Reuters is reporting that that whole preferred shares idea with respect to bank bailouts might not really be so preferred. We’ve argued for some time now that if the government really wanted to influence policy and have some control over the day-to-day operations of the targets of its largess, it should do so like everyone else, with common stock. Someone obviously thinks this plain.
We aren’t sure that we buy those early and oft repeated arguments for preferred stock, that using that particular vehicle would get the taxpayers funds back quicker and with more certainty. To us the selection of preferred stock looked like a weak emulation of Warren Buffett’s investment in Goldman Sachs, and a not-so-subtle message to the banks that the government would still be as “hands-off” as a non-voting shareholder during a proxy fight.
Perhaps now the gloves are coming off?
U.S. officials are examining ways to convert government stakes in banks into ordinary shares as banks accumulate losses, the Financial Times said, citing people close to the discussions.
Policymakers are considering an idea that the government change its existing holdings in the banks, which have taken the form of preferred shares — non-voting stock that carries a fixed dividend — into convertible preferred shares that could be converted into common stock, the paper said.
Under this proposal, the shares would automatically convert into common equity if there was a decline in the bank’s health, as measured by its tangible equity ratio, for example, the paper reported.
The government may also make future capital injections in the form of such convertible preferred shares, the paper said.
It bears mentioning that this passage sounds a bit ominous: “Policymakers are considering an idea that the government change its existing holdings in the banks.”
One wonders if this will be with or without the consent of the banks in question.
U.S. explores converting stakes in banks: reports [Reuters]
When the government buys shares in a Company its nationalization. You can’t be half-pregnant. Why are we pissing over semantics? Ever known a government agency to relinquish power?
So the government’s investment converts into an interest lower in the capital structure as the bank’s health deteriorates? That makes absolutely no sense. What’s the use in owning securities that are senior to common in liquidation if they’re just going to convert into common before liquidation anyway?
Change We Can Believe In!
“Pres BO” alert: he will be speaking any minute.
Buying preferred shares was a brilliant idea. It gives banks a lot of cash junior to debt while putting the taxpayer ahead of the common shareholders – including management’s restricted shares.
If the taxpayer doesn’t get paid back, the shareholder and management are wiped out.
On top of that, John Q. Public is clipping a nice coupon – 5 or 8% depending on the tranche. That is especially tasty if you consider John Q is borrowing from the Chinese at 1% to fund this.
The real reason to buy common stock is because the formerly-AMZN-is-going-to-400-oil-is-going-to-200 equity analysts have decided that “tangible common equity” should be the new metric of bank health because it fits the thesis they are selling that banks are going to zero.
That is total crap. The government should continue to buy preferred shares – and Geithner and the IRS commissioner should have a little meeting with Whitney and friends and mention that more realistic assessments of the banks would be the patriotic thing.
As regulator the government has plenty of power over the banks. You think Citi is Treasury’s new lapdog? When has Jamie said no to a suggestion from the government? He knows where his bread is buttered.
Finally, the analysis of the Fed’s crappy deal with the TARP money is terrible. Maybe the Fed could have gotten better terms, but 1) the taxpayer does not get paid back if the terms are so onerous the banks fail; 2) the taxpayer has a far lower cost of capital than, say, WB; 3) Treasury is already long the banks through tax receipts and all that toxic CDS crap on the AIG books.
CBO should look into that – keeping the major banks out of a credit default event over the next 5 years has to be worth BILLIONS to that AIG book that we now own. BILLIONS.
They are discussing the fact the investment banks will “fare better” than the regular banks on CNBC.
They are discussing those who think there have to be bank failures.
insure the losses, fire the board of directors and require the boards have a majority of gov’t appointees. sure you have the problem of finding competent board members but they could help set pay and risk.
#7, what if they “staff” the boards the way they staffed the SEC?
@2, I was about to leave the exact same comment.
Three analogues to the government’s “strategy” proposed here:
1) Hitting to the green in two strokes on a par five, then putting into the bunker on purpose.
2) Getting a foreclosure notice on your house from the bank, then spending $20,000 to renovate your kitchen.
3) Going into a car dealership and opening with a bid above the sticker price
Good work all around.
@5 should be writing this blog instead of an anonymous neophyte like EP.
#10:
DB is, as you may be aware, hiring another writer. You should apply!
@10
Agree. Though what @5 said about Whitney was a little off. Leave the analysts alone. They can dig their own graves, and they do most of the time. (Though of course @5 could have been using some hyperbole to make a point.)
“As regulator the government has plenty of power over the banks. You think Citi is Treasury’s new lapdog? When has Jamie said no to a suggestion from the government? He knows where his bread is buttered.”
Certainly, but where in the historical record can you find this influence extending to the micromanagement of salary? Hiring? Underwriting standards?
@13
What influence does the government need?
See Nixon, price/wage controls 1971-1973,
and WWII (Office of Price Administration),
Korean War (Office of Price Stabilization).