Congress doesn’t want that, and neither do I.

From Reuters:

"Bank recaps: Why the preferred stock swap makes sense

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Posted by: Felix Salmon

Tags: bailouts, banking

Paul Krugman and James Kwak are unhappy with the way in which the government is proposing debt-for-equity conversions as a way of recapitalizing the banks — mainly because they don’t consider the preferred stock bought initially under the TARP program to be debt in the first place, and if you look at it as equity, it’s true that no one benefits much from an equity-for-equity conversion.

I’m slightly more constructive, because I never really considered preferred stock to be equity in the first place. It looks like a bond, paying a fixed coupon, and it serves to increase the leverage of common shareholders, just like debt does. If the government converts it into pure equity, then that leverage goes down, which is a good thing, and the bank in question no longer has to make those coupon payments.

More to the point, if a bank ever defaulted on its preferred coupons, that’s game over right there: the FDIC would never stand for such a thing, and would take it over. In that sense, preferred stock can’t really be considered risk capital, which is the intuitive definition of equity. Common stock, by contrast, is risk capital — and if the government’s main aim here is to get the banks lending again (and according to the WSJ today, they’re not), then you want the government capital to be as junior as possible.

Indeed, this is quite close to the general plan I’ve been sketching out for some months now: massively dilute the common shareholders, impose a haircut on the preferred, and leave the senior unsecured largely untouched. The only alternative would be to inject yet more hundreds of billions of taxpayer dollars into the banking system, without any real indication that the money would be put to good use. Congress doesn’t want that, and neither do I."

Me:

“The only alternative would be to inject yet more hundreds of billions of taxpayer dollars into the banking system, without any real indication that the money would be put to good use. Congress doesn’t want that, and neither do I.”

There’s another point to doing this, and that is that it’s an easy form of nationalization. That’s good. Let me say it again:
Nationalization.

For all I know, that’s what the government would really like. Perhaps they’re like the nun and her ruler in my short spell in Catholic School.

“I take no pleasure in being forced to do this young man,” she would say.

“Of course not luv”, I would say to myself. “Any more than I take pleasure in pissing you off.

I want the banks to fear an itchy finger. Here’s why:

http://www.nytimes.com/reuters/2009/04/2 0/business/business-banks-europe.html?re f=business

“That dilemma faces many banks. Dozens of lenders in Europe and the United States have been shored up with rescue funds from governments, but many are keen to limit their reliance on the state and selling profitable units is the most realistic alternative.”

Between:
1) Caps on salaries
2) Government taking control

there’s been a fire, although I’d prefer a conflagration, lit under the asses of these bankers. I don’t want them using taxpayers money. Call me crazy.

There is an oddity to these asset sales though: they seem to be largely foreign assets, and deals made in the last few years. It’s as if we were buying up the world, and are now being forced to sell it back at a loss.

- Posted by Don the libertarian Democrat