One Hundred Days

One hundred screwups. And here’s a pretty serious one:

The feds will ask the banks to increase their tangible equity by converting preferred shares to common stock, including the taxpayers’ preferred shares that were purchased with TARP funds. The WSJ editorial board called this a “backdoor nationalization.” That’s exactly what it is. It’s also a nationalization that increases taxpayer exposure to bank losses without recapitalizing the banks, without providing an exit strategy, and without building in effective safeguards against politically directed lending.

The country’s in the very best of hands.

10 thoughts on “One Hundred Days”

  1. All the Major Banks are insolvent, they have two choices.
    1) Bankruptcy court, and a creditors committee, or 2) Nationalization.

    Personally I’d prefer to see Bankruptcy. Take all those Pieces of crap that pass for bankers and line them up. Fire half, tell the other half they are getting a 50% salary cut and no bonuses, ever again. If the ones keeping their jobs don’t like it, ask them to switch with somebody getting fired.

    Bush/Cheney/Paulsen decided that Nationalization was the preferred solution and pushed to get Preferred stock in all of these banks, and most preferred converts to common at a strike price. Frankly, Nationalization is the worst of all outcomes. They can’t hope to ever raise outside capital, the taxpayers get hosed on the strikes, and the banks end up with a screwed up culture and management chain anyways. Far Simpler to push them all into bankruptcy, but, Bush didn’t want to do that then.

  2. Are they screwups if they are intended?

    The creeping nationalization is a feature, not a bug. How else do the Dems delay the collapse of their payouts to unions?

  3. “Far Simpler to push them all into bankruptcy, but, Bush didn’t want to do that then.”

    Neither does Obama. He wants to increase the government’s stake so where is your post castigating him?

    “All the Major Banks are insolvent…”

    You know this how? What defines a “major bank” ? Are you using Jedi mind tricks again? I thought your mom said to stop doing that when she let you out of the basement.

  4. Mr. Lee, I agree that bankruptcy is much healthier for the economy than nationalization. I’ll point out that, while I’m not a huge fan of Bush’s handling of this, his people got preferred stock specifically because they weren’t voting shares and didn’t represent nationalization (I don’t know whose intentions that were, but that’s what happened). It was Geitner that pushed for common stock.

    I should also note that “Take [the bankers] and line them up. Fire half, tell the other half they are getting a 50% salary cut and no bonuses, ever again” isn’t how bankruptcy works; that’s how nationalization works. Otherwise, the government doesn’t have the authority to do that.

  5. Forget everything else…

    >without building in effective safeguards against politically directed lending.

    This is the whole, entire, complete point. Politically directed lending = laundered campaign funds.

    Everything else is eyewash.

  6. Jonathan

    Preferred stock at some point does represent owner ship issues because most preferred’s have a convertability clause and the Board of Directors is required to take into account the stake position of the preferred shareholders.

    Now the reason the banks are screaming about converting preferred to common, and trust me the Bankers want this, is that at the time, the preferreds carried a coupon of 5%, but with rates of 2-3%, on loans the banks are actually bleeding out on the preferred payment coupon.

    as for what happens in bankruptcy, well that is a function of the creditor committee and the judge, but lots of people get fired during the restructuring. Lehman went into bankruptcy and 90% of their people are on the street now.

    Bill:

    You want a Definition of a major bank, try on any that were considered under the Basel II accords definitions.

  7. Preferred stock at some point does represent owner ship issues because most preferred’s have a convertability clause and the Board of Directors is required to take into account the stake position of the preferred shareholders.

    I would think when the government’s buying stock that’s a fairly unusual situation and might justify an exception. I would think a general law prohibiting the government from owning common shares, while also exempting government-owned preferred stock from those rules, would have been a better call.

  8. What general law prohibits the government from owning common shares? Heck, one of the biggest shareholders in the country is FERS (Federal Employee Retirement System).

    The Treasury holds 60% of the shares in Fannie Mae and Freddie Mac. The Feds held Warrants in Citi, JPM, Wells,
    and Chrysler.

    Wow, can you cite US Code that prohibits the Feds from owning shares in a company?

  9. I don’t think anyone says that the government can’t own voting shares; I say the government shouldn’t own voting shares. Perhaps there’s no legal difference, but I’d say there’s a big functional difference between owning shares as part of a retirement package and owning shares as part of a high-profile corporate turnaround where the government can exert voters influence in order to satisfy political, rather than financial, benefit.

    Fanny and Freddie are not exactly models for emulation. They were already compromised by implicit (and explicit) guarantees of government bailout, and special regulators giving the federal government significant control already. Giving government voting shares is not that big a change, as bad an idea as it is.

    I’m looking at http://lawprofessors.typepad.com/business_law/2009/02/tarp-ii-terms-t.html. I don’t know this site, but it’s the only site I can find that refers to convertible preferred stock; I don’t think the original TARP deal was convertible. I certainly would have noticed at the time; I’m an MBA student and in Intro to Finance during that. We discussed it a lot, as you can imagine. The only way that was palatable was because the shares were not voting.

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