Conversion Plan Yields Blowback on Treasury

By Emily Flitter and Cheyenne Hopkins

 

Another week, another new plan to stabilize the banking industry. But the latest one — converting government-held preferred stakes in banks into common equity — seems to have backfired as critics cited legal and practical obstacles and shares of financial services companies plummeted on the news. In theory, the move is meant to boost banks’ tangible common equity ratios, reduce their dividend obligations and give the government greater control over institutions. Of those arguments, relieving banks of their dividend obligations may be the most powerful, observers said.But the flip side is obvious: The government in effect takes on added risk because it gives up the right to a guaranteed 5% return. “You’ve changed the financial institutions’ recapitalization, which is ‘stronger’ because it doesn’t have to pay out the preferred dividends,” said Karen Shaw Petrou, managing director of Federal Financial Analytics. “But the government position is weaker.” Raising a bank’s tangible common equity ratio is also of dubious value, observers said. Analysts have increasingly turned against regulatory capital requirements as an accurate gauge of banks’ capital position and put more faith in TCE. But Shaw Petrou, though calling TCE a useful measure, dismissed the idea that it more accurate represents an institution’s health. “Washington Mutual had a very high TCE ratio the day it failed,” she said.

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