This is an interesting sequence of events. On late Thursday, May 7 2009 the stress test results were released to the public. Never mind that the banks negotiated the results. In any case they already knew the results before long before others did, as is shown by Goldman Sachs confidently raising capital on April 14, 2009.
Morgan Stanley announced on Friday, May 8 2009 in a press release that it would raise $3.5 billion via a common stock and $4 billion via a senior notes offering to the public. This will generate will generate some $7.5 billion in capital, minus some 0.35% of fees that Morgan Stanley pays to its agent, which is, well, Morgan Stanley.
In a second press release that same day, Morgan Stanley announced that it would exercise its over-allotment option and purchase an additional 21.9 million shares at $24.00 each. This, however, merely rearranges some items on the bank’s balance sheet. Since MS uses its own capital to exercise this greenshoe option, its not bringing in any additional capital.
Wells Fargo intends to raise $8.6 bln trough the issuing and sale of common stock as it announced also on May 8, 2009.
In both cases, Morgan Stanley and Wells Fargo, the underwriting process runs until May 13, 2009. Bank of America did not make an announcement yet. Obviously, they are in a lot of hurry to get people to buy their shares and debt.
Would anyone buy these shares, let alone the senior notes if not for the government attesting those institutions “good health”? The common shares is a sure loss, with the senior notes you at least have a chance of getting something back in case of a bankruptcy, even though the senior notes are not FDIC insured.
This article on Reuters points out that one reason the banks passed the stress test at all was the improving markets. Mark Felsenthal writes on May 9, 2009:
In early March, a month after Treasury Secretary Timothy Geithner announced the tests on February 10 to help restore investor confidence in the major banks, the scene was much bleaker: major stock indexes had slumped to 12-year lows on persistent fears about the financial weakness. It looked possible that a major bank might need an emergency government rescue even before the stress test results could be announced.
But since the trough, markets improved steadily with rising share prices and volumes, better liquidity and other signs of stabilization, and regulators gained comfort that capital markets would be willing to fill any holes the stress tests unearthed at banks.
“It looked to us by mid-March, and early April, that this might work,” said a senior U.S. regulatory official, who spoke on condition of anonymity because of the sensitivity of the tests.
This brings us back to Goldman Sachs and the Supplemental Liquidity Provider role it plays at the NYSE, doesn’t it. Well, what does one expect. Wall St. is a rigged game, so is the stress test, which was obviously long in the making and designed to make banks look good. After all how do you instill confidence but by claiming everything to be ok. We are now waiting for the ‘well-done’ bonuses to be doled out the senior management.
There is a lot of bad smell in this whole thing. It will be interesting to see where the market goes after May 13.