Tuesday, February 24, 2009

Converting preferred shares received in return of TARP money to common shares

Conversion of preferred to common seems to be on the table for some banks. The argument for this proposition is that Tangible Common Equity will be boosted by doing so. There are merits and risk for doing so.


1. Increase Investor Confidence - If government owns common stock in a company, it would welcome the private investors to invest as well.
2. Decrease Interest Payment - When a company converts preferred to common, company does not have to pay the preferred dividend.


1. Diluted shareholder value - This will dilute share holder value.
2. Tax payer stake will be risky as common equity will head to 0 on the event of a bankruptcy
2. Public influence of private business - Private business will be meddled by government.

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