Comments on: What Does “Private” Mean?

By: Linus Wilson

Linus Wilson — Fri, 30 Jan 2009 18:04:58 +0000

Any strings attached to government common stock purchases such as restrictions on paying dividends, buying back common shares, and engaging in cash acquisitions could expire after a couple years.

By: Linus Wilson

Linus Wilson — Fri, 30 Jan 2009 17:59:42 +0000

Even without voting rights, the research of my coauthor and I (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1321666) shows that common stock creates better lending incentives than preferred stock for banks.

Nevertheless, it would be sensible for the government to require banks to not pay dividends, buy preferred stock, or engage in cash acquisitions after accepting government capital. Other decisions about the management of the bank can be left to private shareholders and its managers.

By: Economics of Contempt

Economics of Contempt — Fri, 30 Jan 2009 15:03:25 +0000

You’re right that the government can’t convert its preferred shares into common stock with voting rights. Moreover, the terms of the warrants prohibit the government from exercising voting power on any common stock issued by the banks upon exercise of the warrants.

The preferreds have standard contingent voting clauses (i.e., if the bank misses 6 or so dividend payments, the government gets the right to elect some number of directors). But since it’s inconceivable that those rights would ever be triggered, that’s the equivalent of no voting rights whatsoever. I’ve heard from lawyers involved in the negotiations that the government never seriously considered taking voting rights. That’s for the best, as far as I’m concerned.

Treasury has posted the contracts online now, if you’re interested.

By: George

George — Fri, 30 Jan 2009 05:47:01 +0000

You left out the largest non-private aspect of all – the Federal Reserve (& having it’s notes be legal tender).

By: Private Bad Credit Lenders | Get Money Today

Private Bad Credit Lenders | Get Money Today — Fri, 30 Jan 2009 01:01:54 +0000

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By: James Kwak

James Kwak — Thu, 29 Jan 2009 18:38:38 +0000

Good point. Student loans would be harder to refinance than home loans – if I’ve already spent two years’ worth of tuition, who is going to give me a student loan to pay back my first loan? – but I imagine someone would find a way.

By: Nemo

Nemo — Thu, 29 Jan 2009 17:07:33 +0000

“Still, I’m confused about why you would open the program to existing as well as new loans.”

In general, it is extremely difficult to limit any support just to “new” loans, since in general people can refinance from old loans into new loans. (Or construct more complicated financial arrangements to achieve the same effect. If arbitrage is possible, someone will find a way to do it.)