I linked to this story yesterday but figured I'd discuss it directly as it still has me shaking my head in disbelief:
(From BBC News): " Japanese banking giant Mitsubishi UFJ Financial is to ask investors for up to 990bn yen ($10.5bn; £6.85bn) in a bid to strengthen its funding levels.
Like other finance firms, the bank - which is buying part of Morgan Stanley for $9bn - has seen its market value shrink in the falling stock market.
It will issue common stock of 600 billion yen and 390 billion yen of preferred shares…
..."The group aims for enhanced stabilisation of its financial base and further corporate growth as a global financial group by implementing this capital reinforcement," Mitsubishi Financial said in a statement.
Compared with banks in the West, Japanese firms have suffered less of the fall-out from sub-prime-related mortgages in the US. This has allowed them to swallow up parts of various Wall Street businesses.
But the slowing economy is also making life more difficult for Japanese firms.
Credit rating agency Standard & Poor's said the Japanese economy's slowdown was putting "increasing pressure" on the bank's asset quality and that its profitability was being further cut by "reduced demand among borrowers and a decrease in fee income"...
...Mitsubishi UFJ announced in September it was buying a slice of Morgan Stanley.
It is the biggest overseas acquisition by a Japanese finance firm and will make Mitsubishi UFJ the biggest shareholder in the US bank.
It has also said it will pay $3.5bn in cash to take full control of UnionBanCal, California's second-biggest bank, and will raise its stake in Japanese consumer lender Acom to 40% from 16%."
Banks typically ask their customers to balance their checkbooks properly, not write checks against phantom funds, etc, yet hasn't Mitsubishi effectively written a bad check by spending $12.5 billion on overseas investments and acquisitions only to turn around and have to raise $10.5 billion in order to be properly capitalized.
Anyone else see a problem with this picture?
Yes, yes, I know, I'm oversimplifying (somewhat), things change on a dime these days, and maybe, just maybe, it was honest mistake where someone underestimated the impact of a weakening economy, falling markets, etc, on their capitalization levels, and maybe I'm just being hyper-critical.
But we're talking about the world's second largest bank that's in one of the world's most powerful economies, this isn't just a simple mistake it's a symptom of how disconnected bankers (on a global level) are with reality and how they never seem to notice their capitalization problems until it's nearly too late.
It's no wonder that the majority of the banks of the G7 nations are undercapitalized, the people who are supposed to be minding the store are either mathematically challenged or think that they can't get away with not being properly capitalized.
You can read more here(BBC) and here(FT).
Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.
