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Monday, April 20, 2009

Back Door Bank Nationalization

Largely unnoticed by anyone but the markets (which have tanked on the news) is this announcement.

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,[1][2] 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.


Anonymous said...

You expect me to believe that *this* is what tanked the market? Not skepticism about the substance of Bank of America, Citi, Wells Fargo, and Goldman Sachs earnings reports? Not skepticism about the earnings of smaller banks who aren't as politically well connected as banks like Goldman Sachs? Not GM's impending Chapter 11? Not even that people just wanted to get out of this bear market rally before everybody else did?

You have this tendency to attribute every fall in the stock market to Barack Obama opening his mouth.

Notice I didn't say you think the market falls every time Barack Obama opens his mouth, just that every time it falls it was because of something Obama said. I know you have voiced approval of his plan to let investors buy junk assets on margin using the FDIC as collateral.

mike volpe said...

I think it was all three however this piece isn't about why the market fell but about back door bank nationalization. The piece quoted is from a CNBC story analyzing why the market fell today.

I have a tendency to analyze the market as I see it. You see what you want to see, and frankly, if you didn't comment anonymously it would be easier to identify that which you say. I gave Geithner credit for his plan when it finally came out. I have written pieces pointing out that the market is doing better.

This piece is not a piece analyzing the market, but rather analyzing the back door nationalization plan.

Jason Gillman said...

I have suspected the nationalization plan since the bailouts began.

Considering that much of industrial debt is carried by these larger banks, does it not follow the govt THEN holds a preferred stake in the many other businesses that exist? Not just the banks, but any interests which have borrowed from the banks.

Interesting article.