Unintended consequences

Fannie, Freddie Takeover Jolts Preferred Stock

Treasury Secretary Henry Paulson's takeover of Fannie Mae and Freddie Mac is roiling the market for preferred securities.

This is exactly what I talked about in yesterday's rants. Paulson's mixed signals destroy the financial system. By chopping the legs out from the preferred shareholders at Fannie and Freddie, Paulson has signaled to the markets that NO equity investment in a troubled bank (or any company) is safe. This will result in lowered preferred prices (as we are seeing) and an unwillingness from investors to take an EQUITY stake in these companies. This is happening at just the time these companies most need to raise capital. If you cut-off access to capital through equity investment, you are now looking at the bond market and those rates will be unsustainable under any of these models. You can't continue to borrow money at 8-11% while only making 5-6%. That is ponzi scheme financing. The unintended consequences of Bernanke and Paulson's lies, fudgery and poorly planned moves are having and will have a massive effect on companies ability to recapitalize. This is happening at the most innopportune time. There is no possible way that the government can step in and bailout all the companies that need to raise capital to survive. If you want the ultimate doomsday scenario, that is it. Private equity must be a part of the equation and it won't if the government continues with their current shenanigans. You can't continue to bailout failing companies without fundamentally changing the business models. That is akin to subsidizing not bailing. Subsidizing a failed model will only cause smart private equity to run for the hills. Especially if there is the risk that they lose all of their investment in a susbequent government bailout. What a mess.