Banks rally as CEOs hold off on issuing shares

But, amid the many gyrations in the sector's stocks over the past week or so was a 27 percent pop in Wachovia Corp. after it announced a nearly $9 billion quarterly loss. And a 22 percent jump for Merrill Lynch & Co. after it lost about $5 billion. Investors were also clamoring for shares of Citigroup Inc., JPMorgan Chase & Co., and Bank of America Corp. after they reported pretty dismal quarters.

None of these banks gave any signal that the massive write-offs and charges they've taken because of the credit crisis is close to ending. The real motivation behind the rallies might be that chief executives didn't say they need to sell more stock to keep their banks afloat.

"The CEOs are telling investors exactly what they want to hear," said Jeffrey Kleintop, chief market strategist at Boston-based LPL Financial Services. "It is a huge issue. The potential for dilution by companies issuing lots and lots more equity has been a big risk."

He points out that most investors realize that companies go through good times and bad. That is factored into the stock price. But, what investors will never be comfortable with is companies' issuing new equity to keep their businesses going.

Issuing more stock makes outstanding shares less valuable. Global banks and brokerages have so far written down about $300 billion from worthless mortgage-backed securities and other risky investments, and have raised an equal amount to prop up their balance sheets--without resorting to issuing new shares.

The CEOs of many top American financial services companies have gotten the message from investors. Merrill's John Thain, Bank of America's Ken Lewis, Wachovia's Robert Steel and others have all vowed that selling new stock isn't part of their capital raising plans.

But it also appears, for the time being, that banks and brokerages have ended their campaign of giving wealthy governments and institutional investors stakes at advantageous terms. In November, Citi said Abu Dhabi's investment authority had taken a 4.9 percent stake in the company for $7.5 billion, and Singapore's sovereign wealth fund Temasek Holdings was one of several investors that gave Merrill Lynch a $17.9 billion cash infusion in December.

Regardless of if these big investors would even want to pump more money into crippled banks, the new way out for CEOs is to hold a garage sale.

Merrill sold its stake in news and media outlet Bloomberg LP and back office service provider Financial Data Services Inc., and could possibly even unwind its majority stake in money manager BlackRock LP. Analysts speculate that the nation's largest brokerage might even sell its global private client business.