I Can't Stand It

It was bad enough that noted "investor" William Ackman spread panic throughout the financial markets with his plan to restructure the GSEs in which investors of all classes get screwed. This is, unless one is short like Ackman. Today, a news story on Dow Jones News Wire tells several falsehoods about preferreds and the GSEs.

The article stated that most bank preferreds are non-cumulative and could very well have their dividends cut should the banks need capital. First, most preferreds issued sine 1993 are various debt / equity hybrid structures which are cumulative and pay interest. Secondly, because preferreds are used as income vehicles, are not voting and have either fixed coupons or, in the case of floaters, a fixed spread over a benchmark, they trade and are treated as subordinate debt in the capital markets. Secondly, if an issuer suspends its preferred dividends, the capital markets, especially the preferred market will shun that issuer prohibiting it from tapping the preferred market to raise capital.

The article also states that the GSEs could very well suspend their preferred dividends and could be forced to do so by Ofheo if their capital was sufficiently depleted. Although this is true, in theory, in practice it isn't that easy. First, Ofheo answers to Congress. It is more likely that Congress tells Ofheo to have the GSEs get money from the Treasury or Fed (note: Capital rations are nowhere near critical levels, are not expected to reach critical levels and the GSEs can utilize the fed window and soon, the Treasury's rescue plan will be up and running in necessary). Eliminating their preferred dividends will shut the GSEs out from the non-agency bond capital markets needed to replenish balance sheets and would cripple regional banks who hold large quantities of GSE preferreds on their balance sheets.


This article is going to needlessly result in investor angst. Many investors will needlessly lose money by reacting to this story. What a tremendous disservice to the public. I can't stand it!