February 24, 2009

Risks and rewards in new bailout plan

The U.S. government's bailout switch to investments in banks' common shares is a risky move, Sen. Chuck Grassley, R-Iowa said.

The government agreed Monday to allow banks the option of buying back the preferred shares it has already purchased in its bank rescue efforts or have the shares switched to convertible shares, The Washington Post reported Tuesday.

The switch allows banks to dodge dividend payments of 5 percent a year that would save large banks billions of dollars. It also allows taxpayers to reap benefits should share values rise.

But, common stock is riskier than preferred stock, Grassley said in a statement, The Washington Post reported Tuesday.

The American taxpayers are already shouldering a lot of risk these days. This move could expose taxpayers to even more risk, he said.

The government has already invested about $200 billion in about 400 banks, the Post said.

Investors welcomed the news, with shares of Citibank Inc. and Bank of America rising Monday.

This is a signal that the government believes the financial institutions are strong and provides them with the flexibility of terms should the economy worsen, Scott Talbott, a senior vice president at the Financial Services Roundtable, told the Post.