Comments on: Bank recaps: Why the preferred stock swap makes sense

By: Andy

Andy — Thu, 23 Apr 2009 03:47:24 +0000

Felix: the CPP money is at the holding company level, which the FDIC has no power over. In fact, the two Lehman bank subsidiaries are still alive, believe it or not… So long as the bank subsidiary still has capital, the FDIC doesn’t really care what happens to the holding company.

Nate: the CPP preferred shares, per their term sheet at http://www.treas.gov/press/releases/repo rts/tg40_captermsheet.pdf, “will pay cumulative dividends at a rate of 9% per annum, compounding quarterly.”

By: Paul A

Paul A — Tue, 21 Apr 2009 01:07:43 +0000

In my haste I made a typo, this:

“If once all of the losses are realized, the banks interest income exceeds their interest expense plus prefered dividend then they are fundamentally in trouble and the regulatory ratios will not matter.”

should read:

” If the banks interest expense plus prefered dividend exceeds their interest income, regulatory ratios will not matter.”

Keep up the good work Felix!

By: Paul A

Paul A — Tue, 21 Apr 2009 01:04:01 +0000

I have to agree with Felix on this one.

Free cash flow analysis says that if banks are required to pay out more than they take in each quarter than they are insolvent. Adding to the required bank payments at this point does not help them very much is they are possibly cash flow insolvent. Allowing banks to count prefered as capital only helps regulatory ratios. If once all of the losses are realized, the banks interest income exceeds their interest expense plus prefered dividend then they are fundamentally in trouble and the regulatory ratios will not matter. Stoping prefered payments is technically possible, but could have practical implications(it would be similar to a bank CEO saying “yeah, we think that we might fail the stress test).

By: KenG

KenG — Mon, 20 Apr 2009 20:33:18 +0000

if we let the banks convert the preferred shares to common, we will be giving up the preferred dividends, which for BofA’s just announced qtr, amounted to $1.4B. Having to pay dividends like this to the government keeps the bank from wasting more money than it normally would. Plus, the govt can use the money.

Instead of converting the preferred to common, can’t we just let the banks include the preferred stock in their calculations for determining how healthy they are? The government shouldn’t convert the preferred to common until it is ready to sell those shares on the open market. As long as the govt has an at-risk stake in a bank, it should receive some kind of premium, otherwise it’s just one more gift to a group that doesn’t deserve it.

By: Nate

Nate — Mon, 20 Apr 2009 18:52:48 +0000

I’m not sure what you mean by a bank defaulting on its preferred. I believe that most bank preferred is non-cumulative, and that they are under no legal obligation to pay a preferred dividend. The only rule is that if they pay a common dividend they have to pay the preferred dividend too. So technically, not paying the dividend is not a default – this is why preferred is more like equity than debt.

By: Linus Wilson

Linus Wilson — Mon, 20 Apr 2009 18:31:21 +0000

This is a nice analysis. It is also consistent with my research findings. See http://www.businessinsider.com/krugman-n ew-treasury-plan-is-just-shuffling-deck- chairs-on-the-titantic-2009-4.

By: Don the libertarian Democrat

Don the libertarian Democrat — Mon, 20 Apr 2009 18:23:22 +0000

“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.

By: Conservadick

Conservadick — Mon, 20 Apr 2009 17:27:49 +0000

That would be a great idea, Felix, if only wholesale theft by the Federal Government was permissible under the Constitution. Drat!

By: dazedandconfused

dazedandconfused — Mon, 20 Apr 2009 16:57:31 +0000

I dont understand why there is such a need to absolve the creditors of their potential losses. In doing so we are only laying the groundwork for a future replay of this crisis. Creditors need to be incentivized to police their exposures rather than leaving it to an inadequate regulatory system and underinformed equity holders. Without downside creditors will naturally (and rationally) overlend and ignore risks. Furthermore bank equity holders and certainly the banks employees are also encouraged to overplay their hand in the hope of levered returns without interested creditors to police them. Thus we have a socialized system regardless of the optics, with even larger risks and only a proven disfunctional regulatory system to police it and protect the tax payer.