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No need to pay anyone off unless courts direct government to. Why would government do any serious capital raise when the GSE's are raking in 4 billion plus per quarter, as was happening prior to this hiccup? If commons get no special treatment, then neither do prefs. Government will preserve and conserve, courts will find for claims that will only benefit the companies. If that makes commons healthier and pref's sad, so be it.
That may be so...in the past. Inflation is just starting. The more stimulus they throw at this virus set back, the worse inflation will get, it's a given. I will not be surprised to see all pref issues trend down due to this.
Pref's gonna hurt more as this inflationary environment gets going....
Since the dividend on preferred stock is usually a fixed amount forever, once the preferred stock is issued its market value is likely to move in the opposite direction of inflation. The higher the rate of inflation, the less valuable is the fixed dividend amount. If the inflation rate declines, the value of the preferred stock is likely to increase, but no higher than the stock's call price.
I would maybe agree there are possibly fewer holders....BUT those that are holding, are holding way more. I for one was under 10k shares from begining of 2008 until 2012. Since then, I am at 56k+ and possibly adding.
Please read. Spoken truths matter as much as facts.
From Delaware Law Journal,Sorry.
Must read! Especially prefs folks. From Delaware journal Corp law Sorry.
The irony of preferred stock is that courts treat it with disdain.' It should be a staple of modem finance, because it offers an unparalleled financial flexibility that helps businesses stay afloat during hard times and thus reduces bankruptcy risk for investors.2 Yet it has virtually disappeared in most mature industries, largely because preferred shareholders have found it terribly difficult to protect the value of their investment. As a result, they demand a risk premium that few companies are willing to pay, except as a
last resort. Today, nearly all public preferred stock is issued by financial institutions, insurance companies, or other institutions subject to strict capital adequacy regulation, as illustrated by the size and composition of preferred stock exchange-tradable funds. Preferred stock is more commonly used for funding startups, owing to the peculiar risk-return ratio sought by venture
capitalists. Even in that context, however, its use may be declining, as some venture capitalists are rethinking their commitment to an investment vehicle that offers few legal protections. The problem is that corporate law now gives short shift to the equity aspect of preferred stock. Financially, preferred stock resembles debt, in that it has limited upside and its return comes in the form of periodic coupon payments. Legally, though, it is much more like common equity: preferred shareholders, unlike creditors, cannot sue in contract to recoup either their
principal investment or unpaid coupons, and the terms of a preferred stock investment, unlike those of a debt contract, can be altered unilaterally by the firm. As a result, the value of fixed income equity can be opportunistically expropriated by common equity, by such means as dilutive mergers, leveraged recapitalizations, or risk-seeking economic strategies.'' Not even venture capitalists are safe, despite their deep experience with preferred stock and their business power over the companies. Occasionally, they let down their guard, and then can only watch helplessly as their investments are decimated.
Preferred stock also resembles debt in that both instruments are
vulnerable to exploitation by the common. By their nature, fixed claims lose value when subject to increased risk, whereas equity tends to benefit from additional risk. Thus, if the common shareholders can impel the firm to take on additional risk, the value of their investments will appreciate, at the expense of the fixed claimants.
Preferred stock, by contrast, must rely on much weaker remedies. To
be sure, preferred stock typically issues with covenants similar to those included in bond indentures, but they are not backed by the power of accelerated repayment of principal and interest. Dividends promised to preferred stock can be retracted, and the preferred generally cannot force repayment of the principal in the event that a covenant has been breached. The preferred can roughly approximate accelerated principal repayment by obtaining a promise from the firm to redeem the stock if any covenants are breached but redemptions cannot be relied upon in a pinch-they are subject to statutory restrictions and are regulated less by contract than by
equitable principles of corporate law. Ultimately, the preferred
shareholders, as shareholders, must seek legal remedies by means of actions in corporate law. In board-friendly jurisdictions such as Delaware, this operates as a powerful practical disadvantage. While the common shareholders occasionally win when taking action against the board, the preferred nearly always lose.
The corporate law once offered at least a modicum of protection
against exploitation. For instance, the famous 1986 Court of Chancery case Jedwab v. MGM Grand Hotels, Inc. held that boards must respect fiduciary duties when dealing with the preferred. Over the past three decades, however, courts have eroded such duties to the preferred so far that they exist in name only. Indeed, recent opinions have suggested that the board may even have a fiduciary duty to siphon value from the preferred when the
opportunity arises. Today, preferred shareholders must protect themselves with contract-like covenants in the certificate of designation---covenantsthat are most often interpreted very narrowly, in favor of the common. It is
no wonder, then, that investors have lost interest in preferred stock; if one must rely on covenants, better that they be included in an unalterable, legally enforceable debt contract. Preferred stock cannot survive if the board, acting on behalf of the common, can readily expropriate much or all of its value.
The Corporate Decisional Calculus
Corporate decision-makers (e.g., the officers and/or the board) can be induced to take heed of investors' interests primarily by three familiar mechanisms: the investors' power to replace the decision-makers, the alignment of interests between investors and the decision-makers, and the firm's capital market reputation. In standard governance arrangements, these inducement mechanisms are over-allocated to the common, mildly under-allocated to debt, and allocated hardly at all to the preferred. Alignment of
interests almost always redounds to the common's benefit, as directors and managers frequently are paid in part with common equity interests and essentially never with preferred. Thus, common stockholders can confidently anticipate that the board will at least attempt to increase the share price of the common. In most corporations, the common equity also elects the board, and, as noted above, they enjoy the protections of fiduciary duties as against the preferred. Creditors have no direct representation on the board, but they hold the greatest leverage in terms of capital market reputation. Firms more frequently need to roll over their debt than raise new equity;if they wish to secure low-cost financing, they need to establish a reputation in the debt markets for good capital stewardship.
Preferred stock, by contrast, has little input into or sway over firm policy.
We do not know if capitalized or not until we see that "urban legend" of a rule that we keep hearing about. This could be above the min recap level, and it would finally be nice to have it happen, albeit stealthily. I maintain a skeptical optimism until we relist or get verification of some form, OR courts finally get off their rears and give us a definite ruling. Maybe it will all snowball and come to fruition in the next few months?
Another reason of many, why pref holders should be more realistic in their expectations. No conversions, no coupon payments until max capital rule value is hit, and most likely...No required re-IPO
Let's hope so! That would make too much sense, lol
Yeah, pref's should really take this saying to heart when listening to their hedge fund pals.
Yeah....my sentiments exactly. Where is this "number" coming from?
I go by that old saying...if it sounds too good to be true, it usually is.
You do realize there are many stocks out there that pay no dividends and alot who have recently stopped dividend payments? If the GSE board eventually does a capital raise via more commons, a dividend is only an enticement, not a requirement. Most new IPO's do not pay a dividend until later down the road. Pref's thinking that their dividend or the common dividend is required to raise more capital is as nonsensical an issue as there ever was.
I do believe the GSE's were chartered in Delaware. Some early challenge cases began there, I think....
This is a HUGE unspoken truth that pref holders fail to see when they say they will be converted to commons by the government before release.
Pref's have zero say
Pref's are looked at more as debt than equity.
Diluting commons by cramming down the share price so pref's can convert benefits no one...not government, not commons, not bod, not any ipo. Any IPO would even further dilute and no one will want to buy into that.
Best case for pref's is they get their coupon payment back...2, 3, 4 years from now.
Irony for you
The irony of preferred stock is that courts treat it with disdain.' It should be a staple of modem finance, because it offers an unparalleled financial flexibility that helps businesses stay afloat during hard times and thus reduces bankruptcy risk for investors.2 Yet it has virtually disappeared in most mature industries, largely because preferred shareholders have found it terribly difficult to protect the value of their investment. As a result, they demand a risk premium that few companies are willing to pay, except as a
last resort. Today, nearly all public preferred stock is issued by financial institutions, insurance companies, or other institutions subject to strict capital adequacy regulation, as illustrated by the size and composition of preferred stock exchange-tradable funds. Preferred stock is more commonly used for funding startups, owing to the peculiar risk-return ratio sought by venture
capitalists. Even in that context, however, its use may be declining, as some venture capitalists are rethinking their commitment to an investment vehicle that offers few legal protections. The problem is that corporate law now gives short shift to the equity aspect of preferred stock. Financially, preferred stock resembles debt, in that it has limited upside and its return comes in the form of periodic coupon payments. Legally, though, it is much more like common equity: preferred shareholders, unlike creditors, cannot sue in contract to recoup either their
principal investment or unpaid coupons, and the terms of a preferred stock investment, unlike those of a debt contract, can be altered unilaterally by the firm. As a result, the value of fixed income equity can be opportunistically expropriated by common equity, by such means as dilutive mergers, leveraged recapitalizations, or risk-seeking economic strategies.'' Not even venture capitalists are safe, despite their deep experience with preferred stock and their business power over the companies. Occasionally, they let down their guard, and then can only watch helplessly as their investments are decimated.
Preferred stock also resembles debt in that both instruments are
vulnerable to exploitation by the common. By their nature, fixed claims lose value when subject to increased risk, whereas equity tends to benefit from additional risk. Thus, if the common shareholders can impel the firm to take on additional risk, the value of their investments will appreciate, at the expense of the fixed claimants.
Preferred stock, by contrast, must rely on much weaker remedies. To
be sure, preferred stock typically issues with covenants similar to those included in bond indentures, but they are not backed by the power of accelerated repayment of principal and interest. Dividends promised to preferred stock can be retracted, and the preferred generally cannot force repayment of the principal in the event that a covenant has been breached. The preferred can roughly approximate accelerated principal repayment by obtaining a promise from the firm to redeem the stock if any covenants are breached but redemptions cannot be relied upon in a pinch-they are subject to statutory restrictions and are regulated less by contract than by
equitable principles of corporate law. Ultimately, the preferred
shareholders, as shareholders, must seek legal remedies by means of actions in corporate law. In board-friendly jurisdictions such as Delaware, this operates as a powerful practical disadvantage. While the common shareholders occasionally win when taking action against the board, the preferred nearly always lose.
The corporate law once offered at least a modicum of protection
against exploitation. For instance, the famous 1986 Court of Chancery case Jedwab v. MGM Grand Hotels, Inc. held that boards must respect fiduciary duties when dealing with the preferred. Over the past three decades, however, courts have eroded such duties to the preferred so far that they exist in name only. Indeed, recent opinions have suggested that the board may even have a fiduciary duty to siphon value from the preferred when the
opportunity arises. Today, preferred shareholders must protect themselves with contract-like covenants in the certificate of designation---covenantsthat are most often interpreted very narrowly, in favor of the common. It is
no wonder, then, that investors have lost interest in preferred stock; if one must rely on covenants, better that they be included in an unalterable, legally enforceable debt contract. Preferred stock cannot survive if the board, acting on behalf of the common, can readily expropriate much or all of its value.
The Corporate Decisional Calculus
Corporate decision-makers (e.g., the officers and/or the board) can be induced to take heed of investors' interests primarily by three familiar mechanisms: the investors' power to replace the decision-makers, the alignment of interests between investors and the decision-makers, and the firm's capital market reputation. In standard governance arrangements, these inducement mechanisms are over-allocated to the common, mildly under-allocated to debt, and allocated hardly at all to the preferred. Alignment of
interests almost always redounds to the common's benefit, as directors and managers frequently are paid in part with common equity interests and essentially never with preferred. Thus, common stockholders can confidently anticipate that the board will at least attempt to increase the share price of the common. In most corporations, the common equity also elects the board, and, as noted above, they enjoy the protections of fiduciary duties as against the preferred. Creditors have no direct representation on the board, but they hold the greatest leverage in terms of capital market reputation. Firms more frequently need to roll over their debt than raise new equity;if they wish to secure low-cost financing, they need to establish a reputation in the debt markets for good capital stewardship.
Preferred stock, by contrast, has little input into or sway over firm policy.
The harsh reality for ya.
From Delaware Law Journal,Sorry.
Must read! Especially prefs folks. From Delaware journal Corp law Sorry.
The irony of preferred stock is that courts treat it with disdain.' It should be a staple of modem finance, because it offers an unparalleled financial flexibility that helps businesses stay afloat during hard times and thus reduces bankruptcy risk for investors.2 Yet it has virtually disappeared in most mature industries, largely because preferred shareholders have found it terribly difficult to protect the value of their investment. As a result, they demand a risk premium that few companies are willing to pay, except as a
last resort. Today, nearly all public preferred stock is issued by financial institutions, insurance companies, or other institutions subject to strict capital adequacy regulation, as illustrated by the size and composition of preferred stock exchange-tradable funds. Preferred stock is more commonly used for funding startups, owing to the peculiar risk-return ratio sought by venture
capitalists. Even in that context, however, its use may be declining, as some venture capitalists are rethinking their commitment to an investment vehicle that offers few legal protections. The problem is that corporate law now gives short shift to the equity aspect of preferred stock. Financially, preferred stock resembles debt, in that it has limited upside and its return comes in the form of periodic coupon payments. Legally, though, it is much more like common equity: preferred shareholders, unlike creditors, cannot sue in contract to recoup either their
principal investment or unpaid coupons, and the terms of a preferred stock investment, unlike those of a debt contract, can be altered unilaterally by the firm. As a result, the value of fixed income equity can be opportunistically expropriated by common equity, by such means as dilutive mergers, leveraged recapitalizations, or risk-seeking economic strategies.'' Not even venture capitalists are safe, despite their deep experience with preferred stock and their business power over the companies. Occasionally, they let down their guard, and then can only watch helplessly as their investments are decimated.
Preferred stock also resembles debt in that both instruments are
vulnerable to exploitation by the common. By their nature, fixed claims lose value when subject to increased risk, whereas equity tends to benefit from additional risk. Thus, if the common shareholders can impel the firm to take on additional risk, the value of their investments will appreciate, at the expense of the fixed claimants.
Preferred stock, by contrast, must rely on much weaker remedies. To
be sure, preferred stock typically issues with covenants similar to those included in bond indentures, but they are not backed by the power of accelerated repayment of principal and interest. Dividends promised to preferred stock can be retracted, and the preferred generally cannot force repayment of the principal in the event that a covenant has been breached. The preferred can roughly approximate accelerated principal repayment by obtaining a promise from the firm to redeem the stock if any covenants are breached but redemptions cannot be relied upon in a pinch-they are subject to statutory restrictions and are regulated less by contract than by
equitable principles of corporate law. Ultimately, the preferred
shareholders, as shareholders, must seek legal remedies by means of actions in corporate law. In board-friendly jurisdictions such as Delaware, this operates as a powerful practical disadvantage. While the common shareholders occasionally win when taking action against the board, the preferred nearly always lose.
The corporate law once offered at least a modicum of protection
against exploitation. For instance, the famous 1986 Court of Chancery case Jedwab v. MGM Grand Hotels, Inc. held that boards must respect fiduciary duties when dealing with the preferred. Over the past three decades, however, courts have eroded such duties to the preferred so far that they exist in name only. Indeed, recent opinions have suggested that the board may even have a fiduciary duty to siphon value from the preferred when the
opportunity arises. Today, preferred shareholders must protect themselves with contract-like covenants in the certificate of designation---covenantsthat are most often interpreted very narrowly, in favor of the common. It is
no wonder, then, that investors have lost interest in preferred stock; if one must rely on covenants, better that they be included in an unalterable, legally enforceable debt contract. Preferred stock cannot survive if the board, acting on behalf of the common, can readily expropriate much or all of its value.
The Corporate Decisional Calculus
Corporate decision-makers (e.g., the officers and/or the board) can be induced to take heed of investors' interests primarily by three familiar mechanisms: the investors' power to replace the decision-makers, the alignment of interests between investors and the decision-makers, and the firm's capital market reputation. In standard governance arrangements, these inducement mechanisms are over-allocated to the common, mildly under-allocated to debt, and allocated hardly at all to the preferred. Alignment of
interests almost always redounds to the common's benefit, as directors and managers frequently are paid in part with common equity interests and essentially never with preferred. Thus, common stockholders can confidently anticipate that the board will at least attempt to increase the share price of the common. In most corporations, the common equity also elects the board, and, as noted above, they enjoy the protections of fiduciary duties as against the preferred. Creditors have no direct representation on the board, but they hold the greatest leverage in terms of capital market reputation. Firms more frequently need to roll over their debt than raise new equity;if they wish to secure low-cost financing, they need to establish a reputation in the debt markets for good capital stewardship.
Preferred stock, by contrast, has little input into or sway over firm policy.
What the courts fail to uphold:
"Justice delayed is justice denied"
"If we do not maintain justice, justice will not maintain us"
“Silence in the face of injustice is complicity with the oppressor.”
“Justice consists not in being neutral between right and wrong, but finding out the right and upholding it, wherever found, against the wrong.”
“Justice will not be served until those who are unaffected are as outraged as those who are.” —Benjamin Franklin
“In the absence of justice, what is sovereignty but organized robbery?” —Augustine
Another day of being a GSE (Government STOLEN Enterprise) and their 3 card Monte Conservatorship continues...while the courts act as fast as a 3 legged blind turtle. Wonderful day!
That you can bank on. Obama admin was most corrupt and very stealthy at hiding it. Look what Hillary alone got away with: computer, blackberries, personal server, questions from CNN, and the list goes on. Liberal media too affraid or too deeply involved to go after all the criminal things in that administration...half the press would be implicated & accessories.
Ditto! I have friends that beleive this also.
Yes, I've always thought if it went to receivership that the government would not even leave scraps for anyone. Thank God saner heads see the benefit of the GSE's.
Sticky for reference, please.
More good points Delaware law journal -prefs, sorry
A. The Corporate Decisional Calculus
Corporate decision-makers (e.g., the officers and/or the board) can be induced to take heed of investors' interests primarily by three familiar mechanisms: the investors' power to replace the decision-makers, the alignment of interests between investors and the decision-makers, and the firm's capital market reputation. In standard governance arrangements, these inducement mechanisms are over-allocated to the common, mildly under-allocated to debt, and allocated hardly at all to the preferred. Alignment of
interests almost always redounds to the common's benefit, as directors and managers frequently are paid in part with common equity interests and essentially never with preferred. Thus, common stockholders can confidently anticipate that the board will at least attempt to increase the share price of the common. In most corporations, the common equity also elects the board, and, as noted above, they enjoy the protections of fiduciary duties as against the preferred. Creditors have no direct representation on the board, but they hold the greatest leverage in terms of capital market reputation. Firms more frequently need to roll over their debt than raise new equity;if they wish to secure low-cost financing, they need to establish a reputation in the debt markets for good capital stewardship.
Preferred stock, by contrast, has little input into or sway over firm policy.
The harsh reality for ya.
From Delaware Law Journal,Sorry.
Must read! Especially prefs folks. From Delaware journal of corporate law....good synopsis on prefs. Sorry.
The irony of preferred stock is that courts treat it with disdain.' It should be a staple of modem finance, because it offers an unparalleled financial flexibility that helps businesses stay afloat during hard times and thus reduces bankruptcy risk for investors.2 Yet it has virtually disappeared in most mature industries, largely because preferred shareholders have found it terribly difficult to protect the value of their investment. As a result, they demand a risk premium that few companies are willing to pay, except as a
last resort. Today, nearly all public preferred stock is issued by financial institutions, insurance companies, or other institutions subject to strict capital adequacy regulation, as illustrated by the size and composition of preferred stock exchange-tradable funds. Preferred stock is more commonly used for funding startups, owing to the peculiar risk-return ratio sought by venture
capitalists. Even in that context, however, its use may be declining, as some venture capitalists are rethinking their commitment to an investment vehicle that offers few legal protections. The problem is that corporate law now gives short shift to the equity aspect of preferred stock. Financially, preferred stock resembles debt, in that it has limited upside and its return comes in the form of periodic coupon payments. Legally, though, it is much more like common equity: preferred shareholders, unlike creditors, cannot sue in contract to recoup either their
principal investment or unpaid coupons, and the terms of a preferred stock investment, unlike those of a debt contract, can be altered unilaterally by the firm. As a result, the value of fixed income equity can be opportunistically expropriated by common equity, by such means as dilutive mergers, leveraged recapitalizations, or risk-seeking economic strategies.'' Not even venture capitalists are safe, despite their deep experience with preferred stock and their business power over the companies. Occasionally, they let down their guard, and then can only watch helplessly as their investments are decimated.
shareholders, unlike creditors, cannot sue in contract to recoup either their principal investment or unpaid coupons, and the terms of a preferred stock investment, unlike those of a debt contract, can be altered unilaterally by the firm. As a result, the value of fixed income equity can be opportunistically [t][/t]expropriated by common equity, by such means as dilutive mergers, leveraged recapitalizations, or risk-seeking economic strategies.'' Not even
venture capitalists are safe, despite their deep experience with preferred stock and their business power over the companies. 12 Occasionally, they let down their guard, and then can only watch helplessly as their investments are decimated.
Preferred stock also resembles debt in that both instruments are
vulnerable to exploitation by the common. By their nature, fixed claims lose value when subject to increased risk, whereas equity tends to benefit from additional risk. Thus, if the common shareholders can impel the firm to take on additional risk, the value of their investments will appreciate, at the expense of the fixed claimants.
Preferred stock, by contrast, must rely on much weaker remedies. To
be sure, preferred stock typically issues with covenants similar to those included in bond indentures, but they are not backed by the power of accelerated repayment of principal and interest. Dividends promised to preferred stock can be retracted, and the preferred generally cannot force repayment of the principal in the event that a covenant has been breached. The preferred can roughly approximate accelerated principal repayment by obtaining a promise from the firm to redeem the stock if any covenants are breached but redemptions cannot be relied upon in a pinch-they are subject to statutory restrictions and are regulated less by contract than by
equitable principles of corporate law. Ultimately, the preferred
shareholders, as shareholders, must seek legal remedies by means of actions in corporate law. In board-friendly jurisdictions such as Delaware, this operates as a powerful practical disadvantage. While the common shareholders occasionally win when taking action against the board, the preferred nearly always lose.
The corporate law once offered at least a modicum of protection
against exploitation. For instance, the famous 1986 Court of Chancery case Jedwab v. MGM Grand Hotels, Inc. held that boards must respect fiduciary duties when dealing with the preferred. Over the past three decades, however, courts have eroded such duties to the preferred so far that they exist in name only. Indeed, recent opinions have suggested that the board may even have a fiduciary duty to siphon value from the preferred when the
opportunity arises. Today, preferred shareholders must protect themselves with contract-like covenants in the certificate of designation---covenantsthat are most often interpreted very narrowly, in favor of the common. It is
no wonder, then, that investors have lost interest in preferred stock; if one must rely on covenants, better that they be included in an unalterable, legally enforceable debt contract. Preferred stock cannot survive if the board, acting on behalf of the common, can readily expropriate much or all of its value.
Sticky for reference please
Must read! Especially prefs folks. From Delaware journal of corporate law....good synopsis on prefs. Sorry.
The irony of preferred stock is that courts treat it with disdain.' It should be a staple of modem finance, because it offers an unparalleled financial flexibility that helps businesses stay afloat during hard times and thus reduces bankruptcy risk for investors.2 Yet it has virtually disappeared in most mature industries, largely because preferred shareholders have found it terribly difficult to protect the value of their investment. As a result, they demand a risk premium that few companies are willing to pay, except as a
last resort. Today, nearly all public preferred stock is issued by financial institutions, insurance companies, or other institutions subject to strict capital adequacy regulation, as illustrated by the size and composition of preferred stock exchange-tradable funds. Preferred stock is more commonly used for funding startups, owing to the peculiar risk-return ratio sought by venture
capitalists. Even in that context, however, its use may be declining, as some venture capitalists are rethinking their commitment to an investment vehicle that offers few legal protections. The problem is that corporate law now gives short shift to the equity aspect of preferred stock. Financially, preferred stock resembles debt, in that it has limited upside and its return comes in the form of periodic coupon payments. Legally, though, it is much more like common equity: preferred shareholders, unlike creditors, cannot sue in contract to recoup either their
principal investment or unpaid coupons, and the terms of a preferred stock investment, unlike those of a debt contract, can be altered unilaterally by the firm. As a result, the value of fixed income equity can be opportunistically expropriated by common equity, by such means as dilutive mergers, leveraged recapitalizations, or risk-seeking economic strategies.'' Not even venture capitalists are safe, despite their deep experience with preferred stock and their business power over the companies. Occasionally, they let down their guard, and then can only watch helplessly as their investments are decimated.
shareholders, unlike creditors, cannot sue in contract to recoup either their principal investment or unpaid coupons, and the terms of a preferred stock investment, unlike those of a debt contract, can be altered unilaterally by the firm. As a result, the value of fixed income equity can be opportunistically [t][/t]expropriated by common equity, by such means as dilutive mergers, leveraged recapitalizations, or risk-seeking economic strategies.'' Not even
venture capitalists are safe, despite their deep experience with preferred stock and their business power over the companies. 12 Occasionally, they let down their guard, and then can only watch helplessly as their investments are decimated.
Preferred stock also resembles debt in that both instruments are
vulnerable to exploitation by the common. By their nature, fixed claims lose value when subject to increased risk, whereas equity tends to benefit from additional risk. Thus, if the common shareholders can impel the firm to take on additional risk, the value of their investments will appreciate, at the expense of the fixed claimants.
Preferred stock, by contrast, must rely on much weaker remedies. To
be sure, preferred stock typically issues with covenants similar to those included in bond indentures, but they are not backed by the power of accelerated repayment of principal and interest. Dividends promised to preferred stock can be retracted, and the preferred generally cannot force repayment of the principal in the event that a covenant has been breached. The preferred can roughly approximate accelerated principal repayment by obtaining a promise from the firm to redeem the stock if any covenants are breached but redemptions cannot be relied upon in a pinch-they are subject to statutory restrictions and are regulated less by contract than by
equitable principles of corporate law. Ultimately, the preferred
shareholders, as shareholders, must seek legal remedies by means of actions in corporate law. In board-friendly jurisdictions such as Delaware, this operates as a powerful practical disadvantage. While the common shareholders occasionally win when taking action against the board, the preferred nearly always lose.
The corporate law once offered at least a modicum of protection
against exploitation. For instance, the famous 1986 Court of Chancery case Jedwab v. MGM Grand Hotels, Inc. held that boards must respect fiduciary duties when dealing with the preferred. Over the past three decades, however, courts have eroded such duties to the preferred so far that they exist in name only. Indeed, recent opinions have suggested that the board may even have a fiduciary duty to siphon value from the preferred when the
opportunity arises. Today, preferred shareholders must protect themselves with contract-like covenants in the certificate of designation---covenantsthat are most often interpreted very narrowly, in favor of the common. It is
no wonder, then, that investors have lost interest in preferred stock; if one must rely on covenants, better that they be included in an unalterable, legally enforceable debt contract. Preferred stock cannot survive if the board, acting on behalf of the common, can readily expropriate much or all of its value.
Which really makes you wonder why 2008 take over happened....
Although we all know now that 2008 the GSE's were turned into patsy's for Paulson's bank buddies.
Yessssirrrrreeeeee.
Agreed, and I wonder the same sometimes why he has not moved more aggressively in allowing the docs to see the light of day.
E X A C T L Y. Lol
You can bet Trump wants to admit in court that the Obama administration did something wrong .... (NWS)
Yep....that's the truth.
Crap! Why so high short on fnma?
I agree, JPS won't get canned.
Sorry for confusion....
I was trying to make a point about what MC "says"versus what happens and the vagueness of that HERA clause that the poster Kthompson was basing his argument onwith you. My point being MC can say might, maybe, possibly or may all day, but the proof is in the pudding and MC will not be doing an IPO, he will appoint if necessary and determine, as that clause can be interpreted.
These guys gotta quit getting hung up on vague legal statements in HERA. They write the laws vague and with ambiguity on purpose so that the enforcers of the law or the interpreters of the laws (judges), can have their say in how they view it and what it means.
There ya go! That's too much common sense, you'll scare the baJesus out of the pref posse.