Maybe China should control US banks...

I keep hearing people say things like, "if the government is giving the banks money then the government should be able to tell them what to do", and "this is taxpayer money going to bail out the banks so..." fill in the blank. Skipping to my conclusion, I do not think the government should be telling a business whether they can buy a corporate jet, or how much they are allowed to pay their people. Those are decision for the majority of common shareholders.

Two points.

First, the government has invested in preferred shares of these banks. The government is not a common share holder. If I invest a minority stake in the preferred shares of a company, I do not get to tell the CEO how to run his company. If the company goes into bankruptcy, then I have preference over the common shareholder as it relates to the bankruptcy outcome and a share of whatever is left. If the company is not in bankruptcy, then the common shareholders own the business and I just get my dividend. The government does not have a right to control these banks simply because it has become a preferred investor. If they want to exert control, they should exercise their warrants for common stock. If that gives them a majority then they are in control; if not they need to convince some other big shareholders to go along with their proposals or buy up enough additional shares to become the majority shareholder. If an incremental investor wants to exert control, they can tell the company that their capital infusion is contingent on specific actions. For example, if a company desperately needs capital and only one investor will step up, that investor might say "I will invest the $100 million you need as soon as you fire the current CEO because I don't think he is any good." But if that same investor put in the money a year ago, they cannot wake up one day and have the CEO fired. My bank does not have the right to force me to fix my roof unless I default on my mortgage.

Second, and I'm being facetious and playing out the logic I keep hearing, if the incremental investor in a US bank gets to control the bank, then the incremental investor that allows the US government to invest in the bank should control the US government. Guess what, the government already spent taxpayer money. The incremental spending they are making will be funded by borrowing. Since China is one of the biggest investors in US treasuries, maybe we should make the argument that they should get to control the entity they are invested in.

So returning to reality, I do not think China should get to tell the US government what to do simply because they have chosen to invest in Treasury bonds, and I do not think the US government should get to tell business what to do simply because they have chosen to invest in some preferred stock with un-exercised warrants.

The motivation for investing in the preferred stock should not be to allow government to take over business, it should be because the banking system needed to be recapitalized and the capital markets were in complete disarray. If the government wants to step in to a crisis and try to prevent a failure of the financial system, then the government is trying to fulfill its role of protecting and serving its citizens. It can end there. The government does not need get an acceptable return on its investment or gain incremental control of private enterprise.