Supporters of the common stock approach say it puts the government in the same situation as other shareholders.
In addition, it indirectly increases the company’s book value as well as the chance that some sort of dividend will be maintained.
“The conclusion that investors seemed to have come to is that banks have gotten the money without enough oversight and supervision and have been able to go through it without enhancing their financial condition and people are afraid that the banks will have to be nationalized at some point and essentially wipe out all the shareholder equity,” says money manager Jim Awed, managing director of Zephyr Management. “The only way to change that is to bring in another set of governance.”
“It is critical we prevent dividends from flowing to today’s shareholders until the federal government has been repaid," said Sherman. “If we get the same kind of stock then that may serve as an excuse to keep dividends getting paid on the common stock. I don’t want a piece of the dividend. I want all of it."
“The debate over common versus preferred is silly but it appears to be real in that it’s affecting the markets,” says former FDIC chairman William Isaac, who also supports the recapitalization model.
The government has made it clear these banks aren't going to fail,” explains Isaac, who adds some government concerns are also unfounded because “we are way past the point we need to worry about moral hazard.”
Where's The Money?
On top of the mechanics of the rescue plan, there is also the issue of funding.
Experts say an asset purchase program of would require hundreds of billions, if not trillions of dollars.
“The overwhelming problem in this is size and scale,” says Glauber. “They need enough money to buy the really toxic assets." Glauber, who has been calling for a central government entity to manage the government’s efforts for some time, is among those who estimate there are between $1.5 trillion and $2 trillion of qualifying assets.
Thus far, however, there has been little, if any, public debate about where the money would come from. The remaining $350 in funding from the original TARP is clearly a likely source.
“Lets use TARP round two to stick with the financial system,” Rep Paul Ryan (R.-Wisc.), the ranking Republican member of the House Budget Committee, told CNBC earlier this week.
“Congress is not going to stop anything,” says Sherman. “When we voted for the TARP bill, it was guaranteed the executive branch dominated, regardless of the party, meaning it would be spending the money the way they wanted to.”
House Speaker Nancy Pelosi (D-Calif.) has pretty much supported the bad bank concept publicly. Majority Leader Steny Hoyer (D-Md.) has also made positive comments.
However, many in Congress, including House Financial Services Chairman Barney Frank (D. Mass) have made it clear they would like to see a good chunk of the TARP funding go to homeowner relief, consumer lending and foreclosure prevention.
The Obama administration’s letter to Congress saying it is prepared to commit $50-$100 billion of the economic stimulus plan might satisfy that requirement.
So, if and when the Obama administration taps the TARP for the bad bank concept, the president would be better off if there was a show of support.
Even still, it’s generally agreed that more funding will be needed and that will probably require going to Congress. There’s early talk of a TARP 3. And Congress will have to be on board.
“Congress will play a far bigger role in the third $350 billion," says Sherman. “I would think everyone who was against releasing the second $350 billion would be against the third $350 billion unless it had an awful lot of provisions that haven't seen the light of day yet.”