OK I think I finally understand another part of the Rescue puzzle. This goes back to what folks were saying between the Pelosi Dodgeball and the Senate passage of the TARP.
There are two ways under consideration, not counting the Irish Solution, that banks can be rescued. The first is the only way we talked about initially which is buying up all the toxic assets and then setting them aside - taking all of the question marks off of the books of the banks. The second way is the new interesting way which is to have the banks issue new preferred stocks for the Fed to buy. The Fed holds them and that encourages common shareholders to try and get the more secure capital, the new preferred stocks. The second way adds value directly with cash.
I'm not clear if the preferred stock sale is necessarily a new issue of stock or if most banks already have preferred stock. But this idea looks pretty simple considering how deflated most financial stocks are right now. Surely there are 50 regional banks whose total market cap is now below 5 billion. Putting a billion each into those with a preferred issue would increase them up to 20% and be relatively cheap. I assume that the Republicans would probably insist that such preferred stocks be non-voting shares, I'd bet the Dems will want the government to wrest control from evil capitalists.
Tyler Cohen examines some implications:
We are used to invoking shareholder unanimity theorems, whether they are justified or not. But say the U.S. government owns twenty percent of each major bank. Exactly what instructions do they give the management? ("Hey, guys, just get stuff going again!"?) Presumably the twenty percent shareholder wants something different, and more in line with the public interest, than the desires of the remaining eighty percent. Are we to assume that the twenty percent wins out? Can managers be sued for violating their fiduciary responsibilities? Does the twenty percent explicitly tell the managers to do something other than maximize profit? What if the eighty percent votes to override them?
Hmm.
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