Why did US buy preferred stocks as opposed to the toxic assets (or common stock or bonds of the distressed financial companies)?

Why did US buy preferred stocks as opposed to the toxic assets (or common stock or bonds of the distressed financial companies)?
What was the reason(s) that the US government bought out several
hundreds of billions of dollars worth of preferred stocks over the common equity or bonds of the financial institutions?
Why didn't they buy the toxic assets themselves from the banks?
Also, when the US government "nationalised" the banks by buying into them, I have a couple of questions on this:
1. Did they buy newly issued shares of the banks? This is the most plausible explanation to me, since this would re-capitalize/finance the bank's operations. Moreover, buying out old shares does *NOT* do anything to provide money/liquidity for the banks.
2. What are the advantages/disadvantages of buying the common shares, preferred shares, the bonds, or even the toxic assets themselves?
From the Internet (Wikipedia):
"The Secretary of the United States Treasury, Henry Paulson and President George W. Bush proposed legislation for the government to purchase up to US$700 billion of "troubled mortgage-related assets" from financial firms in hopes of improving confidence in the mortgage- backed securities markets and the financial firms participating in it. [92] Discussion, hearings and meetings among legislative leaders and the administration later made clear that the proposal would undergo significant change before it could be approved by Congress.[93] On October 1, a revised compromise version was approved by the Senate with a 74-25 vote, the sole Senator not to vote was cancer-stricken Ted Kennedy of Massachusetts. The bill, HR1424 was passed by the House on October 3, 2008 and signed into law. The first half of the bailout money was primarily used to buy preferred stock in banks instead of troubled mortgage assets."
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2.7182818284590... wrote:

Essentially because its a lot easier to do that quickly than it is to identify the toxic assets and separate them from the non toxic assets.

Because those have first call on profits if any of those show up.

Because its a lot harder to do that quickly.

Buying into them is not nationalising them. Nationalising them is owning them completely.

Correct.
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Rod Speed wrote:

And running them. There are shades of grey involved here:
1) Owning preferred shares. Not nationalization. Preferred shares have no voting rights.
2) Owning common shares. Not nationalization. You get to vote, but you can also be outvoted.
3) Owning a voting majority of common shares. Partial nationalization, depending on how much freedom you give the managers.
4) Same as 3, but you put a government guy in charge. Nationalization.
JG

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John Galt wrote

That last is just plain wrong.

Still not nationalisation, the majority shareholder doesnt have complete say on everything.

Real nationalisation is
5) The govt owns all the shares and gets to do anything thats legal.

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On Fri, 6 Feb 2009 08:06:58 -0800 (PST), "2.7182818284590..."

Preferred stock, easy to value. Toxic assets, imposssible to value, that's what made them toxic.

It protects the government's investment. Preferred stock owners get paid off first, that's what makes the stock "preferred". Preferred stock collects a nice dividend and has a fixed value that it will be redeemed for in the future. Common stock values could be savaged.
The Treasury sure isn't going to have its investement in these banks savaged to save *other* preferred stock holders.

They couldn't figure out the right price for them -- the same problem everyone else has.
If they paid too little the banks would get crippled and the crisis get worse. If they paid too much the taxpayers would get screwed.
With the preferred stock they knew just how much the banks would benefit, made an investment with a clear value, and protected the taxpayers.

Yes.

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On Fri, 06 Feb 2009 08:06:58 -0800, 2.7182818284590... wrote:

Because it make more sense to do it that way. The people (government) ends up with a much better deal. You will need to watch the videos at http://KhanAcademy.org for a good understanding of illiquidity versus insolvency. The banks are insolvent. We can buy the bad assets or we can increase the "equity" in the bank by the same amount. Either one will restore solvency. But instead of just getting the bad garbage we get the good stuff too.

See above.

Yes. And these shares are superior to current shares.

See above.

Much, much better for the people.
--
"Those are my opinions and you can't have em" -- Bart Simpson

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when a company go under, this is the order how they pay back their liability:
* creditor, bond (?) * preferred stock (class A) * common stock
toxic asset is hard to value and highly volatile derivative
you figure the rest -
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wrote:

I believer employee pay is either ahead of creditors or at top of creditor list depending if you consider them creditors. So Im not sure why people think they can cancel pensions and just keep going. Pensions are a part of pay so if you dont pay that then you cant pay anyone. Coming out of bankruptcy means that your creditors have agreed to a new pay schedule. I cant imagine creditors agreeing to not getting paid at all.
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when a company go under, this is the order how they pay back their liability:
* creditor, bond (?) * preferred stock (class A) * common stock
toxic asset is hard to value and highly volatile derivative
you figure the rest -
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when a company go under, this is the order how they pay back their liability:
* creditor, bond (?) * preferred stock (class A) * common stock
toxic asset is hard to value and highly volatile derivative
you figure the rest -
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