Banks rally markets to raise cash

Amy Scott May 12, 2009
HTML EMBED:
COPY

Banks rally markets to raise cash

Amy Scott May 12, 2009
HTML EMBED:
COPY

TEXT OF STORY

Kai Ryssdal: Ford took advantage of a recent rally in its stock price to raise more money today. It sold close to 300 million new shares. The company’s hoping to net about $2 billion that it’ll use to buy back some of its debt. Ford’s not the only company selling big chunks of stock these days. Wells Fargo, Morgan Stanley, and U.S. Bancorp are just a few of the banks that have hit up the markets for cash. So far, investors are biting. But new share offerings aren’t a win for everyone. Marketplace’s Amy Scott explains how it all works.


AMY SCOTT: When a company like Ford wants to raise money, it hires an investment bank or maybe several. The bankers then go out and find investors to buy the stock. Not that you and I are likely getting any calls.

Richard Sparks is an analyst with Schaeffer’s Investment Research. He says bankers are mostly seeking big investors like pension funds and money managers willing to gamble on Ford.

RICHARD SPARKS: People are just simply betting that it will be the survivor among U.S. auto makers, and that when things turn around and when the economy gets better, that stock will be higher as well.

Investors are also betting on banks. Larry Gellman is a financial advisor with Robert W. Baird and Company. He says even after the stress tests, it’s hard to know just how healthy the banks are. And investors chance buying into a short-lived rally.

LARRY GELLMAN: All these factors make it pretty clear that people who invest at this level, whether they’re individuals or institutions, are taking on a good deal of risk.

Stock offerings can also hurt existing shareholders. Jay Ritter teaches finance at the University of Florida. He says 300 million new shares dilute Ford’s ownership.

JAY RITTER: Consequently the profits per share that Ford will hopefully be earning in the future are going to be spread out among more shareholders.

The sure winners are the big investment banks. They’ll rake in commissions in some cases for selling each other’s stock.

In New York, I’m Amy Scott for Marketplace.

There’s a lot happening in the world.  Through it all, Marketplace is here for you. 

You rely on Marketplace to break down the world’s events and tell you how it affects you in a fact-based, approachable way. We rely on your financial support to keep making that possible. 

Your donation today powers the independent journalism that you rely on. For just $5/month, you can help sustain Marketplace so we can keep reporting on the things that matter to you.  

Need some Econ 101?

Our new Marketplace Crash Course is here to help. Sign-up for free, learn at your own pace.