The Government Buys Preferred Stock

The equity markets forged a come back on Monday with news that around the world Governments were going to invest broadly in their failing financial institutions, including of course the US. This is good news and the markets responded enthusiastically. Banks need capital and they are getting it. The question for holders of financial stocks in general, and equities more generally, is whether it will be enough?

The IMF recently released a new report estimating that cummulative losses are expected to hit $1.4 trillion. To date banks around the world have raised something in the vicinity of $500 billion. $1.4 trillion of losses minus $500 billion of capital raised means that if those losses becomes realized, $900 billion of additional equity will be wiped out. The moves yesterday are the beginning of this process, not the end. They are right to be demanding preferred, because what will happen is that common shareholders will bear the brunt of further write-downs. If those losses continue to add up it is possible that despite these injections, common equity holders will get wiped out. There are still good banks and bad banks, ones that will survive, and ones that will fail. This is still so very far from over.

The bigger questions continues to be what is going to happen to the economy in general. The reports that I am listening to ( not just hearing ) are that we are definitely in a recession and it could be a prolonged one. In that scenerio I am not sure that equities overall are fairly priced, let alone cheap so I think one should continue to tread carefully.

As for my toe in the water….. I pulled it back out and sold.

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