I finally started receiving pen-l messages again today, but not until
after Julio and Jim D. had responded to my earlier message. So my
reply will be cut and pasted from the archives. Thanks to Julio and
Jim for their comments.
Julio quoted me:
Fred (fmoseley) wrote:
It is ridiculous what the government is doing
now ? giving money to banks one way or the other,
and then begging them to please lend this money
to businesses and households.
And then Julio wrote:
Honest question (not challenging what Fred says here): Where is the
evidence that the government is just handing out money to the banks?
When I go here (http://www.treasury.gov/initiatives/eesa/transactions.shtml),
I just see that Treasury is purchasing at par value a lot of preferred
stock with warrants (call options) from different banks. Isn't the
par value skewed in favor of the banks, i.e. below market value were
these assets traded in markets? I don't know. Who knows? That's
what my question is about. Typically, newly issued preferred stock
gets traded at par value. Nothing strange about that. Preferred
stock, a hybrid between common stock and debt, determines its
dividends as a percentage of par value of preferred stock. And,
unlike common-stock dividends, preferred-stock dividends are almost as
stable and safe as debt coupon payments. Treasury is sticking them
with 5%-on-par-value dividends and a myriad legal constraints. The
legal fineprint is here
(http://www.treasury.gov/initiatives/eesa/docs/application-guidelines.pdf).
So, again, is anybody scrutinizing these numbers or we are just going
by what we suspect is going on? Not that I'm not inclined to suspect
this way myself, but if Treasury is handing out money to these banks
by overpaying for their preferred stock (with warrants), why aren't
all other banks up in arms?
My reply:
Good question. Yes, the Treasury is "buying" preferred shares.
Perhaps "giving" was too strong a verb. But the T is accepting a lower
rate of return and no control over the banks. And for the banks in the
worst shape (Citi, BA, plus AIG) this preferred equity will disappear
with more losses in the months ahead. It is beginning to look like a
lot of banks will fit into this category,
and most of the $700b could be gone - gone to the creditors, who get
paid in full, with taxpayer money.
Fred
_______________________________________________
----------------------------------------------------------------
This message was sent using IMP, the Internet Messaging Program.
_______________________________________________
pen-l mailing list
[email protected]
https://lists.csuchico.edu/mailman/listinfo/pen-l
