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TARP Repayment And A New Deck Chair Arrangement For The Banks

Via Atrios, apparently some TARP repayment is more equal than others:

TCF Financial Corp (TCB.N) said it received approval to pay back $361 million in funds it received from the U.S. Treasury's Capital Purchase Program, and cut its quarterly dividend by 80 percent. . . . TCF Financial said it will buy back all of its 361,172 shares of its preferred stock from the U.S. Treasury at a price of $361.2 million plus a final pro rata accrued dividend.

Meanwhile, back of the megabank ranch, the Obama Administration is rearranging the deck chairs, floating the idea of converting its preferred shares to common stock. As Krugman notes, this is pointless:

[C]onverting preferred into common does nothing: itís just a swap among the junior stuff, with no impact further up the line. Itís certainly not a fresh infusion of capital in any meaningful sense. So who is supposed to be fooled by this? The markets? The pundits?

I think this should be filed under "don't just stand there, do something" - giving the illusion that the Obama Administration is on it. They aren't.

Spoeakng for me only

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    If the banks are insolvent as you think, then (2.00 / 1) (#1)
    by steviez314 on Mon Apr 20, 2009 at 11:44:51 AM EST
    common stock, preferred stock..all the same...worthless.

    If they are not insolvent, then common stock has upside while preferred does not.  It also saves the banks some dividends, and gives the government voting rights.

    It's very unlikely that the banks are only "somewhat insolvent" that would make preferred stock woth something and common stock worthless.  There's just not that big a preferred stock cushion.

    The 1st TARP money should probably have gone in as common stock anyway, not as preferred.

    you know better than that (5.00 / 2) (#2)
    by Big Tent Democrat on Mon Apr 20, 2009 at 11:47:34 AM EST
    If the bank is insolvent, better to be a preferred stockholder than a common. You've got a chance of getting something back.

    But that is a nonsequitor anyway. As you well know. My argument is that this does not address the problem.

    In other words, the Obama Administration is NOT on it.

    so spare me your contortions for once and actually address the issue raised in the post.

    Parent

    You are ignoring, as is (4.00 / 4) (#7)
    by Catch 22 on Mon Apr 20, 2009 at 12:52:59 PM EST
    Krugman, that the whole idea of converting stock is to further capitalize the banks. Preferred stock represents two things: One it represents dividends in the millions of dollars per bank. So every dividend they pay out is less capital to get the banks thought future rough times like credit card defaults. Secondly, preferred stocks are treated as a loan becauae they are. By converting to common shares those loan commitments are taken off the books and therefore can be expressed as available capital which can be used in many ways such as loan loss reserves, or for capital ratios that can provide access to private sector loans down the road if need be. Converting the stock give the banks needed flexibility and liquidity.

    That Krugman missed that should show people to not  take everything he says as his being knowledgeable. Yes I know, please don't tell me, he won a Nobel. Yeah he won one for an economic "theory". He didn't win one for understanding banking or practicality.

    Parent

    You're exactly right (5.00 / 1) (#17)
    by reslez on Mon Apr 20, 2009 at 04:02:43 PM EST
    but not about Krugman, who of course is more familiar with banking than you suggest. The point of all this is the banks will no longer have to pay dividends on all that preferred stock. Taxpayer equity (in any sense of the word) is not part of the equation. When they started making all these deals they sold everyone on the fair terms the taxpayer got, which was a stretch of the imagination even back then. Now they're going back and sweetening things for the banks.

    We will continue to see more restructuring after the fact in the banks' favor. It's so predictable you could set your watch by it. Stiglitz said the administration has no appetite to go back to Congress. Well, that's why they're doing it this way. If you think about it, it really is the AUMF all over again. The TARP bill was sold one way but the implementation changes day to day.

    Parent

    Krugman didn't (3.50 / 2) (#18)
    by Catch 22 on Mon Apr 20, 2009 at 04:23:04 PM EST
    write a word about the points I brought up. Not today, not ever. How could his miss those?

    I don't think he is as sharp on this subject as some people want to make him out to be. And today's omissions and the omissions of past writings on the subject serve to support me.

    FYI it is congress who has no appetite for authorizing more money which is why Obama will not go back to them. Congress also offers no additional plan to deal with the very real future contingencies such as credit card defaults. So what is Obama to do? Nothing? Or improvise as he is?

    Both Kurgman and Stiglitz, both of which I have read, have the same agenda and therefore even when they know the whole story the only side of the story you hear is the one they want you to hear. If you are going to take either of their words as the whole truth then you are only fooling yourself.

    Parent

    why do you bring up the (5.00 / 1) (#20)
    by of1000Kings on Mon Apr 20, 2009 at 05:55:52 PM EST
    credit card defaults?

    the banks are fine, right?

    they won't need any more money, because they are solvent, and fine...

    Parent

    A lot depends (5.00 / 1) (#21)
    by Catch 22 on Mon Apr 20, 2009 at 06:07:33 PM EST
    on the sale of their assets. Also a lot depends on the recovery of the recession which began and was gaining speed even before the banking crisis hit. When people papped out all the equity in their homes so they could have their luxuries that is part of what the recession on, the spending spree ended. There were other reasons also like gas prices and lack of domestic spending because of Iraq, etc.

    Add the banking crisis to the recession and the banks face some real challenges. One could truthfully say that without the banking crisis the recession would not be as bad. You could also truthfully say that without the recession the banking crisis would not be as bad. so what we are dealing with is a two headed monster. There is no easy solution. Blaming the banks as people want to do ignores the recession itself and does nothing to fix the problem.

    Parent

    You're still assuming... (none / 0) (#12)
    by Dadler on Mon Apr 20, 2009 at 01:11:59 PM EST
    ...that they are really solvent enough to start with, aren't you?  My guess is all their stock is worthless from now until they pull their spoiled, paradigm-encrusted heads out of their pampered aces.

    But that's just me.

    Money, IMHO, is a simple thing made complex by a few (and not for the benefit of the many), for no other reason than garden variety greed.  The smart and rich take advantage of the uneducated and poor every day in every country on earth.  THAT is what makes the world go round and round and boom.  And it has for a long time.  Good thing we've gone back to pre-Babylon with our scrapping of usury law, might as well keep going back, I guess, maybe we'll get so far back we don't even need money anymore.

    Parent

    I assume (3.75 / 4) (#14)
    by Catch 22 on Mon Apr 20, 2009 at 01:49:03 PM EST
    that millions of shares of bank stock is traded daily, because it is. I assume that that the market cap of banks is still worth billions, because it is.

    I assume that most are solvent until someone can show me they are not. So far everyone including you who assumes they are not solvent has yet to write a single credible sentence showing they are not. Which pains me. It pains me to see people actually be so convinced of something and that they cannot write a single credible sentence proving what they are convinced of is true. What's up with that?

    Parent

    Your assumptions are irrelevant (none / 0) (#16)
    by reslez on Mon Apr 20, 2009 at 03:43:52 PM EST
    and unsupported by facts.

    Fact is the banks have received unprecedented capital infusions.

    Fact is this would not be necessary were they sufficiently capitalized.

    Fact is they will be receiving additional aid.

    Yes, I'm convinced insolvency is a major problem. Trillions of dollars back me up. And I'm amazed you sit there thinking it's not when you're the one with no evidence. Look. Putting aside the fact they've suctioned up billions in taxpayer funds, if the banks were really OK they'd fully disclose. They haven't. They can't. Game over.

    Parent

    I don't agree with you because (5.00 / 1) (#19)
    by Catch 22 on Mon Apr 20, 2009 at 04:40:39 PM EST
    millions of shares of bank stock is traded daily. And the market cap of banks is still worth billions. Those are fact.

    The bank are disclosing to the government via the stress tests.

    They haven't just suctioned up billions in taxpayer funds freely. Those dollars are in the form of loans of equity.

    And what is the alternative to Obama's plan that wouldn't cost the same or more? There is none.

    So you can scream all the normal BS that is put forth on this blog daily if you want to. That doesn't change that something had to be done and that Obama's way is most likely the least expensive way of getting it fixed as the other alternative of nationalization would be more costly, it would take much longer to reconvert the banks to the private sector, and you the taxpayer would then own all the assets of questionable value. Game over.

    Parent

    Bank shares are irrelevant. (none / 0) (#23)
    by reslez on Mon Apr 20, 2009 at 10:38:35 PM EST
    Those shares would be trading at pennies on the dollar if not for government support.

    Investors expect the banks to be bailed out. If not they would be at zero.

    The stress tests do not constitute disclosure in any way, shape or form. The worst case scenario has already been overrun by facts on the ground. These companies are enormously complex: you can't just alter one or two parameters on the fly and get a meaningful result. Garbage in, garbage out.

    You say the banks did not accept taxpayer money freely because the taxpayer got preferred equity in exchange. Of course all that dividend-paying preferred stock has now been converted to common equity. Meanwhile Warren tells us the taxpayer only got 66 cents in stock for each dollar of TARP funds.

    That's a $78 billion giveaway.

    You have no evidence the Obama/Geithner "plan" is any cheaper than the alternatives. While I hope for the country's sake you are correct and the $12.8 trillion committed to bailouts thus far was indeed the "cheapest" solution, events will prove. Obama's approach is not going to solve the fundamental problems facing the banks. We will eventually end up with nationalizations anyway.

    I know we disagree on this. It's convenient our opinions differ on one point, at least, that will be proven one way or the other.

    Parent

    Of course in insolvency it's beter to be a (none / 0) (#4)
    by steviez314 on Mon Apr 20, 2009 at 11:58:23 AM EST
    preferred holder rather that a common holder.  My point there is that there is no PRACTICAL difference.  If the losses are as big as Krugman and you think, they'll eat  through the preferred stock level right to the bondholder level.  Since all we talk about is giving the bondholders a haircut, we are implying zero value to preferred.  So to me, by that liquidation argument, prefeered=common.

    So, if on the downside preferred=common, and preferred=common for Tier 1 capital purposes, and actually common > preferred for Tangible Equity Capital calulations, why not have the government own common instead of preferred, with the upside and voting rights.

    I am arguing that this move reflects what should have been done with the TARP money in the first place last year (assuming your only  choice was how to inject capital.

    Parent

    So many shells... (none / 0) (#5)
    by Dadler on Mon Apr 20, 2009 at 12:49:11 PM EST
    ...so much game, so little that is necessary.  Money is worthless.  It is a shared illusion, and the share is getting smaller and less patient each day.  Our entire economy rests on two things at this point in time: mindless consumerism and constantly reinvented financial schemes to sucker people with (most, it now seems, legal thanks to our apathetic "decision" over time to simply ignore regulation or, worse, to let it be tarred as somehow more evil than business anarchy).  Neither, IMHO, is being addressed by this adminstration.  

    When Obama aims an ounce of real shame at the power brokers he has worked so long to ingratiate himself with, well, then I might believe some "change" could possibly be in the air.

    Parent

    As well as, I should add... (none / 0) (#6)
    by Dadler on Mon Apr 20, 2009 at 12:50:20 PM EST
    ...our decision to allow usury laws to be scrapped, taking us back to some REAL old school loansharking, but now made "legit".

    Parent
    Krugman is out to lunch in his recent (2.00 / 1) (#22)
    by Green26 on Mon Apr 20, 2009 at 06:13:25 PM EST
    article.

    This is not a new idea. Citi negotiated its preferred to common conversion earlier this year, althouth has waited to close the deal. This was based on what the US did previously with AIG, I believe.

    One benefit is an increase in tangible common equity ratio, which is more conservative than Tier I capital and is something the regulators are apparently starting to look at more.

    Another benefit is that the US is forcing other private holders of the preferred to convent to equity.

    Potential private investors and buyers have been wanting the US to convert the preferred to common.

    Using Citi as an example, it's annual preferred dividend payments will be reduced by about $5.5 billion. Obviously, that will help cashflow.

    As pointed out, the US will increase its ownership interest in Citi, which will increase its upside when it sells Citi stock (assuming Citi get back on its feet).

    Preferred stock is not always counted toward Tier I capital, as Krugman said, by the way. The preferred was put in above the bank level of Citi, in any event.

    Lets just make sure... (none / 0) (#3)
    by kdog on Mon Apr 20, 2009 at 11:53:53 AM EST
    the check doesn't bounce before we give back the stock.

    What up, Dog? (none / 0) (#9)
    by Dadler on Mon Apr 20, 2009 at 12:58:42 PM EST
    Those checks won't bounce, the peeps who wrote them won't have enough to pay for that much air.  

    OT, I just saw that Annie Duke, of all people, is on this season's Celebrity Apprentice and making quite the noise.  Poker Player, Female, Celebrity -- which of these doesn't fit?  We've come a long way, baby.

    Fold.

    Parent

    Chilling my brother... (none / 0) (#13)
    by kdog on Mon Apr 20, 2009 at 01:39:22 PM EST
    chilling...Annie must be running as bad at the tables as the banks are at the Wall St. casino to be reduced to reality tv...or just loves that camera.  

    You couldn't pay me enough to spend time with Donnie Trump...I'd rather go bust on the felt.

    Parent

    I heard on the Obama network (none / 0) (#8)
    by Capt Howdy on Mon Apr 20, 2009 at 12:57:55 PM EST
    that Krugman is starting to be a big boogeyman for the Obama administration.


    As in... (5.00 / 1) (#10)
    by Dadler on Mon Apr 20, 2009 at 01:00:09 PM EST
    ...they're trying to make him out to be the boogeyman, or that he's really starting to have the boogeyman effect on them?  I vote both.

    Parent
    both, probably (none / 0) (#11)
    by Capt Howdy on Mon Apr 20, 2009 at 01:01:31 PM EST
    What?????? (none / 0) (#24)
    by Militarytracy on Tue Apr 21, 2009 at 06:57:16 AM EST
    This isn't poker faced Obama playing the backdoor nationalization card?  Sorry, when I was on the road that was a diary up at Orange State and I couldn't resist.