The more I think about it the more it looks like they are going to $0 or some symbolic number, I find it really hard to believe tax payers will lose a cent before shareholders run out of money, after all its said that paulson was the one who pushed for $2 a share on BSC. If the treasury gets the authority to buy equity there I find it hard to believe the share offering will be a 'success', most offerings are running at steep discounts plus paulson tedency to push for symbolic anti-moral hazard moves should make the worst offering since TMA tapped the capital markets and we know how that ended. Its interesting that even if one could come up with an argument that these companies have enough capital(like the Bill Millers of the world) this still doesnt mean a thing, if the market PERCEPTION is that these companies need more money and the treasury steps in to contain panic, its all over, the share count would go through the roof But I would like to hear other peoples opinion on this
Question is what is the cost of that capital? How do they make any money here? Sure Gross is in love with their debt because he bought it when it was trading at a huge discount and now it is going to get official US Gov backing, but as with BSC, equity holders will be the ones to take it on the chin. Any move they make is going to dillute equity holder's stake and for GSEs to be part of the solution to the housing problem (which by the way isn't that people can't get a mortgage, its that there are few well qualified people who want one right now and shoring up Fannie and Freddie isn't going to change that) they will need to rasie more capital. How they do that without impacting equity holders negatively I can not see. It seems to me that what Paulson is saying is that if we can just fix the credit markets and make them work again then housing will take care of itself. So if banks feel that they will be able to unload their RMBS to the GSEs then we are back in business. But what about the tighter credit standards, even if the GSEs start buying up bank RMBS (did they ever stop?) who will be applying for these loans? Rates are higher and equity lower so it isn't going to come from refinances and who can qualify for a home if the have to be truthfull about their income and have to come up with 20% down with mortgage rates hitting 3 year highs and the rent to buy calc working firmly in favor of renting even after tax considerations. Having said all that I honestly have no clue what is going to happen. What should happen given the state of housing http://mrmortgage.ml-implode.com/20...me-sales-report-preview-for-official-reports/ is obvious and I see nothing in Paulson's plan that will really address it, but there is so much messing around going on in the markets right now, in the short term you can't hope to see reality reflected in price, long term it will get there. So I have been buying SKF (which just bounced off its 200 day)OCT and JAN calls and QQQQ/FXI August Calls as a hedge against further rally. I am looking for $200+ SKF sometime this year.
The more I think and read about this current housing bill it seems to me that what is going on is getting Fannie and Freddie to take all the crap off the bank's books. Using the GSEs as vehicles to make banks solvent again. Could also be timed so that the Fed doesn't have to keep all the toxic stuff on its balance sheet when these new loans expire. The banks take it back and sell it to the GSEs that will now have the money to buy it and be able to raise as much as they need as they are now essentially issuing US notes. Shifting the burden of the losses from the banks and their shareholders on to the public. Pretty nifty footwork. Wall street is happy because the banks are saved and will actually be able to retract some of their write downs as they will get a good price for their crap from the GSEs (this could be why the financials have been rallying so hard) The politicians are happy as they get a huge new expansion of government. The public is happy because they think this will save the country from a deeper crisis. Mark my words, by the time all this has played out, the cost to the tax payer will be in the order of $200-$500B, not the $25B they are currently projecting. The reason the government is going to buy the stock is because it is a way to funnel money to the GSEs with the pretense that the public is getting something for that money (when in fact these companies are going to be less than worthless once they are saddled with all the bad debt that they can take), it also will give the current shareholders who are powerful entities like state pension funds a chance to get out and reduce their potential opposition. The bond holders too are happy because they are now sure that their money will be protected as they are essentially holding US treasuries now. All very neat for everyone, just add another few hundred billion on the national tab. My SKF call might be completely off base.
I read a good article about "schools of punishment" for the bad behavior of banks last night. I think we're probably heading the way Japan headed, whether we mean to or not: http://www.businessspectator.com.au/bs.nsf/Article/Three-schools-GU3LQ?OpenDocument My take on the bill is like Mvic, they're trying to shift all the crap onto the government in the long run. We'll all pay for it eventually in inflation. I'm not sure Paulson really wants to punish shareholders. I think his move with BSC was done since it was so blatantly obvious that the government was directly bailing them out, and every cent they got on the dollar was because the government stepped in. Since so much of the stuff in the housing bill is going to be going on behind the scenes and won't be as obvious to the casual observer, I don't think the politicians will feel as much of a need to "punish" the stockholders. I really think it's all about image in their minds.
if FNM and FRE get that credit line, shareholders are still on the hook to service and pay that debt, if they get a equity infusion I have really HARD time seeing the issuance coming at a premium to the share price, its far more likely it will come at a discount, possibly a massive one to attract third parties
Daal, I think the offering will push the share price down, but I definitely don't think it's going to $0, especially since the government's intention with this bill is to show that they will save Fannie and Freddie when they have to. Unless they just decide to make them totally government entities (and even then I don't think the shareholders would get $0/share), I think the gov will try their hardest to make their stock prices fluctuate somewhat normally. BSC was perceived as a company made of greedy evil Wall Street people by the public, Fannie and Freddie are perceived as the good guys backing the greedy banks. I don't think Paulson would mind punishing the banks a little, but that is dangerous since the banking system needs to stay solvent.
Agree in the short term, this is a stealth bailout of the banks and the GSEs will be made to look solid. Eventually after the banks have unloaded as much as they can on to the GSE's books, maybe in several years we will see them go belly up if housing doesn't come back and be taken over by the government entirely. I wouldn't use FNM puts as a hedge because they will not trade based on reality, these have been some of the most manipulated stocks (all their earnings manipulations) and its just going to get worse in the next few years.
These companies have less than $70B in equity and the market is worried about them, if they were to raise say $30B on this capital market how bad will shareholders take it on the chin?as far as I know we had like three or four capital raisings of this size(C, MER, UBS, some other european bank) the combined market cap is $25B and they will try to make the largest raising we had in months. It seems like a slam dunk but I want to make sure I'm not missing something. This lastest rally reminds me of the ABK surge right before the capital raising, it was pretty obvius shareholders would be toast, yet the stock went from like $8 to $12, then when they released the terms it sank, now it stands at $2 a share