Investment Banking executives remind me of President George H.W. Bush (#41) when he uttered those regrettable words “Read my lips…NO NEW TAXES.” Except the current group is just making promises that they don’t need more capital. Of course, those comments go a long way to calm the crowd and suggest that the worst is behind us. They’ve been doing that since last fall but investors seem to have a very forgetful and forgivable nature. I am neither forgetful or forgiving when it comes to things like this.

• Merrill Lynch CEO John Thain March 16, 2008 - “We have carried out an enormous cleaning of our credit portfolio. We have more capital than we need, so we can say to the market that we don’t need more injections. We can confirm that we have tackled the problem.”
• Merrill Lynch CEO John Thain April 3, 2008 -”We have plenty of capital going forward and we don’t need to come back into the equity market.”
• Merrill Lynch CEO John Thain April 17, 2008 - Says he is “open” to raising capital through preferreds.

In the end, they raised billions. They had to after all. Never mind the promises. As they say….promises are meant to be broken. We all know that. Why get so upset?

Citi has had their share of “read my lips” promises too. In January, after the billions of capital injections received from the Sovereign Wealth Funds, Citi CFO Gary Crittenden and CEO Pandit suggested the bank wouldn’t need to raise more capital. Then on April 18, 2008, Crittenden said this about needing more capital infusions - “You can never say never.” Tonight, never is now as they announce another $3 billion of new equity that will dilute existing shareholders.

Everybody seems to love new capital….The media loves new capital…The Fed loves new capital…The market bulls love new capital. They love hearing that no new capital will be required. They also love hearing that new capital is required but it’s already on the way. Both stories work just fine. This either means that the kitchen sink worked and the worst is behind us so we won’t need new capital. Or…this means there is a strong appetite for investors to keep plowing more money into these blackholes and we will always have new capital to avoid big problems that might require another government bailout. In fact, go back to the post-Bear Stearns bailout articles and you’ll see that whether it was UBS or any other writedown, as long as it was followed with the promise of new capital…it was all good and the markets went higher. Imagine an exec of a financial institution being honest and saying they don’t have enough capital….Just ask Alan Schwartz what happens when you cannot lie about it any longer. Imagine an exec promising to cut dividends. Imagine an exec saying they have no clue how much they’ll need but just plan on them asking for a few billion every quarter until they don’t ask anymore. The truth hurts. Apparently, the lack of truth is much preferred in our current market.

I don’t dislike new capital. I dislike the appearance that these comments were made specifically to manage the stocks and the markets. Apparently, there are no consequences for making promises that will be broken as long as it helps the government and the bulls prop up the markets. It’s either intentional miscommunication or it’s an incompetent failure of execs to understand their balance sheet. Neither of those are encouraging to me.