News Focus
News Focus
icon url

Tex

09/11/08 8:40 AM

#199 RE: martingale #191

re news

The purpose of the bailout is to assure the world that the creditors are safe.

The bailout isn't designed to do favors for the common stock, whose owners have lost control of the company and will have their ownership reduced to 20.1% of what it had been, while the government agrees to bring the net worth of holdings up to zero per share repeatedly for a while. Government gets to loan the companies for as long as it wants funds at a 10-12% rate (depending whether the cash dividend is current every quarter).

Common owners have to watch while the companies shrink, in accordance with the bailout agreement, to having a specified, limited amount of their own capital tied up in retained loans, which means that the opportunity to profit in the future is not only diluted, but additionally capped. If common owners don't like the way the company is run, there's little to do as they will have to buy off the government's interest to shed its control -- even if eventually profitable again. If profitable, this buyout could be extremely expensive.

Indeed, there is no provision for buying out the double-digit debt owed to the federal government in connection with the bailout, so creating a more efficient capital structure able to leverage an adequate credit rating (without government backing; the current credit rating is based on the government's credit) will be impossible without government consent. And where else will the government be making 10%?

This could be a long haul to independence. This is a state-run factory for now. Has anyone ever heard of a state-run factory making a ton of money?

For my appetite for financials, I'll stick to ACAS and the companies it manages.
http://jadedconsumer.blogspot.com/search/label/Ticker%3AACAS

Take care,
--Tex.