Rhunzzz

Recapitalization and the Implicit Treasury Guarantee

The way I see it, preferred stock has certain advantages over debt and common stock, from the point of view of stabilizing financial institutions.

1. Flexibility. A bank who misses an interest payment is in default, but it can miss a preferred dividend so long as it makes it up later (if the pref. is cumulative). Also, the bank does not necessarily have to pay back the principal for the preferred, it has the option of calling it.

2. No voting rights. The government does not want to be in a position where it must actually be running the banks, nor does it want to be seen as having such rights, nor does it want to dilute the common shareholders.

Am I right on this?