The partial meltdown in bank stocks was a surprise and a warning. The market seemed to know that the powers-that-be were going to order more capital -- a great deal more capital -- according to the declaration today that a surcharge will raise bank capital to at least 10% of all their footings.
This is proper revenge for being Too Big to Fail and almost destroying the global economy in 2008. No wonder the shares of Bank of America, Citigroup, Wells Fargo and other national and regional banks were battered. As the Hank Paulson character in the HBO movie of Too Big To Fail, was reported as saying: "Wall Street has a gambling problem... Why would we bail out someone whose sole purpose is to make money?"
This is a major challenge to bank earnings and bank shares in the market. The major banks will have to sell on average another 60 or 70 million shares to raise that capital. Selling those additional shares will put massive pressure on the shares outstanding now.
And with vastly more shares outstanding, the earnings available to those shares will be far less than at present. No wonder the banks are selling near their tangible book value -- that is if you can trust the tangible book value in light of the mortgage loans that might still have to be written down in value.
No wonder Bank of America (BAC) did not become a $30 stock as big-time hedge fund managers like John Paulson thought they would. The stock has been under liquidation and is selling just over $10 a share. Even JP Morgan is suffering at $40 a share, though Keefe Bruyette & Woods reckons its eventually worth $58 a share.
Another solution: those too big to fail institutions could become smaller by unwinding positions and liquidating assets and reduce their dangerous level of leverage in this manner. Bank executives will wail about less profits, lower share prices, smaller bonuses, unhappy shareholders. Oh, woe is me!
In Too Big Too Fail Treasury Secretary Paulson confesses to one of his aides: "We're late. We've been late on everything." Maybe, with this tough demand to increase statutory capital far beyond what the banks were willing to do, there will be a banking system that is more protective of itself. On the basis of past practice, though, we have learned they will find some way to gamble again with our and their future -- and cause even more need for costly bailouts.