Investors were also troubled by a report that the government is converting its interest in bailed out financial institutions from preferred into common shares. The move is seen as a political maneuver that will enable the White House to avoid asking
Congress for more money, but also constitutes a de facto nationalization of the
businesses that will give the government ownership stakes.
So, what is the practical effect? Well, here is what preferred stock is.
Preferred stock usually carries no voting rights, but may carry superior priority over common stock in the payment of dividends and upon liquidation. Preferred stock may carry a dividend that is paid out prior to any dividends being paid to common stock holders. Preferred stock may have a convertibility feature into common stock. Preferred stockholders will be paid out in assets before common stockholders and after debt holders in bankruptcy. Terms of the preferred stock are stated in a "Certificate of Designation".Common shares have ownership interest. As such, by converting preferred stock into common stock, the government then immediately takes an ownership stake in each and every bank they have given money to. Since they give nearly one trillion dollars in TARP money, they have enough preferred stock to convert to significant shares of common stock.
The federal government will now have enough common stock to be able to make significant decisions as far as who sits on the board of directors. The board of course is the final arbitor of who is the CEO, CFO, etc. As such, the government, if this winds up happening, will take a back door step to nationalization. It will have enough voting power to be a rainmaker in board decisions. By being a rainmaker in board decisions, it ultimately is a rainmaker in executive decisions. By being a rainmaker in executive decisions, it ultimately becomes a significant player in all decisions. As such, we have back door bank nationalization.