Fight disinformation: Sign up for the free Mother Jones Daily newsletter and follow the news that matters.


On my initial scan through the news the morning I read that the Treasury is planning to convert some of its preferred shares (purchased under the original TARP bailout for distressed banks) into common stock.  It’s supposed to be a way for the feds to stretch their bailout dollars because, according the New York Times, “The change to common stock would not require the government to contribute any additional cash, but it could increase the capital of big banks by more than $100 billion.”

That didn’t seem to make any sense, but hey, what do I know about high finance?  And then I got annoyed by California’s latest ballot initiative, and then intrigued by the Jane Harman wiretap, and forgot all about it.

But I guess I’m not crazy after all.  (Not totally crazy, anyway.)  James Kwak, who knows a thing or two about this, says the whole thing sounds ridiculous.  Here’s Kwak highly condensed:

If you don’t give a bank any more money, it doesn’t have any more money. By converting preferred into common, you haven’t changed the chances of the bank going bankrupt….If you accept the idea that converting preferred into common creates new capital, then you are implying that those preferred shares weren’t capital in the first place….Tangible common equity and Tier 1 capital are just two ways of measuring the health of a bank. Taking money that wasn’t TCE and calling it TCE doesn’t serve any economic purpose.

Right.  Back when the original TARP bailout money was handed out, the preferred shares were very deliberately and very conspicuously called Tier 1 capital.  That’s the bestest capital there is, and converting it into common stock doesn’t make it into super-duper Tier 1.  It does get the banks off the hook for paying dividends on the stock, but since most of these banks are (or claim to be) extremely cash flow positive, that shouldn’t be their biggest worry at the moment.

So….I dunno.  This is weird.  Might there be text hidden in the conversion contracts that releases banks from those horrible restraints on executive pay that they hate so much?  Or is there more to this than meets the eye?  Stay tuned.

We've never been very good at being conservative.

And usually, that serves us well in doing the ambitious, hard-hitting journalism that you turn to Mother Jones for. But it also means we can't afford to come up short when it comes to scratching together the funds it takes to keep our team firing on all cylinders, and the truth is, we finished our budgeting cycle on June 30 about $100,000 short of our online goal.

This is no time to come up short. It's time to fight like hell, as our namesake would tell us to do, for a democracy where minority rule cannot impose an extreme agenda, where facts matter, and where accountability has a chance at the polls and in the press. If you value our reporting and you can right now, please help us dig out of the $100,000 hole we're starting our new budgeting cycle in with an always-needed and always-appreciated donation today.

payment methods

We've never been very good at being conservative.

And usually, that serves us well in doing the ambitious, hard-hitting journalism that you turn to Mother Jones for. But it also means we can't afford to come up short when it comes to scratching together the funds it takes to keep our team firing on all cylinders, and the truth is, we finished our budgeting cycle on June 30 about $100,000 short of our online goal.

This is no time to come up short. It's time to fight like hell, as our namesake would tell us to do, for a democracy where minority rule cannot impose an extreme agenda, where facts matter, and where accountability has a chance at the polls and in the press. If you value our reporting and you can right now, please help us dig out of the $100,000 hole we're starting our new budgeting cycle in with an always-needed and always-appreciated donation today.

payment methods

We Recommend

Latest

Sign up for our free newsletter

Subscribe to the Mother Jones Daily to have our top stories delivered directly to your inbox.

Get our award-winning magazine

Save big on a full year of investigations, ideas, and insights.

Subscribe

Support our journalism

Help Mother Jones' reporters dig deep with a tax-deductible donation.

Donate