I agree with you, however, that this could scare off subscribers to the new shares. They will look very closely at how the government has dealt with the old shareholders over the past 13 years, because something similar would be likely after the next housing crisis (if one comes). The new subscribers are not voluntarily going to get slaughtered.
I have never bought this argument. Whatever mistreatment the government has inflicted on shareholders in the last 13 years cannot be undone, and a giveaway to current
shareholders won't reassure the new money one bit. All it would tell new investors is if the government acts up again, the new money might have to wait 13+ years to be made whole.
The new money will be stepping into the shoes of the shareholders from 2008, not 2022 (or whenever the capital raise happens). The only way the government could hand out money to reassure the new investors is to pay off the 2008 shareholders, regardless of whether they have since sold their shares, while freezing out anyone who bought after 2008.
I think new investors won't care at all how the pre-equity raise common share base is split amongst the existing common, Treasury, and the juniors if converted.
Thus, to a certain extent, there is also psychological pressure on the government not to treat the old shareholders too badly.
Given the party in charge I think it's quite the opposite: the "hedge fund windfall" narrative is very powerful and too much of a "giveaway" will be viewed very negatively by many of those in power.
Cancelling the seniors instead of converting them to common is basically Treasury writing a giant check to existing common shareholders. Why on earth would Treasury choose to go that route, when it involves less money for the government and
terrible political optics?
And please don't answer "lawsuits" because the only thing that might stick is a takings claim, which can only result in an award in the amount of the share price drop from before the senior-to-common conversion to after, a few billion at most. That's a drop in the bucket compared to the upside for Treasury.
A SPS swap to commons could formally be justified by asserting that FnF were indeed bankrupt in 2008 and therefore a restructuring similar to Chapter 11 would be acceptable even today.
The government doesn't even need to go that far. A senior-to-common conversion would be for the same reason as exercising the warrants: enhancing taxpayer value. No other reason is necessary, though lessening the "hedge fund windfall" is a nice political bonus.
Nevertheless, it would be a very "brutal" procedure that would effectively expropriate the common shareholders.
I totally disagree with this characterization. A senior-to-common conversion wouldn't be "expropriation" at all because calling it that implicitly involves comparison to a counterfactual. The common shares have basically zero economic value right now and the share price is under $1. There is almost nothing for Treasury to "expropriate" anyway.
Deleting the SPS and just exercising the warrants would be a signal to subscribers to the new shares that the government - for all its shenanigans like the NWS during conservatorship - wants to show at least some fairness.
The problem with using the term "fairness" is that there are as many definitions of that word as people you ask. People like John Carney and Scott Foster would think the "fairest" way to deal with existing FnF shareholders is to zero them all out.
And, as I said above, I don't think any new investor would be reassured by "fair" treatment of the 2022 shareholder base, which likely has rather little overlap with the base before conservatorship. All it tells them is they would have to hold their shares for an indefinite period of time (which could be 13 years or more) to get their money back in another downturn.
As long as the SPS and the warrants exist, I think there is no way of FnF going public at all. Your idea that the warrants could be exercised a few years after the IPO seems unrealistic. The subscribers to the new shares want clear conditions already at the time of the IPO so that they can calculate reasonably.
Fully agree. Senior cancellation or conversion and warrant exercise will have to precede the capital raise, or at least happen alongside so that the new investors know how much of the companies they will be getting for their money.
That's also why I think all the common shares offered will have to be at one time; if FnF plan to do a subsequent common share offering later, how could the first one be valued when the final share count (after later offerings) is unknown?
But it also means that the government will claim less than 40% of the FUTURE market cap at the time of the IPO. It is a mistake to confound the status quo before the IPO (when the government can own up to just under 100% of FnF) with the status quo after the IPO.