There was quite a bit of banking news today, largely spurred by this NY Times article discussing the government's plan to convert their preferred shares from TARP to common shares as a method of recapitalizing the banks.
Even if no new money goes into banks, common stock creates different incentives than preferred. Managers, if they are doing their job, maximize the value of common stock (not preferred stock). Limited liability means that a distressed bank will have perverse incentives until it has enough common stock to absorb those losses. With too little common equity, banks will pass up good loans because too many of the gains are realized by preferred stockholders and debt holders. Managers running banks with too little common equity will be tempted to make speculative loans and shift those losses onto senior creditors (preferred stockholders and bondholders).