The important thing to notice about the Treasury’s “equity” injection into major financial institutions is that it is equity in name only. The preferred stock the Treasury is taking is at a prescribed dividend (5% for 5 years, 9% thereafter) and has no voting rights. Economically, it is a subordinated loan without a term.
A few observations come out of this. First, is that it means that Treasury has very little economic upside. No matter how well the banks perform, the best that Treasury can do is get a 5% return. True, the Treasury will get warrants for common stock, which gives it some upside, but that is only for around 13% of the deal; the other 87% of the deal has no upside. Also, Warren Buffet was able to get 10% from Goldman Sachs. Why isn’t Treasury getting the same deal? (And how fast do you think Goldman will use 5% Treasury dollars to buy back Buffett’s 10% stock, if he doesn’t have redemption restrictions in the deal?)
Second, by making an economic loan, but doing it in the form of preferred stock, Treasury has functionally subordinated itself to the bondholders and other debt obligations of the banks. That is a HUGE boon for the bondholders, because it functions a lot like a government guarantee of their positions. It also benefits the common shareholders by making sure that they won’t be taken to the cleaners like WaMu and Lehman shareholders.
Third, as has been noted elsewhere, Treasury didn’t forbid the financial institutions from paying dividends on the common stock, only from raising the dividends. So formerly cash strapped institutions are going to be able to keep paying out dividends…from taxpayer funds.
So why did Treasury do the deal as preferred stock?