Heritage Foundation ran an article entitled, “Treasury Exposes Markets to Added Stress Flu” in which they suggest that the Treasury is adding to the uncertainty by announcing its intention to exchange preferred stock for common stock in banks:
“The Treasury [ ] doubled down on market fears through its equity conversion proposal. Treasury currently owns billions in preferred shares of the major banks. These shares plus its supervisory powers mean the most troubled banks have already been effectively nationalized through the backdoor. The banks are still learning what this means in practice, and its not pretty – threatened pay caps, CEO firings, etc. Converting the preferred shares to common shares takes this nationalization one small step further.
What the conversion does not do is make the banks any healthier. Banks that are light on capital remain so. And because it has so little concrete meaning, the conversion to common shares raises serious questions about Treasury’s real intentions.”
So…could the Treasury actually intend for uncertainty to rise with consequent rise in risk premiums and attendant flight to safety in Treasury bonds? Yesterday the Treasury announced they would need to borrow $361 billion in marketable debt in the second quarter, a record for the period and more than double its previous projection. They expect to borrow about $500B in the month of July alone. Is the Treasury so sinister as to engineer a flight to safety to insure a demand for its debt?