- The Washington Times - Monday, May 18, 2009


Based on the reported results last week of the “stress tests” of our nation’s largest financial institutions, the majority of banks are healthier than anticipated. Healthier banks are a good sign, but not all concerns about our financial system are eased.

Moving forward, it is essential that the federal government resist the urge to pursue policies that further entrench the government in our financial system and instead work on an exit strategy.

One positive development since last week’s stress test results is that banks have released plans to raise billions of dollars in new private capital. These banks have been borrowing cheap capital from the taxpayers since last fall, and several want to repay it. The more private capital banks raise, the less pressure Treasury has to take a larger government stake in them.

If private investors are not willing to invest in these institutions, the government shouldn’t be so anxious to invest more of the taxpayers’ money. Administration officials have said they will not let any of the large banks fail, but taxpayers can’t continue to beef up their balance sheets forever.

One of the administration’s proposed options is converting existing preferred shares the taxpayers now hold in these financial institutions through the Troubled Asset Relief Program (TARP) to common stock shares. Exercising this option would take us down a path toward bank nationalization, and I strongly urge Treasury to take it off the table.

The federal government should not make taxpayers common shareholders in American banks. Such a conversion plan would only expand the government’s intervention in the financial sector and put at greater risk investments made on behalf of taxpayers. Such large-scale government intervention will create more uncertainty in the financial sector and further delay economic recovery.

A share conversion only changes the way capital is accounted for on banks’ balance sheets, but it won’t add any new capital. Treasury should focus efforts on encouraging these banks to bring in real, additional private capital. More stability and certainty from government policies is needed to help bring private capital off the sidelines and into financial institutions. Threats of de facto nationalization will only discourage much-needed private investment.

Before converting shares and further involving the government in the operation of financial institutions, we should learn the lesson of the American International Group Inc. situation and what happens when the federal government becomes a major shareholder of a financial entity.

Conversion of billions of dollars of preferred shares to common equity would make the federal government the largest shareholder in several of these banks, giving the government a greater say in their operations.

Treasury was not designed to function as majority shareholder in our banks. The American taxpayers deserve to keep their investment in preferred shares because those shares pay dividends and because holders of preferred shares are first in line to recover their investment if a company goes under.

Converting preferred shares to common shares and providing free, balance-sheet capital to these entities is a further incentive for them to hold on to their troubled assets rather than deal with them.

The federal government must stop propping up unhealthy financial institutions and start working on an exit strategy for the American taxpayers. If our markets are ever to stabilize, the federal government must stop micromanaging our financial institutions, encourage them to attract more private capital, and drop any plans to convert the TARP preferred shares that would give the government more control.

Rep. Randy Neugebauer, Texas Republican, is deputy ranking member of the House Financial Services Committee.

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