SHartwell

Haven't We Heard this Market Song Before?

Hardnosed: Unfortunatly, common shareholders have been placed in "checkmate".

If you vote "no", the company files for bankruptcy and - the way the deal docs are written - the new investors walk away with the whole company and common holders get nothing.

If you vote "yes", you get a small slice of the new company.

This was basically a bankruptcy - but much faster, without all the messy paperwork and legal fees, and with a net result that gets the shareholder more than they otherwise would have had.

Don't blame the new investors - they just took advantage of the situation (I'm not one of them, unfortunately). Instead blame the "brilliant" management that tried to finance a long-term obligation (the mortgages) with short-term funding (the repo) and got caught with their shorts down.

So the only reason to vote "no" here is because you're mad (justifiably, in my view) and you're willing to forgoe that last $1.20 per share to express your frustration.

Haven't We Heard this Market Song Before?

Sorry folks, this deal is done. The reason JPM renegotiated the Bear deal is because they messed up the original documents. Unless you find a similar mistake the the TMA documents there's nothing you can do about it (and even then you'd have to foot the bill for a lawsuit).

So the choices are to vote for the share increase, in which case the shares are worth the diluted amount (around $1 by my very rough estimates) or vote against and have the company declare bankruptcy - in which case you'll get zilch.

In bankruptcy you'll get nothing because of the clever way the docs have been structured. TMA has an unrealized loss of around $1.5 billion on its repo position (hence the current book value of 8 cents per share, pro forma).

The hope is that the repo position recovers in the coming year - in which case the diluted common will have a book value of around $0.55 (by my rough calcs). But if you don't vote for the new shares, the deal has all the repo recovery going to the new bond investors - and hence you're right back to 8 cents (at best) - before the costs of bankruptcy.

Bear was in a similar postion. The market value of their $30 billion mortgage book collapsed, and on a mark-to-market basis their book value of $80 rapidly approached zero. Had the Fed not stepped in, they would have declared bankruptcy. The Fed bought the book at a knock-down price (hence Ben's comments today that they might make money on the deal). While it hasn't been disclosed, I suspect that post this transaction Bear's book value wasn't far off the $10 price. Another reason for bumping it from $2.

Had the Fed (or somebody else) stepped in and bought TMA's mortgage book at a similar price, the company would have been bankrupt and the common would have been worth zero. And the new buyer would have received the potential upside of the prices returning to reality.

The way this deal is structured, you've got a shot at some of the upside, as long as you play ball and vote for the share increase. Hence the shot at a book value of $0.55, with more profits to come after that. So it's not a great deal relative to where the stock used to trade, but it's actually a pretty good alternative to bankruptcy.

As for Cayne's $61 million (and much though I dislike the guy based on what I've read), keep in mind that it was less the 10% of what his shares were worth at their peak last year (6%, actually).

TMA's peak last year was $24. 6% of TMA's peak price of $24 is $1.44 - which is about where we are now on TMA and surprisingly close to the discount Cayne got.

Whether he should have ever been paid the shares in the first place is a different discussion...