From September 2010 to the present, the U.S. Government made more investments in the preferred stock than the size of the publically traded market. According to Standard & Poor’s in 2005, the market cap of publically traded preferred stock in the U.S. was $193 billion. In new research entitled “TARP’s Dividend Skippers”, my coauthor Dobrina Georgieva and I recount over $400 billion of preferred stock investments made by the U.S. Treasury in Fannie Mae (FNMA.OB), Freddie Mac (FMCC.OB), AIG (AIG), Ally Financial (GMA), and 707 banks. Those preferred stock investments since Labor Day 2008 have totaled $83.6 billion, $61.3 billion, $47.5 billion, $13.9 billion, and $204.9 billion, respectively. The U.S. government is most of the market for preferred stock investments. When the Government is bigger than the market, one has to wonder if this socialist expansion has gone too far.
The U.S. Treasury also owns a majority of the common stock of Fannie Mae, Freddie Mac, AIG, and Ally Financial. Yet, most of the commercial banks have escaped government control through common stock ownership. Yet, this last May 2010 one small California lender, Saigon National, was one of TARP’s 101 deadbeats to become the first bank to be obligated to accept two U.S. Treasury representatives on their board. This month eight more banks—Anchor Bank (ABCW), Blue Valley Bancorp (BVBC), Commonwealth Business Bank, Lone Star Bank, OneUnited Bank, Pacific Capital Bancorp (PCBC), Seacoast Bank (SBCF), and United American Bank—are likely to become partially government controlled as they miss one more preferred stock dividend. Six missed dividends allow the U.S. Treasury to appoint to board members to the bank. Pacific Capital (PCBC) has found a private equity backer and has convinced the U.S. Treasury to swap its preferred shares for common for 37 cents on the dollar.
My joint research shows that the publicly traded dividends skippers are likely to be small banks as measured by assets with low supplementary capital ratios and a high percentage of non-performing assets. This bodes ill for the currently stalled so called Small Business Lending Fund, a.k.a. “Son of TARP”, legislation, which would inject $30 billion into community banks with under $10 billion in assets. My joint research shows that small banks are more likely to be deadbeats that cannot pay back taxpayers. In addition, my paper “Escaping TARP” with Wendy Yan Wu shows that the smaller banks are much less likely to pay back the taxpayer preferred stock early.
The latest $30 billion expansion of the U.S. Treasury into the preferred stock market will focus on buying preferred stock in small banks that will likely struggle to pay those funds back. Unfortunately, the data says those small banks, which accept government funds, are the worst bets. Yet, members of Congress are eager to fill their campaign coffers with the campaign contributions of those banks that cannot raise private capital. So don’t be surprised if taxpayers own preferred stock issued by thousands of banks in the coming year.
Disclosure: I do not have long or short positions in individual securities mentioned. I only have long positions in broad-based index funds.