Joe Giannone managed to get someone at JP Morgan to try to explain what on earth is going on with their $6 billion issue of preferred stock:
The bank declined to comment on the transaction, but our sources at JPMorgan said the bond sale was routine, one of more than a hundred such deals over the past decade. Moreover SEC rules prevent banks from disclosing material information in the days ahead of an earnings announcement.
Besides, the source said, bond buyers all over the market knew a deal was in the works and proved to be very hungry for the paper, which was structured so that common shareholders will not see their share of profits diluted.
This is utterly unconvincing. Taking the points one at a time:
- A $6 billion capital raise is not "routine". If JP Morgan had done a hundred such deals it would have raised, um, $600 billion. Which I’m quite sure it hasn’t.
- You can’t disclose material information ahead of an earnings announcement? That’s because you’re meant to disclose material information in your earnings announcement, or at least on the conference call afterwards. Once the earnings are out, there’s no SEC constraints. Why didn’t JPM say anything yesterday, after the earnings were out? And why are they still declining to comment?
- If "bond buyers all over the market knew a deal was in the works," doesn’t that mean that they were in possession of material information, ahead of the earnings announcement?
- And while it’s true that shareholders won’t see their share of profits diluted, it’s also true that total profits will now be about $500 million a year lower thanks to the interest payments on this new debt. JP Morgan’s earnings were $2.37 billion in the first quarter, so that kind of money is hardly immaterial.
JP Morgan’s shares opened at $44.34 this morning, erasing 22% of the gains they made on Wednesday. Since then they’ve risen, but it’s not completely outlandish to suppose that some investors were spooked by the capital raise.
In general I think it’s a great idea for banks to raise capital in this environment, especially when their derivatives exposure is as large as JP Morgan’s is. But I also think it’s a great idea to do so transparently.