Diluting the Equity of Banks Equals Stretched Dollars

This New York Times article is a must read. I quote:

“In a significant shift, White House and Treasury Department officials now say they can stretch what is left of the $700 billion financial bailout fund further than they had expected a few months ago, simply by converting the government’s existing loans to the nation’s 19 biggest banks into common stock.
Converting those loans to common shares would turn the federal aid into available capital for a bank — and give the government a large ownership stake in return.

While the option appears to be a quick and easy way to avoid a confrontation with Congressional leaders wary of putting more money into the banks, some critics would consider it a back door to nationalization, since the government could become the largest shareholder in several banks…
Taxpayers would also be taking on more risk, because there is no way to know what the common shares might be worth when it comes time for the government to sell them.”

To avoid having to beg for more money while being broadcast on national television, the government is carefully crafting a shift in the bailout plan. They will “stretch dollars” so that even more bank risk can be shifted to the masses. This sub plot is so obvious it cannot even be classified as “slight of hand.” There is one great trick inherent in this plan however—now you see a capitalist free market, now you don’t! With each and every new governmental “ownership stake” in private business, we creep ever closer to a socialist economy. The best ruse: they pulled the coin right out from behind our own ears!

With bailout dollars now convertible into equity, more dollars will magically appear—they have “stretched.” The pile of money is now bigger! But ask yourself, how much is a stretchy dollar worth?

The Catch
The catch is obvious: dilution. Now, the government will own a bigger share of the equity in the bank, but the equity will be diluted. This has significant ramifications for the masses. Recall when the article said, “taxpayers would also be taking on more risk.”
You are the government. Nationalized losses are your losses.

Gains for a few, losses for the masses.

Nothing changes in the markets—just the participants.

Peace