from even considering such potentially lucrative deals.
Alternative Asset Ambitions
Shares in Fortress Investment Group and Bear Stearns have fallen more than 50% since the days after Fortress's initial public offering last February. The two recently discussed whether they had more than that in common, according to the Financial Times. Although no deal transpired, the implication is that Fortress was looking to become more than just a hedge fund and private-equity manager. Like some other fund groups, it has intentions eventually to compete on Wall Street's turf.
Ambitious rival managers such as Citadel Investment Group might take note. Citadel is just one of several fund firms that were rumored to be on the brink of going public until the markets turned against them. Such firms might find inspiration in the abortive Fortress-Bear talks.
After all, they lack an option open to publicly traded firms such as Fortress and Blackstone. Stephen Schwarzman's firm is using its stock to help buy GSO Capital Partners, a corporate-credit specialist hedge fund, for almost $1 billion. There is no reason Wes Edens, the Fortress boss, couldn't follow. Both groups' shares remain generously priced relative to the market. A series of modest acquisitions could get either of them well down the road toward a significant investment- banking franchise.
For alternative-asset managers that lack a stock-market currency, it is tougher to expand quickly. Yet Citadel, for one, has the ambition to take on Wall Street. It already has turned trading know-how into separate businesses, and its executives clearly relish creating an institution with a Goldman Sachs-like reputation. For Citadel or another privately held rival, a bigger deal with a publicly traded investment bank, perhaps modeled on the Fortress-Bear idea, could simultaneously help achieve strategic diversification and provide a traded stock.
Such a combination would be tougher to manage than going it alone, but it would bypass two big headaches: going public in an unwelcoming market, and the uncomfortable scrutiny that goes with an IPO.
-- Robert Cyran, Antony Currie, Richard Beales, Lauren Silva
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This column is by breakingviews.com, an online financial commentary site.
