IN JANUARY, as the government purchased preferred shares in Citigroup, it was mentioned at the time that, as a last resort, the government would convert preferred, dividend-paying shares into common stock only if the government deemed it absolutely necessary.
JUST LAST WEEK, articles appeared in the MSM indicating that Tim Geithner was going to ask Congress for another $300 to $500 billion in TARP money.
NOW BREAKING ON THIS MORNING'S NEW YORK TIMES FRONT PAGE: As of today, that discussion has shifted to reflect anti-bailout congressional sentiments, and we're told the Treasury Department "may" be imposing Citigroup-like requirements on multiple, yet-unnamed banks in: "U.S. May Convert Banks' Bailouts to Equity Share."
U.S. May Convert Banks' Bailouts to Equity Share
By EDMUND L. ANDREWS
Published: April 19, 2009
(Appears on Pg. A1 of April 20, 2009 NY Times)
WASHINGTON --
...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.
The article continues--simultaneously citing an unwillingness on the part of Congress to provide additional Wall Street bailout funds--explaining that Treasury intends to negotiate Citigroup-style agreements with "other banks, as needed." And, that this change in strategy would more than fulfill the needs for any capital requirements that certain big banks might need in the short term.
IMHO, one could call this the highest stakes game of poker ever played.
Of course, as the article reminds us, this type of preferred stock conversion would mean that the government would then maintain significant voting rights on the boards of those banks. And, as the NY Times story states the obvious result of all of this, "...taxpayers would also be taking on more risk, because there is no way to know what the common shares might be worth when it comes time for the government to sell them."
The article also tells us that the Obama administration had budgeted for $250 billion in the 2010 fiscal year to "...prop up the financial system." However, (you've got to love this line) "....Because of the way the government accounts for such spending, the budget actually indicated that Mr. Obama might ask Congress for as much as $750 billion."
Nationalization, or even just the hint of nationalization, is a politically explosive step that White House and Treasury officials have fought hard to avoid.
--SNIP--
The Treasury would also become a major shareholder, and perhaps even the controlling shareholder, in some financial institutions. That could lead to increasingly difficult conflicts of interest for the government, as policy makers juggle broad economic objectives with the narrower responsibility to maximize the value of their bank shares on behalf of taxpayers.
Those are exactly the kinds of conflicts that Treasury and Fed officials were trying to avoid when they first began injecting capital into banks last fall.
Is this taking the bank nationalization discussion to the brink, or what?
Go for it Mr. President. Nationalize the damn banks!