"Second Quote From Tim Howard I’ll give you my response just with respect to Fannie (makes the numbers easier to understand). Today you have a company with about $11 billion in annual earnings, 1.15 billion shares outstanding, and essentially no capital. Let’s say Fannie needed to raise $60 billion to meet its new capital standards (not a prediction, just an example). Let’s further say that it has three years to get fully capitalized. It can get halfway there (assuming no growth in its outstanding MBS) through retained earnings, but still will need to raise about $30 billion in new equity. Factoring in dilution, let’s now assume it’s able to issue 400 million new shares at an average price of $75 per share. So now you have a fully capitalized company with $11 billion in earnings, 1.55 billion in outstanding shares, and annual EPS of $7.10 per share. At a P/E of 10:1 that’s about a $70 stock (at a P/E of 12 it’s about an $85 stock). If Treasury exercises all of its warrants immediately, Fannie still has no capital, still has to raise $30 billion in the equity market, but now has 5.7 billion shares outstanding. Figuring the dilution that would result from Treasury selling its shares and the market anticipating the impact of mammoth capital raises is tricky, but at an average price of $15 per share Fannie would need to sell 2 billion shares of new stock to become fully capitalized. That’s a huge amount to raise in three years, and assuming you could do it, you’d end up with a company earning $11 billion per year, 7.7 million shares outstanding, an EPS of $1.43, and a stock price of about $14 at a 10 P/E ($17 at a 12 P/e). If I’m a plaintiff, an end state that has a $14 stock versus one with a $70 dollar stock is a huge deal. I would be inclined not to settle without significant alteration of the terms of the warrants, and if I couldn’t get the terms I wanted, I would offer to fund the Washington Federal lawsuit to its conclusion, to get the warrants eliminated entirely. That why, for me, the unaltered warrant terms are a “deal-killer.” Since Treasury did nothing to earn those warrants–it simply gave them to itself because it could–I would not accept a deal that left them unaltered (and cost me close to $55 per share on the value of the company I want to bring out of conservatorship). But we’ll see what the real plaintiffs do."
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