The Federal bank bailout will dilute existing shareholders. The banks, however, are frustrated about having to admit that. Thus, a flurry of angry phone calls demanding that the government issue a special exemption to accounting law.
Specifics? The banks are giving the government warrants amounting to 15% of the government’s preferred stock investment. Not surprisingly, these warrants have to be accounted for. They can be treated two ways:
- By issuing stock, which will cause immediate dilution
- By remaining as a liability on the balance sheet, which will be repriced every quarter and could cause a hit to earnings (if the stock increases, the value of the warrant–and the bank’s liability–follows it up).
The banks don’t want either of those things. Instead, they want to pretend the warrants don’t exist. So they are petitioning for a special exemption that allows them to book the warrants as equity without issuing new shares.
People involved in the discussions say the issue will be resolved this weekend.
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