Riding the SEC-led rally, I believe the second round of fund raising game of the Western Financials are getting closer. And that may already be kick-started by Merill, after it announced another massive writedown and invited Temasek Holdings for an additional $900 million cash infusion. But how many more Temasek is willing to finance the fragile banks? I believe, we can write off permanently banks that engage in second round of financing based on the following reasons:
1) Incompetent management. Those highly-paid executives should have known by now how much writedowns their company is going to suffer. To protect the shareholder value, they should have grabbed enough capital through the first round of financing. A second round means they don't even know how bad financially their banks are. Time to withdraw money from the bad apples.
2) Heavy interest burden. The market is efficient. To attract buyers, they need to hike the interest rate. That means, for the next couple of years, those banks can only focus on strengthening their balance sheet at the expense of their growth prospect.
3) Crowding out effect. Given the situation that even the US government is having problems financing the whole mortgage market, I can't imagine how much more a bank needs to pay if they are in need of capital. Of course, the US government can borrow from the market (say from the Chinese government) and lend to the financials using the Fed discount window (read: much cheaper rate). But do you think the Chinese are stupid enough to continue lend money to US government under the current low short-term rate? Something has to give in.
Therefore, now is time to be selective on banks. Cheap banks are cheap because they are going to be mired in debt for the forseeable future. We should look for the strongest bank instead. We should start with those banks that hasn't needed capital amid the credit crunch. As of today, I can think of HSBC and JPMorgan Chase. Maybe, it is time to accumulate them for the longer-term perspective.
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