Banks Are Selling Stock. Should You Be Buying?

Three months ago, how quickly a bank could pay back TARP money wasn't an issue on many people's minds. Instead we were worrying about how much more taxpayer capital they might need.

Fast-forward to a spectacular stock rebound, an inkling of an economic bottoming process, the completion of the bank stress test, and a barrage of pitchfork-wielding taxpayers and retroactive-taxing politicians, and banks are trying to rid themselves of TARP money faster than they can scream "socialism."

Goldman Sachs (NYSE: GS  ) and JPMorgan Chase (NYSE: JPM  ) have been crafting plans to repay the funds in full for a while. Now several (relatively) smaller banks are raising capital in hopes of ditching the burden that comes with calling the stars and stripes your designated savior.

In the past few days, major banks have been selling stock in droves. Have a look:

Bank

Announced Stock Issuance

Current Market Cap

Capital One (NYSE: COF  )

$1.55 billion

$11 billion

BB&T (NYSE: BBT  )

$1.5 billion

$14 billion

US Bancorp (NYSE: USB  )

$2.5 billion

$34 billion

All three banks say they plan on using the proceeds to repay TARP. None of the three were required to boost capital levels after the stress test results became public late last week.

Additionally, Wells Fargo (NYSE: WFC  ) and Morgan Stanley (NYSE: MS  ) raised a combined $12.6 billion worth of common stock last week. Both are being forced to raise capital in accordance with the stress test, yet both have expressed sincere interest in paying taxpayers back ASAP.

So what's this mean for your investments? Some good, some bad. Of course, no one's complaining that banks have gained enough confidence from the investment community to raise private capital -- a task that would have been virtually unthinkable just weeks ago.

Yet here's another way to look at it: If banks are eager and willing to sell stock, should you be equally enthused about buying that stock?

Think about it, and the question almost answers itself. When insiders are willing to sell high, outsiders typically aren't buying low. Issuing capital that represents a significant portion of a company's market cap is a big deal with severe long-term consequences. Regardless of the penalties that come with holding TARP funds, this isn't the kind of thing any sober CEO would be willing to do unless they could get it done at a price high enough to be ultimately advantageous for the company. Prices that are high enough to benefit the company typically do not equal prices low enough to qualify as bargain investments.

When companies -- especially those that aren't being forced to boost capital -- flood the public market in an attempt to raise money while investment sentiment is high, it's usually not because they're trying to make new shareholders rich. Anyone who bought most dot-com IPOs knows precisely what I'm talking about.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. The Fool has a disclosure policy.


Read/Post Comments (28) | Recommend This Article (95)

Comments from our Foolish Readers

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  • Report this Comment On May 11, 2009, at 4:33 PM, catoismymotor wrote:

    I already own a piece of most major banks in this great land in the form of bailout money. I am not going to put money into a company that would not exist without the assistance of Obama-Wan-Kenobi.

  • Report this Comment On May 11, 2009, at 4:57 PM, mbreturn2u wrote:

    Why should we buy their bank stocks,when their still not help us? Wells Fargo,is screwing companies over,and not helping them,to put money in their ceo's and others pockets. When they help the American people,then i'll think about it.

  • Report this Comment On May 11, 2009, at 5:32 PM, bigsmitty52 wrote:

    I hadn't thought about the sell high by the banks aspect of this. Thanks for waking me up!!

  • Report this Comment On May 11, 2009, at 6:06 PM, Gigarob wrote:

    You are assuming the CEO's of these banks are intelligent enough to know the stock prices are high. History has proven otherwise.

  • Report this Comment On May 11, 2009, at 7:19 PM, 7footmoose wrote:

    I am surprised that so many Fools are so angry at the Banks. I would have thought that devoted Fools would have understood that much of the current problem has been a result of actions taken and actions threatened by elected officials on Capitol Hill. Granted the Banks are in trouble and they have been recipients of enormous sums of our money but this event had its origins on the Hill in the form of threats regarding bankers not making enough loans designed to raise the percentage of American home ownership. This threat led to the first sub prime loan. That move coupled with the enormous Government guaranteed hedge funds we know as Fannie Mae and Freddie Mac led to the pandemic of greed which overran Wall Street and Main Street. Fools we have met the enemy and he is ourselves. Our greedy want not selves.

  • Report this Comment On May 11, 2009, at 7:33 PM, xetn wrote:

    The real evil behind the banking crisis is the Fed for its member banks (in fact all banks) are its puppets and it pulls the strings by controlling all policy in the US. It controls the money supply, regulates interest rates and in addition the following from a Fed publication entitled "The Federal Reserve System: Purposes and Functions" Among the Fed’s "functions" are the regulation of:

    * Bank holding companies

    * State-chartered banks

    * Foreign branches of member banks

    * Edge and agreement corporations

    * U.S. state-licensed branches, agencies, and representative offices of foreign banks

    * Nonbanking activities of foreign banks

    * National banks

    * Savings banks

    * Nonbank subsidiaries of bank holding companies

    * Thrift holding companies

    * Financial reporting procedures

    * Accounting policies of banks

    * Business "continuity" in case of economic emergencies

    * Consumer protection laws

    * Securities dealings of banks

    * Information technology used by banks

    * Foreign investment by banks

    * Foreign lending by banks

    * Branch banking

    * Bank mergers and acquisitions

    * Who may own a bank

    * Capital "adequacy standards"

    * Extensions of credit for the purchase of securities

    * Equal opportunity lending

    * Mortgage disclosure information

    * Reserve requirements

    * Electronic funds transfers

    * Interbank liabilities

    * Community Reinvestment Act sub-prime lending demands

    * All international banking operations

    * Consumer leasing

    * Privacy of consumer financial information

    * Payments on demand deposits

    * "Fair Credit" reporting

    * Transactions between member banks and their affiliates

    * Truth in lending

    * Truth in savings

    So, given the above control that the Fed wields over banking, the banks were forced to comply with every hair-brained idea floated by the Fed, Freddie and Fannie. I am not saying that the bankers are not responsible; they are and most bank mangements should be removed by the shareholders.

  • Report this Comment On May 11, 2009, at 7:57 PM, IIcx wrote:

    No, it will be years before they can regain a business model we trust. Banks are a very bad investment.

  • Report this Comment On May 11, 2009, at 8:20 PM, 35092 wrote:

    banks are a bad investment, but i am invested in BAC, and have a 30% loss on paper. dunno really what i should do? my whole investing philosophy is buy/hold long term, but with all the b.s. part of me just wants to take the loss. any ideas? any rays of hope?

  • Report this Comment On May 11, 2009, at 8:33 PM, carlmurr wrote:

    Bank new capital sales will dilute existing shareholders; capital ratios will be less than before and loan to capital leverage will be less. I don't see Bank earnings recovering to 2007/2008 levels in the next 3to5 years.

  • Report this Comment On May 11, 2009, at 8:38 PM, Ibeatmykids wrote:

    "banking establishments are more dangerous than standing armies"

    -Thomas Jefferson

    The government prints the money that is backed by nothing except it's word. Who do you think the banks work for? The government artificially drove the value of these banks up and strategically the banks are now offering a stock sale at the inflated prices. The government manipulated it all. We need to go back to the gold standard because eventually this huge bubble we are in will burst. And I don't mean this latest bubble. Look at it on a scale 1000 times bigger than that. I am talking about this enormous bubble that has been growing since FDR. Our government has bailed us out of recessions numerous times and not let the free market sail its natural course. All this has done is delay the inevitable which is going to be an enormous crash after decades of artifical growth + inflation. We eventually will not be able to afford these bailouts which need to be bigger and bigger each time. The longer the government manipulates the "free market" and artificially pulls us out of recessions the greater the crash will eventually be. It will be of a magnitude that will cripple our country so severely that our lifes will change drastically. At least I got my house. I can hunker down there.

    A market crash is as natural as a forest fire.

    So my answer is no, do not invest in the banks.

  • Report this Comment On May 11, 2009, at 9:46 PM, walt373 wrote:

    35092:

    Strictly buying and holding doesn't work. Buying quality companies at below their intrinsic value and holding, does. Is BAC priced below its intrinsic value? Who knows? Maybe. Maybe not. Is it a quality company? I would say no, it's very troubled and will be less profitable in the future than it has been in the past.

  • Report this Comment On May 11, 2009, at 10:37 PM, paultaut wrote:

    I really don't care How the situation is solved, I just want them to remain independent. Anything the Government runs is doomed. So if Banks issue Debt or shares to get out from under, they should do whatever it takes.

    When Bank Insiders start to sell their shares enmass, then I will consider it as "Banks are selling stock". This is just raising Capital.

  • Report this Comment On May 11, 2009, at 11:24 PM, automaticaev wrote:

    I like citi still.

  • Report this Comment On May 11, 2009, at 11:41 PM, Unofficialy wrote:

    Just what 7footmoose and xetn stated. The banks are not entirely to blame. Remember good old Bush Sr's policy of everyone gettin a house. This is a governement screw-up.

  • Report this Comment On May 12, 2009, at 12:06 AM, automaticaev wrote:

    Hmm saying banks are more powerfull then armies makes me want in.

  • Report this Comment On May 12, 2009, at 3:05 AM, automaticaev wrote:

    10% last year is good? I know people at like 500% how is he the great investor dosnt make any sense. Lotta money in lotta monry out thats all. All you needed to do was pull out before the obvious stock market crash wtf?

  • Report this Comment On May 12, 2009, at 3:08 AM, automaticaev wrote:

    really if you made 5% day tradeing every day you would be waayy over 10% wtf how is 10% concidered a great investor?

  • Report this Comment On May 12, 2009, at 3:39 AM, automaticaev wrote:

    hell manage .05% profit average every day and your superior to him.

  • Report this Comment On May 12, 2009, at 5:33 AM, driller101 wrote:

    "North Carolina regional bank BB&T said Monday that it plans to sell $1.5 billion in stock and slash its dividend by 68% in order to repay the TARP funds"

    They plan to slash their dividend and their investors equity so the top executives could continue their rediculous compensation packages.

    Why would anyone consider investing in this bank?

  • Report this Comment On May 12, 2009, at 12:43 PM, TNMountaineer wrote:

    7footmoose:

    You're one who understands where all this began--in Congress. By eliminating Glass-Stegall and the "uptick" rule, the oversight unraveled. This allowed the commercial and investment banks to buy and sell to one another, and the ponzi scheme began. Madoff is a piker compared to these guys.

  • Report this Comment On May 12, 2009, at 5:10 PM, multi007 wrote:

    Im all in with BAC - I put my money where my mouth is.

  • Report this Comment On May 15, 2009, at 2:31 PM, 7footmoose wrote:

    i am less pessimistic than Ms Whitney but I must admit she makes very good reading. As for investing in Banks it is caveat emptor. Today the FDIC announced that they were going to force changes in management and the boards of some of the stress tested banks. It's not that some of that isn't needed its just that which business genius in government is going to be in charge of making those decisions, Pelosi, Frank, Murtha? These are the people who a guiding the automobile industry on how to reorganize and become profitable. The are very few members of Congress who could make a decent living outside of their highly contrived world.

  • Report this Comment On May 15, 2009, at 2:36 PM, warren955955 wrote:

    What? Banks are a bad investment? I made330,000.00 last month on Wells Fargo stock. You just have to know how to play the market. Remember that the market is like going to the casino...don't think you can just keep investing and take out profit when you are older and need it....you have to play the odds and get out when it works best.

  • Report this Comment On May 15, 2009, at 6:00 PM, jeffe65 wrote:

    I agree with warren955955; you have to treat the market as less of a "sure thing" than people seem to want to. I bought CITI a couple of moths ago, but I didn't go into it thinking it's an investment in the financial sector. I went into it thinking, "How much would I be willing to risk if this were Vegas?"

    Other stocks are better bets, to be sure, but in spite of what all the experts say, none of them has ever been able to predict the future any more accurately than I can. They just sound a lot better when they say it...

  • Report this Comment On May 17, 2009, at 1:39 PM, booyahh wrote:

    Let's see, you can buy new BAC shares for $8.50, and sell them immediately at a market price of $10.50. That's an immediate profit of $2.00 per share. Is the author retarded? I suspect he's just bitter that he missed out on the most recent rally.

  • Report this Comment On May 18, 2009, at 10:27 PM, Matt8265 wrote:

    "Better than Expected" !

  • Report this Comment On May 21, 2009, at 4:07 AM, rbreau1 wrote:

    I question the purpose of this article. Seems to me the author can come back in six months and say he was recommending bank stocks should they be up at that time or just the opposite if down.

    Read it carefully and you will find he leaves the question open to you to think about it.

    Selling high will benefit the company... who is the company? In the future that can be quoted as saying "see, I told you to buy the bank stocks back here."

    I think the author should make a clear statement. Is he recommending bank stocks at this time or not. An answer in clear English will suffice.

    My opinion is that look out a few years and you will think this was a good time to be buying bank stocks.

  • Report this Comment On June 04, 2009, at 8:31 PM, Thankingyou1 wrote:

    Look, if someone wants to take a small position in the bank stocks, why not? I'm not talking about betting the farm, but an amount that is reasonable enough that if the value did go to zero you wouldn't lose any sleep over it.

    I missed a really good opportunity on PNC. Now, it's up too high to make a really good profit (from my point of view that is.) There are people out there making money on the banks. Sure, it's a risk, but Charles Lindbergh always spoke of the calculated risk!

    The banks are not going to stay in the toilet forever!

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