As UBS (UBS) Gives Away The Farm, US Banks Look Very Expensive (C)(JPM)(GS)(MER)

May 22, 2008 by Douglas A. McIntyre

UBS (UBS) had to raise money. The sins of its subprime addiction have come back to haunt it. US bank shareholders should shudder when they look at the pricing that the Swiss bank had to offer to get $15.5 billion. The rights offering is at a discount of over 30% to where the stock currently trades.

UBS would make the case that each subscription right per share held will entitle the owner to buy more shares in the future. The bank must reason that its price will go up and that the right will be worth something. That may be a victory of hope over reason.

The deal has attracted Goldman Sachs (GS), Morgan Stanley (MS), and JP Morgan (JPM) as underwriters. Smart money moving in for a killing.

The pricing of the transaction speaks volumes about the value of other large money center banks, especially those which hold subprime paper and other consumer debt. Several analysts have recently come out with predictions that firms like Citigroup (C) may not make much money for the next year or two. The media has been filled with notions planted by experts that say that brokerages like Lehman (LEH) have several more quarters of write-downs. The short interest in financial companies has been rising over the last several weeks.

For a month or two there was some real optimism that the credit system would pull a rabbit out of its hat. The Fed had done its work. The worst was behind the industry and the hangover would be modest. But, in the last few days, reports of more disasters have gained currency. As the economy falls apart and housing gets worse, the big banks have to suffer. It is inevitable.

Looking at the UBS pricing, it would not be fair to deduce that Citi is not worth much more than $17. That would take it back to its 52-week low reached about two months ago. It would put JP Morgan (JPM) down to $33, just below its 52-week low. A similar analysis holds for Merrill Lynch (MER) and Goldman Sachs (GS). The “UBS math” applied to US firms puts most of them almost exactly at their  one-year nadirs.
What things sell for is a better benchmark of value than what analysts and pundits think they should sell for. That being the case, bank stocks are about to hit a sell-off.

Douglas A. McIntyre