Stephen A. Lawrence wrote:
If the Feds had extracted piles of (new) common stock from the banks that would have diluted existing investments, effectively screwing common stock holders, and in fact resulting in de facto nationalization.
I do not know what they did with the banks, but they did extract common stock from AIG, diluting the holdings. The stock is worthless, and will probably never recover I am told. I happen to know about this because -- I am sorry to say -- I own some AIG stock, which is now suitable for wallpaper.
I was told that the Fed's strategy here, seizing both the stock and charging interest, is to ensure they get their money back. Normally you do not take over a company only to bleed it to death with high interest loans. (It would be against the law for an ordinary investor to do that.) But the purpose is not to nurse the company back to health. If the company does recover, the Feds sell their stock and get back their money. If it fails, they are the first creditor in line, and they get back their money. (Actually, they will do both, as soon as possible: first sell off everything not nailed down, and then sell off the 80% of the stock for whatever it is worth.)
They really have put the taxpayer's interests ahead of the corporation's interests and survival. As they should.
I do not view this as the government "effectively screwing common stock holders" even though I am a stockholder. The management of the company screwed the stockholders. The government is just cleaning up the mess, and liquidating the company. This is normally done with Chapter 7 bankruptcy procedures, but in this case the company is so large and the liquidation must be done so quickly, the court system and regular procedures cannot handle it. So the Feds are doing it directly. It seems prudent to me. I expect the government will be liquidating General Motors in a few months. They may not call it that, but that is what they will be doing.
- Jed
