MonkeyBusinessBlog: The "Bigger Idiot Theory" Is Alive and Well!

Nice article from the Wall Street Journal this morning about how surprisingly easy it has been for our battered banks to raise relatively enormous sums of capital in the last few weeks. Banks' Telethon Nearly Over. Check this out from the article;

Nonguaranteed debt sales and the conversion of preferred shares to common stock have generated roughly another $20 billion, for a total of $85 billion or more, giving most of the banks considerably more capital than U.S. regulators have required them to amass as they ride out the recession. Money is pouring in so fast that surprised bankers can hardly believe it, especially since most investors didn't want to go near financial stocks just three months ago, even though they were nearly 40% cheaper.

J.P. Morgan's Dimon, Morgan Stanley's Mack, BofA's Lewis and AmEx's Chenault

"It's easy to raise capital now," one executive at a bank that recently raised capital through a public stock offering said Tuesday. Investors are "happy to gobble it up."

Some investors who participated in recent bank-stock sales said the logic is simple: The likelihood that the economy will veer off a cliff is dwindling, and many banks look cheap on a price-to-earnings basis.

"The Armageddon trade is off the table," said David Tepper, president of Appaloosa Management LP, a Short Hills, N.J., hedge-fund firm that owns shares of Bank of America Corp., SunTrust Banks Inc. and Fifth Third Bancorp. Based on likely earnings in 2011 and 2012, the banking industry "may be the cheapest sector in the market," he added.

What is wrong with these people? Like we say here A LOT, it's like watching the same blind dog chasing the same parked car and getting his face smashed in......again and again! This is exactly what was going on LAST Spring! Armageddon was off the table because the government bailed out Bear Stearns, firms like Lehman had plenty of capital, Freddie and Fannie were getting new powers that were going to help them make lots and lots of money, etc...etc. Everybody bellied up to the bar and got SMOKED. Also from the WSJ;

Mutual funds and other large institutional investors have been aggressive buyers in some of the stock offerings, according to people involved in the deals. Because lots of those investors had previously shunned bank stocks, they lagged behind the overall market when bank stocks rallied starting in March. This month's frenzy of deals was a chance to increase exposure to the industry at a slight discount to the market price.

There's a good sign. Fund guys trying to chase the bank rally they missed by buying new financial stocks 40% higher than where they wouldn't buy them just three months ago. There's a movie that always ends well right? What's funny here is Moody's is actually starting to do its job when they say;

Analysts at Moody's Investors Service warned Tuesday that U.S. banks with debt that is rated by the Moody'sCorp. unit face about $470 billion in losses through next year. If the economy continues to suffer, those losses could swell to $640 billion, and Moody's would likely accelerate its bank-debt downgrades.

"In such a scenario, absent continuation, and likely deepening, of U.S. government capital and liquidity support programs for the banking industry, numerous banks would be insolvent," the Moody's analysts wrote.

It's last June all over again. Check out this post we did LAST June 15th;

Since Friday last week (June 13) Lehman Brothers has received an incredible amount of praise and faith from some huge players in the market. Check out some of the names that recently put not only their words, but also their money behind Lehman Brothers this week.

- BlackRock President Robert Kapito - "We have confidence in the firm, in the leadership. They have a history of being a team, a place of focus, of working out their situations, of having confidence in the marketplace."

Hank Greenburg (former head of AIG) - "Lehman is a very good franchise. They've done a great deal to reduce their leverage. I think they'll do fine. They've done a good job marking down the things that should be marked down."

Putnam Head of Investments Kevin Cronin- "We are holders of all levels of their capital structure. The market has unfairly punished the price of their stock and bonds. We know they are going to be winners in the long run."

New Jersey Department of Investment - "Based on our research and first-hand experience with the company in a variety of areas, we have a high regard for Lehman's business lines and management team. We are pleased to have the opportunity to increase our investment."- Chief of Investment "South-Side Johnny" (Just kidding, they didn't give a name for the great state of New Jersey)

It is very encouraging to not only hear these words but also to see these guys putting their money where their mouths are. It is obvious that these guys are taking Lehman's word that the many billions of subprime, Alt-A residential mortgage positions, as well as the many billions of commercial real estate positions, are marked correctly with no more nasty surprises lurking on Lehman's balance sheet. That faith is especially courageous considering Lehman shocked the entire investment community by posting a $2.8 billion Q1 loss and then followed it up with the demotion of its CFO and the "resignation" of it's president. Talk about forgiveness too! These massive losses didn't just materialize out of nowhere last week. They were there all along. They must have been there to get the CFO and the president fired! Therefore, perhaps Lehman was being something "less than transparent" with it's investors up to last week. To trust Lehman with more hard earned money, especially pension money in the case of New Jersey, after all that is downright inspiring!

As we used to always say, "As long as there's a bigger idiot to buy your crap, you're hedged!"