US banks have managed to raise tens of billions in fresh capital recently, but it’s not enough to warrant a rapid upgrade from Moody’s.
“We do not expect these recent capital raises to result in a quick reversal of our US bank financial strength ratings to previous levels,” firm says, because of the still fragile state of the economy. “Should macroeconomic conditions worsen, Moody’s does not believe the recent capital raises represent an adequate buffer against the asset quality deterioration that would likely result.”
And, firm adds, further economic deterioration could result in the equities market quickly shutting down for the banks, limiting their ability to raise more capital.
Baseline Scenario blogger James Kwak notes that banks’ capital raises have taken a lot of anxiety out of the market lately, but the government still hasn’t figured out how to dispense banks’ toxic assets.
“It’s nice that people aren’t so nervous anymore,” he says. But that doesn’t mean the problem
should be ignored.
Raghuram Rajan, banking expert at Chicago School of Business, sums it up well.
“If we reenter the downturn, and the banks begin to look shakier – we’ll wish we had moved the assets when the market was calm and stable, rather than leaving them to create uncertainty and volatility at the center of the banking system.”
Anyone sense the complacency now toward banks and their mounting bad assets, in the wake of stress tests and capital raising?
We can, and it reminds us a lot of how investors and Wall Street reacted when Citi and UBS dropped their first big write-down bombs on the same day back in October 2007. Remember that? Stocks rallied. And a USA Today headline the next day audaciously blared: ”Investors Cheer UBS, Citigroup’s Write-Downs.”
Former Citi CEO Chuck Prince even said the company expected “normal earnings” in the following quarter. Stunning, to read that now. The Dow Industrials rose nearly 192 points that October day. No, we’re not making that up. 191.82.
Looking back, those late 2007 write-downs were a pittance, not a “kitchen sink,” as some claimed at the time. In fact, they were downright quaint.
And next July, banks’ capital raising efforts this spring may look equally quaint after another year of US consumers digging out from decades of piling up debt, unemployment marching toward 10% (and beyond?), and more credit cards, auto loans, mortgages and commercial real estate loans turning sour.
(Steve Russolillo and John Shipman contributed to this report.)