Stress tests 'excuse to nationalize banks' Obama to convert bailout preferred shares into common stock

The following report is excerpted from Jerome Corsi's Red Alert

"Are you ready for government-owned banks?" Jerome Corsi's Red Alert asks readers.

The Obama administration appears to be gearing up to use the bank stress tests as yet another means of nationalizing U.S. banks, Corsi wrote.

While the administration has only allowed the stress test results to become public in partial disclosures made over a series of days, he said up to 10 of the nation's largest 19 banks are likely to need more capital immediately.

Federal regulators are insisting that Citigroup raise $50 billion in new capital and that the Bank of America raise $34 billion.

Regulators have agreed to allow the banks to convert government-owned preferred stock that was granted when taxpayer bailout funds were given to struggling banks to be converted to common stock.

The transaction will allow the struggling banks to book on balance sheets the bailout "loans" as capital, with the government taking ownership positions in the financial institutions as a result.

"The stress test requirements conveniently have opened a back door through which the Obama administration can begin the process of nationalizing the nation's largest banks," Corsi wrote.

He noted that the Obama administration's determination to take an ownership position in struggling U.S. financial institutions marks a watershed moment in U.S. financial history when banks and brokerage firms move from a free enterprise environment into an environment where U.S. financial institutions are at least in part government owned.

"At the same time, federal regulators are insisting financial institutions raise additional capital, the Obama administration has systematically undermined the market for private capital to be invested in the banks," he wrote.

Corsi said that in the Chrysler bankruptcy, the Obama administration demonized secured lenders and irresponsible "spectators" who refused to accept second place to the UAW, a junior unsecured lender that the Obama administration allowed to receive a bigger debt repayment plus 55 percent of the equity in the government restructured automaker.

Now many investors fear any new private capital placed in struggling U.S. financial institutions could be at risk in the future should they refuse to accept the Obama administration's ideologically driven government solutions to possible financial crises.

Corsi wrote that federal regulators also appear to be developing a tough set of new requirements financial institutions must meet before repaying federal bailout funds.

Financially strong institutions such as Goldman Sachs and J.P. Morgan Chase have expressed a strong desire to repay government bailout funds as soon as possible, so as to avoid strong Obama administration intrusion into their management.

"Specifically, federal regulators appear inclined to demand that financial institutions demonstrate their ability to raise private capital on their own before any federal bailout funds are repaid," he wrote. "This decision would discount financial institutions relying upon strong first-quarter profits as the trigger justifying repayment of government bailout funds."

The banks needing to raise additional capital under the stress tests will have until June 8 to present to the government a recapitalization plan that federal regulators accept.

While the stocks of financial institutions have rallied on Wall Street, Corsi noted that investors appear to be discounting the dilution to current holders of common stock that will necessarily occur when the Obama administration converts preferred shares into common stock.

Also being discounted is the increased risk to taxpayers when the government takes an ownership position in these still struggling financial institutions, he wrote.

As preferred stock holders, taxpayers would hold a superior position to common stock holders in a bankruptcy proceeding.

Red Alert's author, whose books "The Obama Nation" and "Unfit for Command" have topped the New York Times best-sellers list, wrote that taxpayers would also face the same dilution faced by any common stock holder in the event the financial institution decides to raise additional capital or is forced by the government to do so.

Corsi received his Ph.D. from Harvard University in political science in 1972. For nearly 25 years, beginning in 1981, he worked with banks throughout the U.S. and around the world to develop financial services marketing companies to assist banks in establishing broker/dealers and insurance subsidiaries to provide financial planning products and services to their retail customers. In this career, Corsi developed three different third-party financial services marketing firms that reached gross sales levels of $1 billion in annuities and equal volume in mutual funds. In 1999, he began developing Internet-based financial marketing firms, also adapted to work in conjunction with banks.

In his 25-year financial services career, Corsi has been a noted financial services speaker and writer, publishing three books and numerous articles in professional financial services journals and magazines.

For more information on the stress tests and for financial guidance during difficult times, read Jerome Corsi's Red Alert, the premium, online intelligence news source by the WND staff writer, columnist and author of the New York Times No. 1 best-seller, "The Obama Nation."