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I like your comparison. Yes, there is a crisis of confidence looming if the old shareholders are almost completely diluted by an SPS swap. The NWS is already a nasty forewarning - for things that could happen again in the future.
In the worst case, the IPO could go bust.
"soon" = it happens in a time span that today's 30-year-olds will live to see.
breaking news or neck breaking news?
The pessimism here is "so thick you can cut it with knives". Just the opposite as before the Scotus ruling, when everyone assumed at least a tenfold increase in common stock prices.
In that respect, these are interesting times for contrarians, especially with regard to JPS, which are trading near record lows relative to commons (factor of 1.5 instead of 3 to 5 normally).
All it takes is a brief hint from the Biden administration that it will continue the path towards recap/release, and prices double overnight.
...Of course, such a hint will come only after all "greedy" hedge funds have sold off at the lows
Please note that I don't have another ID.
There are 1.8 billion shares of Fannie and Freddie combined. For simplicity, I have done the calculation for Fannie and Freddie combined. Share prices are usually around the same level.
What really matters in my calculation is the fact that the lower FnF's share prices are, the higher the dilution. It could therefore be that someone is "helping things along" as they fall.
Currently there might be short sellers who are also acting in the interest of the U.S. government (I can't prove this, of course).
Below I have calculated the benefits that would accrue to the U.S. government if the SPS-to-common stock conversion occurs at a particularly low common stock price.
Calculation A assumes $2.50 common stock price at the swap
(dilution factor = 44)
Calculation B assumes $0.80 common share price at the swap.
(dilution factor = 135)
I assume that the market cap (MC) after recap/release will be $250 billion, and that $100 billion (40%) of this "pie" would go to the government (possible SPS swap, warrant exercise), the JPS and the common shareholders.
--------------------------------------------------
CALCULATION A: (high share price).
Assume FNMA were still at $2.50.
Then the MC of the common stock would be 1.8 billion shares x $2.50 = $4.5 billion.
In case of a SPS-to-commons swap the dilution factor would be
($193 billion + $4.5 billion)
----------------------------------- = 44
$4.5 billion
Leaving JPS out of the equation, the old common shareholders would receive (of the $100 billion pie to be distributed):
$100 billion divided by 44 = $4.38 billion,
....and the government would receive $100 billion - $4.38 billion = $95.62 billion
$4.38 billion (existing shareholders' share) divided by 1.8 billion common shares = $2.43 (target price after recap/release)
--------------------------------------------------
CALCULATION B: (depressed price).
Let's assume that the short sellers succeed in pushing the FNMA price to 80 cents and hold it there.
Then the MC of the common stock would be 1.8 billion shares x $0.80 = $1.44 billion.
If the SPS were swapped into common shares, the dilution factor would be:
($193 billion + $1.44 billion)
------------------------------------- = 135
$1.44 billion
Again, leaving out the JPS, the old common shareholders would receive (of the $100 billion pie to be distributed):
$100 billion divided by 135 = $0.74 billion,
....and the government would receive $100 billion - $0.74 billion = $99.26 billion
$0.74 billion (existing shareholders' share) divided by 1.8 billion shares = $0.41 (target price after recap/release)
--------------------------------------------------
CONCLUSION: The more the share price is depressed prior to the announcement of the recap/release, the greater the dilution factor in the SPS swap (and also in the JPS swap, if that were to come in addition).
Therefore, it could well be that there are "interested parties" who are depressing prices out of pure self-interest.
This is just some background information on who the "evil short-sellers" might be.
It would be a contradiction in terms to impute rationality to consensus.
Thank you for your answers. I too appreciate your posts very much.
I wonder if JPS shareholders are not also affected by HERA's succession clause. Are you sure JPS holders would really be asked f. e. to agree to a haircut (based on contractual rights)? Or could FHFA and Treasury bypass/ignore them in much the same way they bypass common shareholders?
Question for Kthomp19:
In what order could the swaps occur as part of the restructuring?
A: First the swap of JPS into common shares (increasing the number of commons from 1.8 to 9 billion). Then the swap of SPS into the combined amount of those 9 billion commons?
OR
B: First the swap of SPS into commons (dilution by a factor of 100, so there are subsequently around 200 billion common shares whose value falls sharply). Then the swap of JPS into those already heavily diluted commons at par value?
----------------
I believe that (A) would dilute JPS significantly more than (B). JPS could end up being worth as little as $8, not $25.
Are there any legal arguments against (A), f. e. that JPS rank higher in the capital stack, which would prohibit (A) and leave (B) as the only valid option?
"It behooves the subject to obey his king and sovereign, and, in obeying the orders given to him, to reassure himself of the responsibility which the divinely appointed authorities assume for them; but it does not behoove him to hold the actions of the head of state to the standard of his limited insight, and, in conceited arrogance, to presume a public judgment on the lawfulness of them."
Gustav von Rochow (1792 - 1847), Prussian Minister of the Interior and Minister of State
Not if you look at CET 1 which is essential for a release.
Michael Kao: "If the Gov were smart (I know that’s a big “if”), it would initiate settlement talks now"
Re: Fannie/Freddie-Post-SCOTUS Ruminations From A Star Wars POV. Been thinking a lot about SCOTUS ramifications and spent a fair amount of time today with various legal experts. Some high-level thoughts below. (THREAD)
— Michael Kao (@UrbanKaoboy) June 30, 2021
Tim Howard expects a political solution
(from his latest newsletter)
That's what I thought even before Scotus:
https://investorshub.advfn.com/boards/read_msg.aspx?message_id=164487707
Michael Kao - Fannie/Freddie-Post-SCOTUS Thoughts:
Re: Fannie/Freddie-Post-SCOTUS Thoughts. To paraphrase my favorite stormtrooper, “This was NOT the legal opinion we were looking for.” Lots to unpack. Here are my initial thoughts. (THREAD)
— Michael Kao (@UrbanKaoboy) June 23, 2021
Calabrias capital rules were far too high to make a capital raise feasible.
If Thompson had sought a positive, equitable solution for holders of common stock, the case would never have reached SCOTUS.
The reason is that the U.S. government is not the Salvation Army and U.S. is not really a state governed by the rule of law. What governs instead are greedy politicians who distribute from the bottom up (into their own pockets).
"The law" is an ideological instrument of power designed to promote the illusion of justice, when in fact - as Fannie/Freddie shows - the government is ruthlessly robbing its citizens.
The real sticking point is the exercise of the warrants. That dilutes by factor 5.
$7ps (with JPS conversion) and $8ps (without JPS conversion - your previous post) doesn't make much difference.
No "quagmire": Here's what Tim Paglaria thinks about common and preferred performance.
If the SPS get cancelled now (Collins/SCOTUS), all further lawsuits are moot regarding SPS. You can't bring a lawsuit against something that no longer exists. The other issues in these lawsuits will, of course, remain.
According to Thompson, after "buying back" the SPS (i.e., Scotus declares the SPS paid off) and paying all accrued SPS dividends since 2008, $29.5 billion remains.
And if the SPS are "gone" after the buyback, no more dividends need to be paid.