U.S. May Convert Banks’ Bailouts to Equity Share

Source: New York Times

WASHINGTON — President Obama’s top economic advisers have determined that they can shore up the nation’s banking system without having to ask Congress for more money any time soon, according to administration officials.

In a significant shift, White House and Treasury Department officials now say they can stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, simply by converting the government’s existing loans to the nation’s 19 biggest banks into common stock.

Converting those loans to common shares would turn the federal aid into available capital for a bank — and give the government a large ownership stake in return.

While the option appears to be a quick and easy way to avoid a confrontation with Congressional leaders wary of putting more money into the banks, some critics would consider it a back door to nationalization, since the government could become the largest shareholder in several banks.



Read more: http://www.nytimes.com/2009/04/20/business/20bailout.html?_r=1&hpw

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So, what happens if (or when) these banks go bankrupt?

The good thing about that idea is that the taxpayer would share in the gain if they return to health. As to the risk, if the banks fail - they the stock will be worth nothing, but the money given as a loan would not be repaid.

Making this change then seems win/win, there is a short term benefit for the banks in that it gives them liquidity and for the tax payer it gives them the chance to gain on the up side - with the down side remaining the same. I think shareholders may lose as this will dilute the value of their stock. (You wonder if that reason rather than a philosophical rejection of nationalization is really behind the critics.)

I like this idea.

Whoever is so inclined can philosophize about nationalization all they want then.

Government control of the banks would make a lot of sense from the point of view that the government would be in control of the other 90% of money creation, which is currently done by private banks now.

Seems like a modest proposition, for government to be the one actually responsible for issuing our money.

:popcorn::popcorn:

Sounds like an interesting plan to me.

I'll be glad to see the government actually take advantage of the weak position these greedy fuckers are in.

I like it.

assuming that the common stock eventually proves to be worth more than zero, but that is not a bank.

Just a backdoor loan forgiveness and conversion of the resulting junk stock into even more leverage money for even more banks.

Glad I'd already said bye to the money. I never believed for a second that a dime of it would ever be repaid or recovered in any way. Wonder what multiplier they'll use? 10x? 100x?

"Preferred stock". The banks have been paying the interest on it--5%, presumably per year.

The large banks need to be broken into smaller pieces so they cannot damage our economy by being "too big to fail".

Its also necessary to foster pro-consumer competition if our goal is to re energize the consumer credit markets.

That will never be possible if the government continues to take a hands off approach to fixing the banking industry.

the bailout. It will be a ripoff of the taxpayer and a massive giveaway
to the bank shareholders to pay the current prices now, when the same shares
could have been had much cheaper, if they did this equity thing right away.
In fact, it looks like this whole bailout and the recent stellar banks'
performance reports were engineered to put taxpayer's money into the shareholder's
pockets. Clearly, without the bailout there wouldn't be any "stellar" reports
and increased stock valuations. Most of the banks would have been bankrupt,
and taken over by the government at no additional cost. In any case they better
fix the share prices at which they are planning to exchange the debt for equity
right now. Otherwise, by announcing the plan without fixing the prices they will
just create a mini-bubble in bank shares and will screw the taxpayer even more.