TARP dividends are killing bank profits
When the Bush Administration gave banks money under the Troubled Asset Relief Program (TARP), it was not a complete freebie. The government has received preferred shares in many institutions. These shares pay dividends to the government as compensation for the investment. Well, apparently, those dividends are becoming a bit of a problem for banks because they are eating into banks’ much needed capital by siphoning off money to the government.
Honestly, I do not know how to sidestep this issue because the government should be compensated for its efforts as a normal investor would. Zero-coupon bonds would generate the same accounting effect, even though no money was changing hands. Payment-in-kind (PIK) preferred shares would be seen as inadequate. Common stock would be dilutive to existing shareholders and is one reason not to hold stock in these companies. Converting dividend-paying preferred shares into common stock may be the best route forward.
If anyone has a solution, feel free to chime in.