Zdreg,
I will try to address your query however a good article (that probably does a better explanation than me) can be found here:
http://seekingalpha.com/article/135589-bailed-out-banks-how-they-stack-up
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As you are probably aware, preferred stock has characteristics of debt and equity.
For my analysis, I made the following assumptions:
1. Recognise that preferred stock has higher liquidation preference to common stock.
2. Polarise things and treat preferred stock as equity.
Let's look at SNV as one example.
TARP "investment" by the US Govt was
967 million.
Market cap = 1.07 billion.
Therefore even though the market cap of the common stock is 1.07 billion, the US Govt has a liquidation preference of 967 million, which means that there is very little left over for common shareholders.
Although assumption #2 above is a little simplistic, CIT is another good example to look at.
If the debt for equity swap goes ahead, then common shareholders will get roughly 2% of equity in the new capital structure, whereas preferred shareholders will get approximately 7%.
Alternatively in a bankruptcy situation, CIT common shareholders are very likely to get zero, and CIT preferred shareholders might get some scraps if there are any left.
So how can this information be used for investment decisions?
Consider short positions in companies where you consider the ratio of TARP "investments" to market cap to be "high".
This analysis was very useful in the days leading up to Friday 27 Feb 2009, when Citigroup announced the conversion of US TARP preferred stock into common equity.
The reaction of the common stock on that day suggested that "investors" were not treating the TARP preferred stock as equity before that date.
Quote from zdreg:
what is significance of large amount of outstanding preferred?
