Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

The Amazing, Shape-Shifting Convertible Preferred

By

If implemented, downside risk will increase exponentially.

PrintPRINT
I have been asked whether there was anything in Chairman Bernanke's speech yesterday that changed my outlook on the prospects of nationalization for some of our largest financial institutions. In a word: "No."

From my perspective, all Chairman Bernanke did was to confirm Monday's Joint Statement from the bank regulators, which said the government was hoping to implement "temporary capital buffers" "to provide a cushion against larger-than-expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers."

And that the government's security of choice would be "mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory" (my emphasis).

Knowing that there are teams of professionals on Wall Street dedicated to giving new hybrid securities cute names, let me suggest that the government henceforth refer to these incremental investments as "Maybetorily" Convertible Preferreds - as in, maybe they're straight preferred stock, maybe they're common stock, maybe they're gone altogether - it all depends on how bad the economy gets from here.

How these Maybetorily Convertible securities can in any way provide the impetus for further private-sector investment into the common stock of our banking system confounds me. As I see it, if implemented, existing common shareholders have at best the same upside they previously had, with exponentially larger downside.

At the same time, though, I do appreciate that these incremental investments provide some greater systemic stability - although with everything the Federal Reserve has done to date, it's hard to see that was ever in doubt.

So yet again, rather than throwing the frogs (banks) into nationalizing boiling water immediately, the government is going to place them in a tepid bath and watch, suggesting, at least this week, that while they may have to turn up the temperature a little bit ("temporarily"), no one will ultimately get burned.

Maybe, maybe not.
Position in SPY
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
PrintPRINT
 
Featured Videos

WHAT'S POPULAR IN THE VILLE