George Soros in “How to capitalise the banks and save finance” (Oct. 12, 2008) is certainly correct that now is the time to take advantage of the flexibility built into the Paulson/Bernanke rescue plan to re-capitalize the banks through the purchase of convertible preferred shares by the federal government. Convertibility into common stock provides the public with some participation in the possible upside of a turnaround in the fortunes of the banks.
However, Mr. Soros makes no mention of whether these are to be voting shares and no mention of whether they come with a seat on the board of directors of the banks fortunate enough to be the recipient of a rescue at the expense of the wider public.
The real danger in the current situation is that a financial crisis – finally recognized – becomes a legitimation crisis that undermines a deeper faith in our basic political institutions. Thus, accountability and transparency must be the order of the day.
Any preference shares issued by the private sector financial institutions must come with appropriate voting rights and at least one seat on the board of directors of the rescued banks. That is only way that the general public, which after all is footing the bill for this rescue after having been victimized by the de-regulation of the last twenty years, can rest assured that the banks will now turn in a direction that is socially and fiscally responsible.
Such a move will, in and of itself, send a measure of reassurance to the wider public and have an impact on restoring general confidence in our core financial and political institutions.
Stephen Diamond, JD, PhD
Associate Professor of Law
Santa Clara University School of Law