Until this point government stuck to preferred stocks instead of common stocks traded in the market. Preferred stocks are not exactly ownership, as there are no voting rights, and this arrangement between government and the banks is deliberate.
Preferreds are closer to debt than to equity. With yesterday’s announcement, that might change with the government trying to convert its preferred holdings into common stocks. When it holds a majority of common stocks, it would then be defacto nationalization.
https://www.federalreserve.gov/newsevents/press/bcreg/20090223a.htm
Any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory. Previous capital injections under the Troubled Asset Relief Program will also be eligible to be exchanged for the mandatory convertible preferred shares.
How much can the government take?
The Treasury’s current preferred investments in Citi (C) for example is 5x times its market cap and theoretically government could take Citi 5 times over. In Bank of America (BAC), it is 2X, in AIG and GM it is probably 100X J, 33% in JP Morgan (JPM), etc. So, if the government wants to nationalize it can do so with its current holdings without spending anything extra. As I have mentioned earlier, we are very close to seeing some blockbuster nationalization (most likely Citi).
Chart source: https://en.wikipedia.org/wiki/Troubled_Assets_Relief_Program
How to proceed with the Citi nationalization?
The scale of announcements the last few days means that it is a matter of just a few hours / days before the receivership, and what will be most interesting is how government is going to run it. Unlike AIG, Freddie Mac (FRE) and Fannie Mae (FNM), Citi is far more complex and far more global. Insurance was pretty highly regulated and hence
