The rebuke of the FASB decision to modify MTM accounting rules continues. The latest analyst to bash the banks since the FASB decision is Mr. Mike Mayo of Calyon Securities. Mr. Mayo advised investors to sell bank stocks. He rates banks such as KeyCorp, Fifth Third, BB&T, SunTrust and U.S. Bancorp as "sells". He gave "underperform" ratings to BAC, C, JPM, PNC, and Comerica. Mr. Mayo expressed concern over rising loan losses.
This is not surprising. Loans are not marked to market but will probably be valued as part of the upcoming "Stress Tests". The government may "strongly suggest" that banks sell certain loans at prices below where they are valued on banks balance sheets. The government would then inject more capital into the bank, possibly in the form of convertible preferreds which can be exchanged, at the behest of the banks, into common equity (to improve TCE vs. total assets). This could dilute share prices.
Things are much rosier on the bond side. Although bank corporate bonds have not rallied along with common shares, the do not pose the same kind of volatility risk. Senior note holders of the major banks, including those on Mr, Mayo's sell and underperform lists, probably have little to fear in the way of defaults. Movements in bond spreads have been muted in either direction. Yes it is true that bank CDS continues to widen, but there is probably a technical reason for this. Hedge fund and other money managers may be purchasing CDS protection as an alternative to shorting the common. Bad news from a bank would benefit one who is short the common and one who purchased protection. Therefore, those who are offering protection want a larger premium to do do.
Look to senior bank paper as a way to pick up yield with minimal default risk.
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