Back door nationalization as bailout money may convert to equity stakes

The White House and Treasury Department may decide to convert the government's existing loans to the nation's 19 largest banks into common shares, just like it did with Citigroup (C), in order to stretch what is left of the bailout funds, according to a story in today's New York Times. The Obama administration knows they don't have the votes to get more bailout funds, so by converting the preferred shares, which are similar to debt, to common shares they can raise the equity in the banks and avoid having to give the banks more money.

But the bigger question is what has this money done for us lately? According to The Wall Street Journal, very little. The Journal reports this morning that bank lending has dropped 23 percent since the banks got their cash infusion from TARP. This report will only fuel the fire of the backlash from Congress regarding the banks spending on perks and bonuses rather than lending.