(2009-04-22) Geithner Convert Preferred Common

Tim Geithner may insist on converting its preferred shares in some of the nation's largest banks into common equity... The occasion for this latest nationalization trial balloon is the looming result of the Treasury's bank strip-tease - a.k.a. "stress tests." Treasury is worried, with cause, that some of the largest banks lack the capital to ride out future credit losses. Yet Secretary Timothy Geithner and the White House have concluded that they can't risk asking Congress for more Bail-Out cash. Voila, they propose a preferred-for-common swap, which can conjure up an extra $100 billion in bank tangible common equity, a core measure of bank capital. Not that this really adds any new capital; it merely shifts the deck chairs on bank balance sheets.

Henry Blodget notes Unfortunately, the plan also has two major flaws: First, it's smoke and mirrors. Second, the taxpayers will be even more exposed to losses than they are now.