Obama’s leap to socialism

The Hill ^ | 04/21/09 | Dick Morris

[Mount Athos]

President Obama showed his hand this week when The New York Times wrote that he is considering converting the stock the government owns in our country’s banks from preferred stock, which it now holds, to common stock.

This seemingly insignificant change is momentous. It means that the federal government will control all of the major banks and financial institutions in the nation. It means socialism.

The Times dutifully dressed up the Obama plan as a way to avoid asking Congress for more money for failing banks. But the implications of the proposal are obvious to anyone who cares to look.

When the Troubled Asset Relief Program (TARP) intervention was first outlined by the Bush administration, it did not call for any transfer of stock, of any sort, to the government. The Democrats demanded, as a price for their support, that the taxpayers “get something back” for the money they were lending to the banks. House Republicans, wise to what was going on, rejected the administration’s proposal and sought, instead, to provide insurance to banks, rather than outright cash. Their plan would, of course, not involve any transfer of stock. But Sen. John McCain (R-Ariz.) undercut his own party’s conservatives and went along with the Democratic plan, ensuring its passage.

But to avoid the issue of a potential for government control of the banks, everybody agreed that the stock the feds would take back in return for their money would be preferred stock, not common stock. “Preferred” means that these stockholders get the first crack at dividends, but only common stockholders can actually vote on company management or policy. Now, by changing this fundamental element of the TARP plan, Obama will give Washington a voting majority among the common stockholders of these banks and other financial institutions. The almost 500 companies receiving TARP money will be, in effect, run by Washington.

And whoever controls the banks controls the credit and, therefore, the economy. That’s called socialism.

Obama is dressing up the idea of the switch to common stock by noting that the conversion would provide the banks with capital they could use without a further taxpayer appropriation. While this is true, it flies in the face of the fact that an increasing number of big banks and brokerage houses are clamoring to give back the TARP money. Goldman-Sachs, for example, wants to buy back its freedom, as do many banks. Even AIG is selling off assets to dig its way out from under federal control. The reason, of course, is that company executives do not like the restrictions on executive pay and compensation that come with TARP money. It is for this reason that Chrysler Motors refused TARP funds.

With bank profits up and financial institutions trying to give back their money, there is no need for the conversion of the government stock from preferred to common — except to advance the political socialist agenda of this administration.

Meanwhile, to keep its leverage over the economy intact, the Obama administration is refusing to let banks and other companies give back the TARP money until they pass a financial “stress test.” Nominally, the government justifies this procedure by saying that it does not want companies to become fully private prematurely and then need more help later on. But don’t believe it. They want to keep the TARP money in the banks so they can have a reason and rationale to control them.

The Times story did not influence the dialogue of the day. People were much more concerned with the death of 21 horses at a polo match. Much as we will miss these noble animals, we will miss our economic freedom more.

[sirchtruth]

But Sen. John McCain (R-Ariz.) undercut his own party’s conservatives and went along with the Democratic plan, ensuring its passage.

Conservatives, you've got one option. Get rid of this liberal coddling PRICK!

[Cuttnhorse]

Leap??? What is Morris yammering about...Obummer has been a socialist since he was in his teens.

[Bearshouse]

Get rid of this liberal coddling PRICK!

Citizens of Arizona will have a better option next year. Chris Simcox (co-founder of the minute men) is challenging McCain for his senate seat. Let's hope they do the right thing.

[Uncle Hal]

Dick Morris is right. This would amount to nationalization of the banks. This a terrible precedent and must be avoided at all costs. With the government controlling the banks they would control the economy.

[rigelkentaurus]

I do not understand these CEOs, not at all. I know most of them are big RATS, but still, even a RAT CEO would not like being told how to run the company by the government.

I wish one of them, just one, would grow a backbone. Next time they are hauled in front of Congress or some other highly public event. Have a check written out to the Treasury for the full amount of the TARP loans and give it our governemnt officials while on TV and walk away.

[snowsislander]

Mr. Morris is exactly correct with this piece.

[wildandcrazyrussian]

When I try to watch the video clip linked in, I get a message
“This video has been removed due to terms of use violation”. Can you provide a clickable link?

[nathanbedford]

Is it not the case that Obama can accomplish this coup de main merely by fiat without reference to Congress?

I think the original Tarq legislation grants the executive these kinds of powers. At some point even the Supreme Court has got to consider whether the concentration of power in the executive and the abdication of its responsibility to legislate by the Congress crossed the line of unconstitutionality.

It is ironic that the mainstream media will undoubtedly go bankrupt without a federal bailout so they cannot be expected to bite the hand which they hope will feed them. Republicans in the House are impotent and Republicans in the Senate nearly so. That leaves us talk radio and a faint hope in the court system. Tea anyone?

[Mount Athos]

i didn’t link any videos, just the article i cited

[snowsislander]

Is it not the case that Obama can accomplish this coup de main merely by fiat without reference to Congress?

I think the original Tarq legislation grants the executive these kinds of powers.

I did track down some of the public filings in the SEC's Edgar system from Wells Fargo about the Treasury's purchase of these preferred shares. I posted a portion of that document and some of my comments about it here on March 1st: Securities Purchase Agreement for U.S. Treasury's purchase of Wells Fargo Preferred Shares (Oct.'08).

In particular, the shares sold to the Treasury are not convertible; I would style them as "5% Cumulative Non-convertible Preferred Shares", although technically, the rate goes to 9% after five years.

The exact terms for the preferred stock can be found at http://idea.sec.gov/Archives/edgar/data/72971/000095012308013950/y72262exv4w1.htm.

In particular, section 6 makes it perfectly clear that these shares cannot be converted to common stock:

Section 6. Conversion. Holders of Designated Preferred Stock shares shall have no right to exchange or convert such shares into any other securities.

Also, these shares do not have any put feature that I see, so the only means for them to be turned back into cash is via the redemption procedures in that document. Such redemption is at the option of Wells Fargo, and would have to be initiated by Wells Fargo.

So Mr. Morris is exactly right that this is an exercise in compulsory nationalization: if these shares are forcibly converted, despite the clear agreement not to, this is an exercise in tyranny by the executive branch.

As a side issue, the Feds also separately purchased warrants to buy common stock at $34.01 per share (the agreement is here); since Wells stock price is well below that exercise price currently (it appears to be selling for about $18-$19 per share currently), it would not make any sense that I see for the Feds to use those warrants to purchase common stock at $34.01 per share that could be bought for considerably less. My own guess is that this warrant purchase was solely for upside participation if Wells stock did recover, but that's just a guess.

[Pearls Before Swine]

Thanks for looking up the terms of the preferred. As we know, Citicorp agreed to a conversion because its tangible equity had shrunk to a pitifully low level. Perhaps Geithner and the other clowns don’t remember the original terms and therefore were assuming (shooting from the hip) that Citicorp’s deal was an available patter for all of the other TARP’d banks.

[nathanbedford]

Thank you for an informed response. It appears that the conversion is ultra virus the agreement on which past and subsequent stockholders have a right to rely and further would give them standing to bring an action against the governments take over of the bank by an improper conversion to common.

Just maybe the hope of a court setting this aside is not so faint after all.

The problem is the administration would just ram a new deal down their throats. But it might just be that if the banks are not in extremis they might not buckle.