Government is treating the country to a national conversation on corporate finance, focusing on a tension between common stockholders of corporations and those who lend or buy preferred stock. The government is deep into the business of lending or buying preferred stock with taxpayer money; the public is interested to know how secure those positions are and how likely they are to reinvigorate private investment in public companies.
While the Bush Administration made loans and bought preferred stock without insisting on many restrictions, the Obama Administration proposes a more restrictive posture. Both struggle with the inherent tension in corporate finance between protecting creditor and senior equity interests, on the one hand, and providing common (junior) stockholders with periodic returns on investment through dividends on the other.
Creditors and senior equity holders want assurance of repayment, so the temptation may be to prohibit common stock dividends entirely. This temptation explains why many populist critics rebuked Bush Treasury Secretary, Henry Paulson, for lending or investing in corporations without restricting their right to pay cash dividends to common stockholders. The rebuke may also explain Obama Treasury Secretary Timothy Geithner’s opposite proposal to prohibit such dividends, although this populist stance may prolong rather than shorten the current capital crisis.