As I have said in some of my other writings, there is not a lack of capital in the system. There is a lack of capital for institutions with opaque balance sheets and for institutions that have been run poorly. Here’s more evidence that even in cases where there is some doubt about the balance sheet, well run companies can find capital (via WSJ):

TOKYO — Mitsubishi UFJ Financial Group Inc. said it has closed its $9 billion purchase of a 21% interest in Morgan Stanley on Monday, keeping the outline of the proposed deal intact but sweetening key aspects for the Japanese banking giant.

The two financial firms have been under pressure to change terms of the deal because the plans for MUFG’s investment were drawn up before Morgan Stanley shares plunged more than 50%.

Under the revised plan, MUFG acquires $7.8 billion of convertible preferred stock with a 10% dividend and a conversion price of $25.25 a share, and $1.2 billion of non-convertible preferred stock with a 10% dividend. The terms are more expensive for Morgan Stanley. Still, completing the deal may boost confidence from the stock market, where many investors were betting the deal would fall apart completely.

Morgan Stanley is basically a well run company. The market forced them to raise capital on punishing terms, but they were able to raise capital. In other words, the market is working. Strong companies are providing capital to weaker companies. In some cases, the strong companies are taking over the weak companies and buying assets at fire sale prices (via WSJ):

Spain’s Banco Santander SA said Monday it was in advanced talks to acquire full control of Sovereign Bancorp Inc., a large thrift-holding company hobbled by souring loans.

The two sides were in deep negotiations late Sunday and hoped to complete a deal by Monday, people familiar with the matter said. Details of the transaction weren’t clear, but Santander was expected to pay roughly Sovereign’s stock price of $3.81, where it closed Friday in 4 p.m. New York Stock Exchange composite trading. That would value the Wyomissing, Pa., company at about $2.53 billion. Sovereign approached Santander late last week, according to a person familiar with the matter.

The market will solve this problem if the Fed and Treasury will just provide enough stability to get deals done in a timely fashion. The Fed needs to stick to its basic function as a lender of last resort and get out of the business of being the lender of first and last resort. Most of the actions taken by the Fed and Treasury over the last year have just delayed the necessary market actions. We could have been done with this episode already if these companies hadn’t been kept on life support for the last year through the TAF and TSLF.

The only way the credit market will function normally again is if the bad banks are removed from the system through mergers or bankruptcy. It may be a painful process, but it is the only one that will work.

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