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:
- 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.
- 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."