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Please Stop the Accounting Gimmicks

We get word from the Treasury Department that they are easing the terms of the original investments under TARP.  Treasury Department, under Henry Paulson, invested almost $300 billion in 350 financial institutions.  In exchange for the money, taxpayers, via the Treasury Department, received preferred stock and warrants in the financial institutions.  Now, Treasury Department, under Timothy Geithner, wants to change those original terms in order to give financial institutions more ‘flexibility’ with raising new capital from private investors.  Treasury is offering to exchange the preferred stock we currently own for preferred stock with a mandatory conversion to common stock at the discretion of the financial institution.

Treasury Department, who was probably influenced by Citigroup and the other financial conglomerates, expects that the easing of the original terms of investment will:

1. Encourage private investors to invest along side the U.S. government; and
2. Provide a huge “accounting” benefit: it improves bank’s tangible common equity ratio.

Are they serious or are they just buying time to get the “stress tests” done and then do what should have done weeks ago - financial reorganize insolvent banks?

If the preferred stock is converted to common stock then the U.S. Government would be the majority owner of many of the financial conglomerates. In the case of Bank of America, if all the preferred stock was converted to common stock the U.S. Government would own 66%.  In the case of Citigroup, a conversion to common stock would mean 80% U.S. Government common stock ownership.  A conversion would dilute current stockholders ownership because they will own a significantly smaller percentage of the financial institution.  How is this suppose to encourage private investors?  Sure, the conversion is at the discretion of the financial institutions but regulators are probably calling the shots at many of these financial institutions and this brings financial institutions even closer to “nationalization”.  “Nationalization” would wipe out equity investors.  So again, how is this suppose to encourage private investors?

The “accounting” benefit derived from changing preferred stock to a preferred stock with a mandatory conversion is just a gimmick.  This offer by Treasury Department artificially pads the tangible common equity ratios of many financial conglomerates.  Tangible Common Equity Ratio is a performance measurement to determine if a bank has sufficient capital to absorb future losses and how leveraged they are.  It compares tangible common equity to tangible assets (particularly loan portfolio).  Tangible Common Equity Ratio strips out intangible assets (stuff that is not really real) that banks will often use to pad their balance sheets particularly after acquisitions and preferred stock.  So, in order to improve the Tangible Common Equity Ratio a company would convert our preferred stock to common stock which would increase Tangible Common Equity.  This new Tangible Common Equity number, which includes our common stock ownership, would dramatically improve the Tangible Common Equity Ratio.

Nothing really changes with this gimmick.  The financial conglomerates still own the toxic assets that are causing the problem.  It just improves this ratio that is commonly used by securities analysts and now possibly bank regulators. 

Please stop wasting time and postponing the inevitable which is the financial reorganization of the financial conglomerates.