Game Theory - Rational Thought

[BigMistaD]

A trusted investment source of mine has moved out of common and into preferred within last week. I was flabbergasted as he has owned C for many years like myself My entire thesis was Legacy C holders are in lock step with government due to 79.9% warrant position.

However, I could be wrong. We know the following:

>Common will still trade per Calabria comments.
>P will be converted to C . We don’t know whether it will be at full par or not.
>P is anywhere between 45% - 55% of par. C is at $3.
>New C and P holders will want cheaper C price to convert to or aquire.
> Govt will want higher C price for more $$$.
>En Banc decision looming large.
>Govt plan due in June.

I do not believe govt will announce plan until En Banc is released to public.

Comments welcome.

[joseph s]

Frankly, it's all a crap shoot with common.
The positive thing is that to raise 100-150 billion in fresh capital, concessions will need to be made in my opinion. I think that the concessions may include:

1. Any wind down out of certain realms of business (that Calabria wants) will need to be done with extreme care. The entire housing market is at stake. Likely over 10/15/20 years, not 2 or 3.

2. The warrants are highly likely to be exercised before any capital is raised.

The government's interest aligns with shareholders

That being said, there are many ways for things to go differently and it is highly likely that the preferred stock conversion will be at favorable terms because if they aren't, it will not be agreed to.

I think that the common shares will work out fine. Probably better than the preferred stock at this juncture. I have no guarantee of that and am 100% preferred.

Not a recco

[SimSla]

Can anybody explain why the P will be converted to C?

[Chris Roberts]

a. Because Moelis says so

b. Lowers the need to raise more capital

c. $33B in capital with stroke of pen

d. Big boys okay with this plan

e. All of the above

Multiple choice

[SimSla]

All of the above is wrong. Whoever told you this has no business/accounting background.

[Random Stranger]

Is P conversion to C mandatory? Will there be a vote? What about dilution after conversion?

[feralcomprehension]

"Is P conversion to C mandatory?"

  No, at this point it's conjecture.

"Will there be a vote?"

  If truly proposed, yes.

"What about dilution after conversion?"

  Likely, depending on timing.

[Chris Roberts]

Tell that to Moelis, John Paulson, Bruce Berkowitz. They'll get back to you.

(I am a CPA with 35 years of business experience)

When Layton (who obviously knows about Moelis) says they need $50 and Fannie needs $75, he is including the $33B for JPS conversion.

The JPS $33B would be counted as capital.  Finally, it will be a good deal, as the common will be priced to move higher... but this is all conjecture.

What's your inside or outside knowledge on why this would not be appropriate and actioned?  This happened with Citi and BoA, btw.

[Guido da Costa Pereira]

Attached is information on For BofA and Citi

https://projects.propublica.org/bailout/entities/27-bank-of-america

https://projects.propublica.org/bailout/entities/96-citigroup

[SimSla]

First converting the JPS to common does not create 33 billion of new capital. It is already accounted for in the 6 billion capital the companies are reporting as capital. This is as if you have 5 dollars in your left pocket and you are moving it in the right one (Accounting 101 by the way). 

Layton said what the final capital number needs to be 125 Billion. The companies will need to raise through SPO and Retained earnings 119 Billion of new capital. That is 6 billion of current capital ( that includes the JPS) plus new fresh 119 billion that is currently sitting in somebody's bank account.

[skibrian]

So many people on the board are lazy because they don't read the original contracts, the offering memoranda.

there is no MANDATORY conversion of preferred to common stock.  It is however NEGOTIABLE.

Preferred shareholders (should!) have rights that are not being litigated in court.  One thing that has not been taken away (yet, and will be fiercely fought in court) is the right of the holders of the security to vote on any changes to the terms of the original public offering.  Go go either website.  Read the offering memorada for any and all junior preferred shares.  Any changes to the structure of that security (including a conversion to common shares) requires 2/3 vote of the holders of the security.  In fact, every single series (each ticker you see on yahoo) will have to hold a proxy to approve any deal.  Given hedge funds will probably negotiate on our behalf and hold the power to reach 2/3 collectively, we preferred shareholders can rest assured that our best deal should be reached if our elephant fund friends do a good job working with the government.

There is no mandatory scenario.  In fact, the last preferred stock with a conversion feature was a Fannie Mae and it was converted in 2011 sometime.  I haven't read them in a really long time, but I seem to recall some (maybe the FMCKJ? FNMAS?) MIGHT have a conversion feature that can be exercised every 5 years or something?  Not sure...i'm at work, if anyone wants to research that, feel free.  Please do not take that as gospel.  I have some memory of some series that has a 5 year cycle of some sort.  Maybe it was something other than a conversion to common stock.

So far, this right to a 2/3 vote to change the terms of the offering memoranda have not been taken away.  However, part of that is being litigated because instituting the NWS without a 2/3 vote is actually like a mandatory change to the agreements, which is why we are arguing in court.  A mandatory change of any kind in the future will kick off a new round of litagation.  That's why all parties are talking right now.

---ski

shares requiring 2/3:

https://finance.yahoo.com/quotes/FMCKJ,FMCKI,FMCCM,FMCCK,FMCCT,FMCCI,FMCKK,FMCCG,FMCCH,FMCCL,FMCCN,FMCCO,FMCCP,FMCCJ,FREGP,FMCKP,FMCCS,FMCKO,FMCKM,FMCKN,FMCKL,FNMAP,FNMAO,FNMFO,FNMAM,FNMAG,FNMAN,FNMAL,FNMAK,FNMAH,FNMAI,FNMAJ,FNMAS,FNMAT,FNMFM,FNMFN/view/view_4

[joseph s]

Correct on almost every point. The 5 yr deal is the call feature for fnmas/fmckj

I believe the next call for fnmas is 2020.

FMCKJ is 2023.

They likely have extraordinary call features that may allow early redemption

The new capital will be selling new preferred stock. They cannot sell new preferred shares without redeeming the old from the reading I have done.

The whole left/right pocket thing is hogwash.

The JPS hang over the capital structure and basically have veto power for any changs to the contract. 2/3 is a high threshold

FNMFO is the only convertible preferred I know of.

I think in the prospectus (someone pointed it out) it states that if any offering of stock is done for all holders below the current price, the conversion resets to the lower price.

Read the prospectus and understand the terms before making a decision because this info could be incorrect

Not A Recco

[skibrian]

ah yes, joseph.  I remember.  the call feature was because the dividend rate was the highest in the FMCKJ and FNMAS offering because they were issued months before conservatorship at a time of high risk.  If the companies were solvent and healthy down the road, the idea was that they could unilaterally call the preferred stock back at par (I believe) and kill the high dividend obligation.  these shares were never meant to be part of the permanent capital structure.  Their high dividend rate is also why they trade at the highest "cents on the dollar" of all the preferreds.

lastly, I don't know how a CPA of 35 years doesn't understand that the full value of jr.'s on the balance sheet is already accounted for.  as simsla says, converting $6bn of preferred to $6bn of common at whatever price is simply exchanging one type of equity for another.  does nothing to build capital.  Maybe he works at HR Block.  Not that there's anything wrong with HR Block.  They are HQ in Kansas City!  Just, some are CPAs, but aren't normally involved in capital transactions of a strategic nature.

ski

[Chris Roberts]

It would be beneath me to respond to your personal attack. There is a reason for the conversion to common.

Obviously, you've got this all figured out, so I'll just be quiet and collect my money after the non-mandatory conversion.

[BigMistaD]

Dudes, let’s not Complicate the issue. They will convert to common because they’re not going to write a check for $33 billion to pay the preferred shareholders. It’s just that simple.

[Big Bruce]

Agreed. And they don't want to worry about perf dividends. It's a reset. 

[BigMistaD]

...and yes, p holders will vote to convert. The main concern for every P holder is at what ratio.

[BigMistaD]

Off topic. I was. at Pangos All American B-ball hoops camp yesterday. Top 100 high school ballers in nation. Watch Evan Mobley, 7 footer who handles ball like Kevin Durant. He will go #1 in Draft after 1 year of college ball.

[Jeff Wood]

Why don't we wait on all this until the 5th Circuit speaks? They may have something important to say.

[BigMistaD]

Cmon people. Of course, there will be no plan released until En Banc decision!!!!!!!!

[hellbentonholding]

Yes, the voter is the FHFA which assumes all rights, powers and privileges of the shareholders

[BigMistaD]

Mark my words......En Banc ruling will be the biggest middle finger to a govt, the world has ever known.

The govt went “full Venezuela” on shareholders and u know they say about payback. No cCoincidence that the plan will be released in June right around the same time the ruling as expected. Somebody has already given the treasury the heads up that this not in a go your way.

[joseph s]

We will see what happens