Essentially, the two firms are going to sell parts of themselves to taxpayers in order to increase their cash, which will then be used to buy back, yes, parts of themselves that taxpayers already own.
What does that remind you of? Some sort of scheme in which funds from the newest investors are used to pay back older investors? But of course I'm oversimplifying, as there must be reasons why this actually makes sense:
- Taxpayers currently own preferred stock, so exchanging that for common stock would move taxpayers to a more junior position in the capital structure. This makes life more simple.
- Preferred stock has a fixed coupon; common stock pays a dividend only at the discretion of the company. This reduces the obligations of the firm.
But above all, the preferred shares are really held by the Treasury, and consequently come with a whole bunch of regulation and (retroactive?) restrictions even though the shares are non-voting. These firms would opt out of TARP at a massive loss, if they could, and taking money from taxpayers to pay off other taxpayers is the next best thing. So stay tuned, because the Fed will announce next week whether firms are, in fact, allowed to pay back TARP. It is most likely that the amount of capital being raised in these offerings is the amount firms must demonstrate they are capable of raising in order to return the TARP funds.
The Fed is essentially mandating that firms demonstrate the ability to raise capital privately, without having it forced upon them. At least it's not as bad as issuing debt to pay a dividend.
(Minus 1 to Bing for making it absurdly difficult to get news on these companies. Two clicks, one of which is the nondescript "more" button?? Dangerously close to a dealbreaker.)