Friday, February 6, 2009

U.S. Explores Converting Stakes in Banks, Reports Say (If the U.S. converts , stocks will take hit)

A twofer. First, from the New York Times Dealbook blog:

U.S. officials are examining ways to convert government stakes in banks into ordinary shares as banks accumulate losses, The Financial Times reported, citing people close to the discussions.

Policymakers are considering an idea that the government change its existing holdings in the banks, which have taken the form of preferred shares — non-voting stock that carries a fixed dividend — into convertible preferred shares that could be converted into common stock, the paper said.

Under this proposal, the shares would automatically convert into common equity if there was a decline in the bank’s health, as measured by its tangible equity ratio, for example, the newspaper said.

The government may also make future capital injections in the form of such convertible preferred shares, according to the report....MORE

And from BloggingStocks:

The U.S. government is thinking about a program that could eventually get it to the point where it owns large numbers of common share in major banks. For investors, that news should be troubling since, as the common share pool increases, the value of each share will probably drop. That is, at least until the banks get healthy....

...That means that there is an elephant in the room and no one wants to talk about it. If the federal government puts $20 billion more dollars into Citigroup (NYSE: C) it could own half the bank which has a current market cap of $18 billion. In theory, the dilution would drive Citi shares as low as $1.50 from their current prices of $3.50.

The common share purchase program points to the government nationalizing banks without officially taking them over. It becomes the largest shareholder in some firms. That means the controlling shareholder.

Bank stocks may seem to be cheap, but they could still have a long way to drop. The government could make sure of that.