What Societe Generale's Funding Says About Value Of Big American Banks

After booking billions of dollars in losses because of actions by a rogue trader and write-offs in its CDO portfolio, Societe Generale went to the market with a rights offering for almost $8 billion. It had to price the package at a 39% discount to where its stock had closed the previous day. ”It’s a very, very low price. We were not expecting such a discount. It reflects the lack of demand in the market,” one Paris-based share dealer at a foreign bank said according to the FT. It is the kind of haircut which is closer to having your head cut off by the barber.

It also speak volumes about what will happen if big US money center banks and brokerage houses have to go back to the market for money this year. The value of LBO debt on the balance sheets of these firms is falling. As The Wall Street Journal points out "nervous buyers also have retreated in recent days from the market for securities backed by student loans and municipal bonds." All of that has raised the very real possibility of another round on bountiful write-offs this year and the need for more capital at American financial institutions.

If Citigroup (NYSE:C) had to offer 39% off to get more money, the price point would be below $16, down from its current price of $26 and its 52-week high of $55.55. Merrill Lynch (NYSE: MER) would have to go all the way down to $32 from $52 now and a 52-week high of $95.

American banking stocks, on sale for a third of what they fetched a year ago. What a sad state of affairs.

Douglas A. McIntyre