Toward the end of 2008 the Government swooped in and established equity stakes in the banks, some of them welcoming the action while others simply acquiesced to effectively endorse the proposal. The original plan advanced was to buy toxic assets from the bank portfolios, but that was soon abandoned in favor of equity investments in the banks. The reason for the change was believed to be because the pricing of the toxic assets could not be effectively determined, yet it is now becoming the pursued plan once again. The equity investments were structured as preferred shares paying a dividend that increases after five years along with some warrant positions to offer some upside to taxpayers. These shares carried no voting rights as that benefit continued on with the common shares. This gives the appearance that the Government is not controlling or nationalizing the banks because corporate governance remains unaffected within its current structure. On the surface this was presented to be a win-win situation until the chaos subsided and operations became normalized. Au contraire!

In a very short period the real essence of the Government appeared and quickly began dictating to the banks. Demands of capping executive compensation became a political favorite, followed by the forced cutting of dividends that applied to all assisted banks to include the healthy ones. Keeping with this theme, suddenly strong encouragement of mortgage modifications began that was soon followed by expected compliance of doing modifications according to Government programs being proposed by any bank that took taxpayer assistance. It has become more obvious by the day that the Government has shown itself to be an intrusive shareholder. Voting rights were never meaningful because of their ability to dictate from a bully pulpit at their discretion. Shareholders can vote as they please, but the Government simply pressures banks into consent or retroactively changes the rules on them. The Government has virtually nationalized most of the banking system through the control they seized and are unabashedly wielding. Many will argue with this assessment, but doing so is ignoring the obvious reality that the Government can exercise any amount of control they deem necessary to advance their own agenda whether it is called nationalization or not. It is no mystery why investors have abandoned these stocks because they simply do not know what they own from both perspectives of asset valuation as well as Government control.

Many of the banks want to repay the Government to reclaim lost autonomy with their businesses and they are running into an unexpected obstacle. Their desire to repay the investments is being hindered with reluctance and bureaucracy to discourage such repayment. This begs the question as to why this is happening, is it really for the health of the financial system, or for a more deceitful purpose of maintaining control over the banks? Creating and sustaining a dominion over the financial system would prove extremely beneficial in executing any ideological “change we can believe in” that our Government may desire to impose upon us. If you control the banks, you control the money and therefore capitalism itself in this country. Perhaps this is the Government’s real objective which would be a derivative of “never letting a crisis go to waste” as recently expressed. Either paradoxically or by design, the more they get involved, the more their involvement will be needed because of the downward spiral created by driving investors away. Their intentions will soon become evident in this regard, but given recent actions and presumptions, the outcome may not be pleasant once it is fully comprehended. The discussions can continue as to whether the banks should be nationalized or not, but what does it matter if the effect is the same?