This credit-crisis saga continues, and the flavor this week was "raising capital." Federal Reserve Chairman Ben Bernanke praised the efforts of large banks to raise capital and recommended that they raise more. There was much speculation about how much more capital banks will need and where they will get it. There was also the usual spate of economic projections and individual company news.
Here are some of this week's highlights.
- Raising capital is getting tougher for banks, which have already raised more than $250 billion in capital worldwide to offset subprime losses on their balance sheets. Merrill Lynch
(NYSE:MER), Citigroup (NYSE:C), and UBS (NYSE:UBS)alone have written down their balance sheets by $79 billion. According to most estimates, banks will need to raise a lot more. But where will they get it? Banks have already exhausted most of the cheaper and less painful methods of raising capital since the start of the crisis.
- Meanwhile, Bernanke praised the capital-raising efforts of American banks, encouraged them to do more, and said that fundraising today will spur future profitability for the banks and help the economy. But again, where will banks find additional sources of capital? In the future, many people speculate that banks will be forced to raise capital in ways that are detrimental to shareholders, such as highly dilutive stock offerings and dividend cuts. How about bake sales and car washes?
- Former Fed chief Paul Volcker warned that the Federal Reserve Bank's political independence could be compromised in lieu of the additional assets being acquired on its balance sheet in an effort to combat the credit crisis. In response to Treasury Secretary Henry Paulson's recommendation to restructure federal regulating agencies and give more power to the Fed to oversee the financial system, Volcker recommended creating a new position within the Fed. He said the position could be a "chief supervisory regulator" that could be called "vice chairman." What a crummy name. How about calling the position "regulation tsar" or "Fed despot"? The position is worthy of a title that Europeans give dictators. It sure would scare the heck out of the bankers.
(NYSE:CFC)will have to face a shareholder lawsuit. A federal judge ruled this week that the mortgage lender must undergo a lawsuit that will target top executives and board members for pursuing overly risky policies that destroyed the company. What's wrong with the usual punishment for top executives who pillage the company and the economy for their own benefit? Fire them and send them off to live the rest of their lives in lavish splendor. That will teach 'em a lesson!
(NYSE:JPM)chief executive Jamie Dimon won high accolades from the New York Post this week. After having announced the layoffs of half of Bear Stearns' (NYSE:BSC)former employees, the newspaper praised Dimon for "rescuing" 50% of the Bear staff. He is also thought to have the inside track on People's 2008 list of the Most Beautiful Bank Chief Executives.
This week added yet another chapter in what is probably the worst U.S. banking crisis since The Great Depression. We will continue to struggle to find answers to key questions. Is the economy on the rebound, or will we dip into recession? Are we in a recession now? Is the worst of the credit crisis behind us? When will the housing market recover? Next week will bring us closer to the answers. Stay tuned.
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