If the government's preferred is pari passu with equity preferred, the additional protection is not a legal protection, but the bank's fear of the big government stick.
I did look around for a few minutes today to see if I could find a filing of an executed agreement with the government at the SEC but I have come up empty so far. If anybody finds one, please let me know by leaving a comment on my most recent post even if it is on another subject.January 21, 2009 7:17 PM"
This discussion has cropped up after I made a comment, which may prove to be incorrect, that Citigroup's preferred dividends may be toast if it eliminated the common stock dividend. The removal of a common share dividend is one legal impediment to eliminating or postponing a preferred share dividend. Once that impediment is removed, Citigroup could quit paying all preferred shareholders. The ones holding cumulative preferred would still have their dividends accumulate with an attached tax obligation whereas the non- cumulative preferred stock dividends would just be eliminated. While that is true, the point made by someone was that the fear of the government might provide the private holders of both equity and trust preferred issues some shelter. The issue then is whether the government's preferred is in complete parity with the preferred previously purchased by private investors, or is it in some special class? The suggestion in the Term Sheets on these deals that I have read so far is that the government is receiving equity preferred stock which would be junior to Trust Preferred which is junior subordinated debt ranking ahead in priority only to equity issues including equity preferred stock but junior to senior and secured debt. So I just need to read an actual agreement to be sure that there are no ifs, ands or buts. If there is complete parity with previously issued equity preferred, then the additional protection is that the bank will not want to stiff the federal government unless it absolutely has to do it. If the bank does not stiff the government, it can not stiff any senior security holder or any holder of a security in parity with its preferred. I hope that is clear. I would also emphasize that a seizure by the FDIC would wipe out all preferred holders including the government.
Anyone interested in buying bank preferred stocks now needs to be familiar with the FDIC priority rules.