The U.S.

government’s responses to the global economic crisis are being conducted through a wide
variety of different programs administered by the Treasury Department, the Federal Reserve, the
Federal Deposit Insurance Corporation, and the Congress. Each program has a different emphasis,
but many of the programs provide cash to troubled companies in exchange for newly issued
securities that are owned by the U.S. government. In many cases, these securities have been
preferred stock and warrants that are convertible into common stock. For example, the Treasury
bought about $70 billion in preferred stock from AIG, some of which was later converted to
noncumulative preferred. The Treasury bought preferred stock and warrants from hundreds of
financial institutions, including Bank of America, Citigroup, and JPMorgan Chase. Some banks
have repurchased the Treasury’s investments, but there is still (mid-June 2009) about $128 billion
outstanding.
The Treasury also made loans to GM ($21 billion), Chrysler ($15.5 billion), and other companies
in the automotive industry. GM subsequently filed for bankruptcy (June 1, 2009), with the U.S.
government pledging to put up another $30 billion. When the dust settles, the government is
expected to own 60% of the restructured GM’s common stock, plus an additional $8.8 billion in
debt and preferred stock. Two questions arise. First, has the government made profitable
investments? The Congressional Budget Office and the Congressional Oversight Panel each stated
in 2009 that the answer is “no”: The Treasury paid too much for the preferred stock and warrants
it bought. On the other hand, the U.S. financial system and economy have not (yet) collapsed as
badly as they did in the Great Depression, so perhaps the money was wellspent.
Second, how much control will the government exert on the companies in which it has invested?
As we will describe later in the chapter, preferred stock does not allow its owners to vote. This
means that the government does not have any direct representation on the bank boards in which it
invested. (This lack of control and access to information created public outrage when AIG hosted
a lavish retreat and when Merrill Lynch executives were awarded enormous bonuses.) The
government will appoint the majority of GM’s new directors, but President Obama indicated in
late June 2009 that none of them will be government employees. Again, it appears as if the
government intends to behave as a passive shareholder. As you read this chapter, think about the
government’s investments in preferred stock and warrants, and decide for yourself whether they
are good investments.