You nailed it, Rodney. No rational management team would dilute the common shareholders — the true owners — to reward the JPS, which are non-cumulative instruments that have already received every benefit they were contractually entitled to. The JPS don’t accrue unpaid dividends and therefore hold no growing claim on capital. In fact, once the companies are released and recapitalized, management has every right to issue new cumulative preferreds at lower yields to redeem the legacy JPS at or near par. That’s exactly how healthy financial firms refinance legacy capital — by lowering their cost of capital, not by handing over half the company to a dormant class of securities.
And the real cherry on top? The FHFA’s own capital framework already assigns zero regulatory capital credit to the legacy preferreds. That means they’re treated as dead weight in the capital stack — a liability to be cleaned up, not converted into common equity. Treasury and management both know that post-conservatorship investors will demand a clean structure with clear, forward-looking capital tiers. Paying off or exchanging the JPS on rational, limited terms fits that model; giving them a windfall conversion does not. The future value creation sits squarely with the commons, who will bear the dilution risk, market volatility, and capital rebuild.
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