Goldstein Article BusinessWeek: Nationalize Citi and Eliminate BAC's Common and Preferred dividends?

A writer for BusninessWeek, Matthew Goldstein,  suggests that he would have been in favor of nationalizing Citigroup, and he argues that Bank of America  should be required to eliminate both its common and preferred dividends.   BusinessWeek   Citigroup has been quasi -nationalized except in name.  The treasury secretary has more power over the affairs of the bank than the Board and CEO. Possibly the government needed to secure a larger number of stock warrants so that the taxpayers could participate on the upside in the event Citigroup survives.  Legally, I am not sure how you would do a nationalization except with a FDIC seizure upon insolvency.  Maybe that could have been done before the latest government bailout, but I sort of doubt it. 

As to his suggestions about BAC,  the government could force Bank of America to eliminate its common and regular preferred stock dividends and to postpone paying its cumulative Trust Preferred dividends in exchange for government assistance.   I would expect that a debate is occurring now between the government and Ken Lewis about the future of both the preferred and common stock dividends.  I would be surprised if the preferred dividends would be impacted but you never know these days. It would be reasonable to expect the common to be substantially reduced, but anyone paying attention to this unfolding crisis, and I assume that includes Mr. Goldstein, knows that eliminating the preferred dividend can have catastrophic repercussions, hurting the solvency of other financial institutions such as life insurance companies and otherwise contribute to a deepening financial meltdown.  It would also make it more difficult for all banks to raise new capital by selling preferred shares.  Perhaps, Mr. Goldstein needs to examine what happened when the government eliminated the preferred stock dividends of Fannie and Freddie.  It put not only other financial institutions in a tailspin but made in more difficult for any financial institution to raise capital. It substantially weakened the value of all preferred stock and caused the capitalization of unrelated companies to fall to dangerous levels.  I also doubt that Mr. Goldstein knows the difference between regular preferred stock and Trust Preferred, thinking, as suggested in his article, that they are both equity.  They are not both equity securities as he should already know but apparently does not have a clue.   Possibly Goldstein needs to learn more about the subjects that he writes about, prior to venturing an opinion.   For example, BAC.PRC, which is one of the securities that Goldstein complains about going ex dividend soon, is not an equity preferred stock but a Trust Preferred identified in the prospectus as debt.  BAC Capital Trust XII Final Prospectus Supplement Final Prospectus Supplement - BAC Capital Trust XI Unlike Mr. Goldstein, I do not believe that it would be a good idea for a major bank to postpone paying interest on its debt.  And as history has recently shown  it would be  almost as potentially problematic to postpone dividends on a non-cumulative preferred issue such as BACPRE.   But, ignorance can be bliss.

I do not own any bank Trust Preferred securities, other than the TC PYV which contains one from J P Morgan, and one of the many reasons is people like Mr. Goldstein may just want to relive recent events and force the deferral of Trust Preferred dividends.  I am aware of the capital destroyers making their pitches and this concerns me. I do own 50 shares of BACPRE, a non-cumulative regular preferred, which is at a higher risk, not of deferral, but elimination.   

Reference to dividends on what appears to be regular preferred stock:Bank of America | Newsroom - Press Releases  I have not checked any except BACPRE to confirm a classification as regular preferred but BAC's description of them is consistent with regular preferred issues (prospectus has to be checked to confirm).  This is a list of outstanding Trust Preferred issues many of which were acquired when BAC acquired other banks, assuming their debt obligations including BankBoston, Fleet, MBNA etc.-Bank of America: Press Releases: 2009-01-05