Credit is scarce but not capital

Bloomberg carries an article noting that credit was tight but there appeared to be plenty of money for commodities. Here is another piece of the action.

Credit is scarce but not capital. Mortgage-ravaged banks and Wall Street firms often have to borrow from the Federal Reserve, as lender of last resort, to meet current bills. They have no problem at all raising big sums from investors for future use.
In recent months, these financial companies have sold $262 billion in new securities — much of it common and preferred stock — according to Bloomberg data. This gives them capital they need to offset losses from subprime mortgages that now total $343 billion.

Investors obviously don’t see this as throwing good money after bad: They eagerly buy more shares than the companies initially planned to sell.

Late last month, Citigroup Inc., the biggest U.S. bank by assets, planned to sell $3 billion in common stock. Investor demand boosted the total by 50 percent to $4.5 billion. People bought without assurance that the bank’s need for capital was sated.

Citigroup so far is the champion capital-raiser, refurbishing its balance sheet with $44 billion in new money. There’s symmetry here. Citigroup’s subprime-related losses are also the highest, at $41 billion.

American International Group Inc., the biggest insurance company by assets, got stuck in the subprime mire too, by guaranteeing payment on loans. The company had a first-quarter net loss of $7.8 billion. Still, last week AIG said it had raised more than the $12.5 billion in new capital it had planned.

Stocks and Bonds

The company said it sold $11.9 billion in common shares and units that can be converted into common and might offer more of both to meet investors’ demand. AIG also sold $4 billion in bonds. AIG’s loss and new capital figures aren’t included in the Bloomberg data cited above.

Though others damaged by subprime losses have cut their dividends to conserve cash, AIG on May 8 raised its quarterly dividend to 22 cents a share from 20 cents. The company is in effect raising money from new investors to pay off old stockholders — a modern-day Ponzi scheme.

Wachovia Corp., the fourth-largest U.S. bank, was able to sell $8 billion in common and preferred stock last month, $1 billion more than planned. No matter that the bank was absorbing losses from once-popular mortgages that allowed homeowners to skip some interest payments and add the amount to principal.

Washington Mutual Inc., the biggest U.S. savings and loan, with subprime losses so far of $8.3 billion, sold $7 billion in common and convertible preferred shares in April to investors led by David Bonderman’s TPG Inc. The company has raised a total of $10 billion in new capital.

Real Money

UBS AG, Switzerland’s biggest bank, has reported $38 billion in write-offs and other losses from mortgages. It has raised $28 billion in capital. Merrill Lynch & Co., the third- biggest U.S. securities firm, has brought in $18 billion in new money against its subprime-related losses of $32 billion.

The parade will continue. Freddie Mac, which supports the U.S. mortgage market by purchasing loans from lenders, said last week it plans to sell $5.5 billion of common and preferred shares soon.

Freddie Mac and its sister government-sponsored company Fannie Mae may be in the market for money repeatedly in the months ahead as the U.S. government looks to them to keep the mortgage market liquid.

Investors may feel they can’t lose by putting money into financial companies. The Federal Reserve — by engineering the takeover of Bear Stearns Cos. by JPMorgan Chase & Co. in March – – showed that no company big enough to have a major impact on the banking system will be allowed to fail.

What’s more, both Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson have urged banks and investment firms to raise more capital so that they can lend more and boost the economy. People also may be intrigued by their ability to buy stock at a haircut from the market price.

Still, when they buy common shares and preferred stock convertible into common, they dilute the earnings potential of all stockholders. And when the companies have to sell more shares in the future, that process starts all over again.

(David Pauly is a columnist for Bloomberg. Opinions expressed are his.)