Banks profit from capital raising

NEW YORK — Leave it to Wall Street to figure out a way to win big from a government-mandated rush by banks to raise capital.

Some financial companies including Morgan Stanley and Wells Fargo & Co. are using their own in-house bankers to advise them on large public stock offerings that are being done to bolster weak balance sheets following the conclusion of "stress tests" that regulators did on them earlier this month.

These advisers don't work for free, even when they're doing deals for their own companies. The fees they charge will ultimately go back into corporate coffers, a roundabout way for the banks to generate profits.

Securities law experts say these maneuvers also can mask a company's financial health and potentially open the door for conflicts of interest.

"Commercial banks that need capital are going down the hall and asking their colleagues for investment banking advice. Then they are charging themselves a fee for helping themselves," said Anthony Sabino, a professor of law at St. John's University. "That sure doesn't sound like it propagates independent thinking."

These arrangements don't violate securities laws and the companies are fully disclosing that in-house advisers are part of the underwriting group. But Sabino and other finance experts still say this is something investors need to keep tabs on as banks look for ways to boost profits in tough times. One thing to watch is what kind of fees they charge.

It's not that the banks wouldn't need the services of investment bankers otherwise. Whether they hire their own staff or an outside firm, these advisers are helping them figure out how to raise money or expand their businesses. That could result in selling off business units, making acquisitions, issuing debt _ or as we've seen in the last week, selling common stock to the public.

That has been the favored route to quickly raise capital in the wake of the government's May 7 release of the "stress tests" conducted on the nation's 19 largest banks and other major financial institutions.