"Do you ever eat a salad without having grown all the ingredients in your own garden?"
Do you expect to receive a rotten salad after reading a review that a restaurant had a rotten salad at a specific point in time? Is the restaurant more likely to have a rotten salad? Sure. Does that make it the most likely outcome? Nope. You'd want more information on the current situation.
"Yes, either Treasury will convert the seniors to commons or they won't. But from our point of view all we can do is assign a probability to it. Right now I'm at 75%, and saying 0% is ridiculous in light of the evidence. What is your number, and what is your reasoning behind it?"
Likewise, I've never said SPS conversion has a zero percent chance. It's certainly possible, but should not be stated as if it's a forgone conclusion. Even if I conceded to you the 75% probability for illustrative purposes, what is the result of the other 25%?
Let's use a $1000 hypothetical example based on $0.50 common cost basis and ignore any JPS for easier math.
- 12% chance common gets wiped out through receivership or other means. My $1000 goes to zero. I go live on a beach and mooch off my family.
- 75% chance common gets diluted by SPS and warrants. My $1000 goes to $10. I buy myself a scratch off ticket and lose that too.
- 12% chance common get diluted by warrants only. My $1000 goes to $76K (based on ~$38/sh) may take some time to stabilize and get P/E to double digits. I patiently watch my investment grow and buy a cheap bottle of wine and go about my life.
- 1% chance common not diluted by anything, both SPS and warrants rescinded. My $1000 goes to $380K, and I buy a car and nice bottle of wine, and I can still afford a lawyer after I get a DUI.
Even with a combined 87% probability of a horrendous outcome, the weighted return on this risk is about 12:1 so I am likely to make money. IMO - the entire above scenarios represent no more than 50% of the likely outcomes. The other 50% is a resolution that we are unlikely to predict, unique to the GSE issue. I'll call that a net-zero gain for now because it could be good or bad, totally unknown but should be accounted for as it becomes clearer.
There is no point bashing Common holders if they are willing to take the risk or are riding out the risk due to the situation they were handed years ago.
AI
