Fifth Third equals zero for investors

In the banking world, the worst time to raise money is when you really need it. Ironically, this is the predicament for many banks – especially those that binged on subprime mortgage.

One of the latest victims is Fifth Third Bancorp (NASDAQ: FITB), which traces its roots back to 1858 (the company is the result of the merger of Third National Bank and yes, the Fifth National Bank).

Well, Fifth Third announced Wednesday that it plans to raise a minimum of $2 billion, which will include convertible preferred shares as well as the sale of non-core assets (for example, there is an electronic processing business that is likely to fetch a good valuation). There's more: the company says it will reduce the dividend by 66% (I guess it's better than nothing).

Basically, Fifth Third has heavy concentration in Florida and Michigan, both undergoing economic stress (whether from autos, real estate or construction). There are also some problems with leveraged leases that recently also suffered an adverse court ruling.

Unfortunately, in the current environment, it's not going to be easy to raise new capital. That is, the terms are likely to be harsh.

And investors are already anticipating this. In Wednesday's trading, Fifth Third's shares plunged 27% to $9.26.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates MergerBook.com.