by Colin Lovett, PICurrent Managing Producer
One of the biggest news items this week involves the government’s attempts to bailout the banking industry. Billions have been poured into this so far and we can probably expect billions more before it’s over.
In fact, the Obama administration is talking about adding more money to the system, but with new strings attached. These involve converting government shares from preferred stock to common stock. Is this a good idea? Well, first we have to look at what each term means.
Currently, government bailout money is exchanged for preferred stock, which has some advantages and some disadvantages:
- The banks are required to give the government annual dividend payments
- Those with preferred stock go to the head of the line to collect money when a company goes out of business.
- The public has no voting rights in running the bank, even if the government owns a majority of the shares. Although to be fair, some count this as an advantage.
- The dividend payments count against the banks assets, making it less attractive to new investors
If the banks swap the government held shares to common stock:
- The government would have a large voting share in the company.
- The bank would have more assets if freed from dividend obligations, thus making them more attractive to new investors.
- The downside happens if the bank fails. Taxpayers are far less likely to get the government money back.
Basically, this issue comes down to one word: nationalization. The Obama administration says it wants to keep the banks in private hands, but if the government gets voting control of a bank, many think that would count as nationalization.
Some economists and policy makers think the government should take control of ailing banks to change management if necessary, fix the problems and sell the bank back to private investors as quickly as possible.
Others are worried the government is poorly equipped to run the banks and might not return it to private control quickly enough.
We’ll keep following this story and let you know how this might affect you. In the meantime, use the comment section below to tell us your thoughts.
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