A Puzzle Piece Falls Into Place...
If you, like me, were wondering why the bank stocks were being propped up at obscene heights (the valuations of BAC and GS in particular are unfathomable to a drug-free mind) well look no farther as we have an answer:
[U]*FED SAYS BANKS MUST TAP EQUITY MARKET BEFORE REPAYING[/U]
By Craig Torres
June 1 (Bloomberg) -- The 19 largest U.S. banks will have
to demonstrate they can sell new shares before they are allowed
to repay their government stakes, the Federal Reserve Board said
The companies “must successfully demonstrate access to
public equity markets,” the Fed said in a statement released
today in Washington. Bank holding companies that want to repay
Treasury funds also “must demonstrate an ability to access the
long-term debt markets without reliance on the Federal Deposit
Insurance Corporation’s Temporary Liquidity Guarantee Program.”
Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan
Stanley have applied to refund a combined $45 billion of
government investments, a step that would mark the biggest
reimbursement to taxpayers since the $700 billion bank bailout
program began in October.
Banks will have to demonstrate how they will meet funding
requirements and obligations to counterparties while reducing
reliance on government capital and the debt guarantees, the Fed
also said today. An announcement on the “initial set” of redemption approvals will come during the week of June 8, the central bank said.
This couldn't have been achieved with banks trading at their true valuations. Instead, it was necessary to push up the value of bank shares so that the new equity could be dumped to suckers at the top. This benefits everyone (gov gets its money back, banks get new capital at unreasonable good prices and so on) except YOU, the sucker, buying GS at 140 or BAC at 12. You see, the gov, the banks and the hedgies all know the true value of these banks is 30-80% below where they are currently trading.
Why are insiders getting out of stocks as fast as possible (according to the WSJ, insider selling is running at almost 10x the rate of insider buying)? They know that the final element of this bear market rally is the massive dilution. Once the banks get their sucker money, they can survive (hopefully) as the next leg of the housing collapse unfolds. As JPM sells shares of itself at twice their value today, they can stash the cash to hedge against inevitable losses as their MBS portfolio continues to get nuked.
If this were such a great new bull market, why are companies diluting their shares en masse? If companies really were undervalued, they'd be buying back their own shares! Companies dilute because they know they are overpriced. Learn something from the insiders--they're selling--why aren't you?