After Citigroup (NYSE: C) and Merrill Lynch (NYSE: MER) reported earnings, there was at least some hope that the worst was behind the banking and brokerage industries. But that may not be true. Over the weekend Royal Bank of Scotland (NYSE: RBS) said it might have to raise $12 billion. Then there is today's news from big Midwestern bank National City Corp. (NYSE: NCC).
NCC will probably announce that it has raised over $6 billion. According to The Wall Street Journal, "the Cleveland-based regional bank was hammering out final terms of the transaction with a group of investors led by Corsair Capital LLC, a New York private-equity group."
Current NCC stockholders will be beaten to death. The new capital will come in at $5 a share. The stock trades at over $8 now. NCC's 52-week high is over $38.
The news is another example of how management at banks doomed their shareholders. Financial companies took on huge amounts of subprime-backed paper. The investments looked safe, but, on closer examination, they carried great risks if the housing market began to falter. The underlying assumption was that home prices would move up forever and that mortgages had been granted to consumers at reasonable rates. Both of those assumptions were wrong.
When something looks too good to be true, it usually is.
Douglas A. McIntyre is an editor at 247wallst.com.
