On Tue, 24 Mar 2009, SA wrote:
>> By no means. What happened at Citi was a forced debt equity swap for
>> large holders of preferred shares. They took a huge hit. And we've
>> given absolutely no guarantee we won't do that again. Fear over
>> unsubordinated debt is rampant. That's why -- unlike in the Swedish
>> case -- nobody is investing in banks or lending them money.
>
> I don't understand this. Nobody was forced to do anything. Geithner
> called up a bunch of preferred shareholders and asked them to convert
> early. They took a huge hit because they bought convertible bonds in a
> bank that's now insolvent. Or am I missing something?
Yeah, you're missing the part where you just said they had to deal with a bank that's insolvent -- which is not a bank whose liabilities have been convincingly guaranteed. A bank like that is completely solvent, and can raise private capital, like the Swedish banks did.
Preferred stock pays dividends based on value of the money you put in (like a loan) not the present worth of the stock. And its cumulative -- if the bank pays no dividends, they have to pay you all your back dividends with interest. So if you know the government won't let the bank fail, that means you're going to get all your money. There is no way anyone would ever have made this conversion without a gun to their heads. We told them do this, or we might wipe you out.
Which is fine with me, mind you. It's a kind of solution; it could even be the template for a further solution. We could do this further up the capital structure. Forced debt-equity conversions are an emminently fair way to make investors pay for fixing the system.
But it couldn't be more different from a Swedish world in which private, non-nationalized banks -- the majority of banks -- could freely raise capital on the private market because all their liabilities were guaranteed.
Michael