To what extent should holders of preferred stock and debt share in the losses of bank rescue plans?
Andrew Ross Sorkin:
Well, this question came in this morning. And it’s a timely, philosophical one, given the results of the stress test that will coming out next week. And it relates to your stakes in Wells, U.S. Bancorp and Goldman Sachs. And the question is the following:
“The government’s proposed restructuring plans for Chrysler and GM require creditors, as well as common shareholders, to bear losses.
“Yet, with the banks, the government’s actions, to date, have not required concessions from holders of preferred stock and debt.”
“The government has merely required the dilution of common stock holders.”
“To what extent should holders of preferred stock and debt share losses in the bank rescue plans or in the resolution of a major bank holding company? And do you expect to be diluted in any of your holdings?”
Yeah, I would say this. That’s very institution specific. With Freddy and Fannie, the preferred was gone. I mean, there was no equity. And the preferred got… in effect, it’s gotten wiped out along with the common stock.
With U.S. Bancorp or Wells, those are companies making lots of money. There’s lots of equity there. So there’s no reason to go up to senior securities and say that they should give up anything when there’s lots of common equity underneath.
It’d be like if I have a mortgage on my house and it’s 70 percent against its current value, saying, just because other people are having trouble in the neighborhood paying their mortgages because they got much higher mortgage or something, your saying my mortgage holder with 70 percent mortgage, that he should give up something and increase my equity even further.
There’s lots of equity there, which there is at Goldman, U.S. Bank, Wells Fargo. There’s lots of equity, lots of earning power.
There’s really no reason for senior debt to give up anything.
You know, you could make an argument at Freddy and Fannie, about the subordinated debt, whether they should’ve suffered as well as the preferred stock and the common. But I don’t see it as applying to earning institutions with lots of future earning power.
I would love to buy all of U.S. Bancorp. You know, or I’d love to buy all of Wells if we could do it. You know, we’re not allowed to do it because it’d make us a bank holding company. But those businesses, there’s no reason for the creditors to suffer.
Now, you get into Chrysler or something of that sort, you know, there is no… I mean, they’re losing money all of time and they do not have a competitive advantage. You know, whether they’ve got a sustainable business model under any circumstances is open to question.
Whether there’s any common equity there is not open to question. You know, there isn’t any common equity. Nobody would pay a dollar, you know, if they had to take on Chrysler and all its debts.
Lots of people would pay billions of dollars to take on U.S. Bancorp or Goldman Sachs, you know, with all their debt. So those are different situations. I…
If you get into a situation where the common equity is wiped out, then you get into a question of… then you get into the proper allocation of things within the capital structure… who gives up so much, and the senior debt may give up something, and so on.
But I don’t see it as applying at all to businesses that are worth a lot of money, where the equity’s worth a lot money.
I have nothing to add.
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