Thanks for your reply and thanks for the link of the framework you wrote all the way back early 2019. Appreciate the detailed reasoning.
Please do correct me if I am wrong as I am no capital restructuring expert.
I don't believe the government would be able to raise 100 B on the market for something they own almost 100% of. The largest raise was Ali baba was it not? 21B.
Even raising 25B would be a far stretch. Whoever that is going to invest in this in large sums would have read up on how the government managed this conservatorship the past 13 years.
The new money would want to know what happens to the warrants. The senior preferred and warrants would have to be dealt with before new money comes on board. If the senior pref are converted to commons does it not deem the warrants worthless? what is the strike price of those warrants? (couldnt find it when i Googled)
And if the conversion of senior pref to commons does occur, even if a reverse stock split is done to get it out of OTC , say NYSE at minimum $4 bucks, the government would still be 99% owner before new money. How would they be able to raise 25B when they control the board and pretty much all of management as is today. With a mandate to provide affordable housing and ensuring accessibility to applicants with lower credit scores, profitability is a conflicting interest.
The past 13 years has shown the world what a great tool the GSE is for whoever gains office every 4 years at the white house. They control fHFA they control Treasury they control everything. They want new money to be the first layer before tax payers are involved incase of a severe downturn in business but no governance from the new money and with conflicting interest.
This is different than AIG, AIG was not meant to serve the public. While I am not saying your calculations are wrong it is just my opinion JPS and commons are two very different bets. JPS investors are betting on the court outcome. Common investors on the other hand are betting the government has no other way to advance their affordable housing agenda and protect taxpayers from another bailout besides a recap and release. GSE has to be a private entity (government way less than 50% shareholding) for new money to come in meaningfully.
If the government wants new money to immediately shield tax payers from risk right now they would just immediately cancel the seniors and list it on the market with a backstop while the GSEs build enough capital. The taxpayers (government) has been doing this for the past 13 years, allowing a few more years while progressively selling their warrants shouldnt be an issue. They can easily break up their warrants and sell it to banks, they write the rules anyway. As core capital accrues the warrants will rise as well.
The government can also just let the GSEs accrue core capital , 20B every year. Max they could do this is 7 years as the warrants will expire then. Lets say they ride it to the final year before relisting the GSEs they will again face the same problem as owning 99% of the company and trying to get someone to buy their shares. (Convert seniors, they would have to cancel the liquidation pref else no money would come in and exercise warrants). At this juncture the core capital would be sufficient, they own 99% of the company with a market cap of say USD 300 B. Government would then sell 300B worth of shares progressively and would take many more years to divest.
Why I dont think the government will be in it for the long haul would be the upcoming court cases. We are only less than 10 months away from finally going to court with juries. I am no legal expert and I have not read all the court cases and opinions but with each court case there are more points plaintiffs can use. It used to be we had no standing and it also used to be they can turn on NWS anytime. I believe before Sweeney we didnt even have access to most communications. I think we agree we have claims and after scotus NWS wont be coming back.
My best case would be settlement and release/recap with government backstop as mentioned above (while cancelling the Seniors and liquidation preference) and thus arranging for their warrants to be sold progressively. Lets say market cap after fully satisfying core capital in 5 years = 300B. Warrants sold progressively to whoever wants to buy them for whatever price. With dilution commons still has stake to 60B worth in market cap. So for sake of simplicity commons worth $60 bucks(end of 5 years) + settlement. I assume the warrants can fetch somewhere around USD 150B, not too bad for the government after already taking more than USD 100B in net worth sweeps. As for the settlement amount, not sure :D.
What I think is most likely to happen is the government lose on significant items in court case next year. Commons and JPS will appreciate, dont have price estimates for commons :D. Looking at a range of settlement from voiding seniors and warrants to government just paying off commons and JPS but no recap and release.
