Report: Big Banks Need Capital

From Bloomberg, "Fed Is Said to Seek Capital for at Least Six Banks." The report cites sources who've been "briefed on the matter."

This comes as the Treasury's stress test results are approaching their due date next week. Bloomberg reports that the extra capital could come converting the preferred stock the U.S. already owns in banks into common shares. It's a strategy that economist Simon Johnson told us amounts to an accounting trick, since it doesn't actually create more money.

Converting preferred shares to common ones does shift the government's position, though, from that of a lender to that of an owner, and in some cases a majority owner. Common shares come with voting rights, for one thing. Also, the owners of common shares wait much further down the line of folks to be paid if the company (or bank) goes kaput.

With Congress signaling that it's unlikely to fork over more millions for bank bailouts, troubled banks may have no choice but to seek new private investors and/or convert the government's shares. Once the government's in the position of common stockholder, one question will be whether it could afford to let a bank fail — since the taxpayer would be at the same risk of losing money as any common stockholder in any bank.

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