Why has the U.S. government bought preferred shares in the banks and not straight equity ?
Buying preferred shares has a number of advantages from Washington’s point of view. First, it injects money into the banks without diluting common equity. It also establishes a transparent and reasonable funding cost for the banks – a 5 per cent dividend in the first five years – and gives the banks an incentive to buy back the shares when the rate goes to 9 per cent after that. The government is also getting some warrants in return for its investment, so taxpayers will see benefits if the banks turn things around and their stock prices increase. Issuing preferred shares also increases the banks’ tier 1 capital levels – which wouldn’t happen if they merely took loans from the government. As a preferred shareholder, Washington will be higher on the pecking order than common shareholders – it will get its dividends first, and will be higher on the list of creditors. Has the Canadian government ever owned shares in our commercial banks? The Canadian government has avoided any direct inves
