Prominent Commercial Mortgage Lender Says US and European Banks Will Struggle to Raise Capital

The US Sub-prime mortgage crisis is about a year old and it continues to take its toll on US banks and brokerage firms. Now Europe's banks are about to pay the price for their own participation in the debacle and their own relaxed lending standards during the first few years of the new millennium. European financial institutions are desperately trying to recapitalize at a time when finding willing investors is increasingly difficult. Swiss banking giant UBS is in the process of underwriting a $15.3B (US Dollars) rights offering in-order to shore-up its balance sheet. And RBS, the UK based financial concern, is looking to raise $24B in cash just months after buying the troubled ABN AMRO.

Trouble in the residential mortgage market and, to a lesser extent the commercial mortgage market, first surfaced in the US. Domestic banks and Wall Street firms have enjoyed a head-start in the race to raise capital. Bear Stearns did yeoman's work securing investor cash but went under anyway as short sellers and other pirates of the speculation world, like predators in the wild that can sense weakness in their prey, stalked, and killed the firm. Morgan Stanley, Citi, Merril Lynch and other less prominent banks, veered away from their traditional investors and took advantage of the largess of eastern and middle-eastern "sovereign wealth funds" that were, at the time, flush with massive amounts of oil revenue and/or lured by a highly favorable exchange rate.

Unfortunately for Europe, arriving a-bit late to the party, the tide of foreign money has ebbed. Having eaten their fill of preferred equity in western financial institutions, the sovereign wealth funds have left the table and aren't interested in perusing the European menu. Oil prices have peeked for now and are closer to a realistic $100/barrel than the feared $200/barrel, and these sophisticated investment funds are reassessing their asset allocation models and contemplating their commitment to the our hemisphere's financial system. To be frank, their huge investments in US banks have yet to bear fruit, losses are mounting and they've had quite enough for now.

Old world banking establishments are going to have to rely on their existing stock and bond holders and their own well heeled compatriots to balance their under-funded checkbooks. However, rounding up money in this environment won't be easy. The rights offering by UBS (mentioned above) represents its third trip to the well during the crisis, and they are far from the only firms in the market with hat-in-hand. France's Credit Agricole is competing for the same investors with a $9.1B issue of its own along with HBOS of the UK, that's looking for $8B. There is no end in sight as-far-as capital requirements are concerned, falling asset values and losses from operations in a weak global economy, are burning equity faster than it can be replaced.

So far, European banks have managed to stay statutorily solvent, although by-no-means healthy. By re-pricing deals in favor of investors and making major concessions to private equity funds they've garnered the cash they've needed to avert disaster.

Crisis is not too strong a word for the situation western financial civilization finds itself in. We are in crisis and the crisis continues. Christendom (as the west was once referred to) can literally not afford for another shoe to drop. The US commercial and investment banking system is surviving by selling other peoples debt and their own equity at church bazaar prices and by refusing to perform any actual banking services for clients. Europe is, by necessity, following suit. As the struggle to raise cash continues near-term stabilization, in the global economy and the world's credit markets, is becoming an imperative for the survival of many institutional financiers.

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