Posted on Tuesday, April 21, 2009
Converting the governments preferred shares in some of the nation's largest banks to common equity. What do you think? The markets it seemed didnt like the idea - they fell. should we be surprised? Who on Wall Street likes what is essentially the nationalization of banks?
The idea seems to have surfaces again this time as a result of Treasury's stress tests since it appears many just lack the capital the Feds think thye need to succeed. And no one wants to ask Congrees for more bailout money at the moment.
The solution? A swap for preferred common stock would create another $100 billion in comon equity for the bannks! Common equity is of course a key benchmark of bank capital reviewed as part of...you guessed it, the stress test. But come on, we all know this doesnt add new money. It just shifts around the old in the same balance sheet bingo that got us into this trouble in the first place. Even worse, while the Federal bucks are pretty distinct and separate now, this move would mix up Federal money with everyone elses and cause its value to fluctuate just like everyones elses.
This at a time when Congress is essentially trying to force banks to write down assets and credit card profits are on the radra again, both putting bank profits are risk...theres no way the banks want government inside forcing them to go along with this stuff.
What we need is not to get government and Washington politics MORE intwined in our nationals bank, but the exact opposite. How much longer will that keep this crisis going?
Some say Paulson scquandered TARP mney, putting banks in this position now by buying prefeered stock in all big banks instead of only those that really needed it. Maybe a case by case approach will be used this time? Maybe banks that are really strapped can be identified and seized and liquidated or recapitalized case by case? Granted bondholders and shareholders could take a major haircut but, hey, they invested in the wrong bank. Its better than all of us paying to waste more money on a blanket approach.