User 227528

Citi, Merrill, WaMu: Death Spiral Financing

First let’s consider Mr Bonderman is not stupid and has more insight into WaMu situation than the average Joe. (You don’t throw 7 Billions into a risky business just for kicks).

Second, let’s not forget that Mr Bonderman business is into take public properties out of the market and make them private.

Third, Mr Bonderman said he has no rush to recover his investment and also has a 25 Billion war chest sitting in his lap.

The terms of the deal with Wamu seems like it was designed to be a first round of financing to take the bank completely, wait a couple of years until the dust settles and cash his way out.

Let’s assume WaMu needs 6 Billion more capital… I bet he will not commit that kind of money in a completely distressed business without some considerable discount. $3 Dollars per share will be around 30% discount of its current price so for simplification lets use that number (if the price is less than $3 the numbers will be much nicer for him) .

If that were the case Mr Bonderman will invest 13 Billons, and obtain 72% of the shares at an average price of $3.36 (the book value of the adjusted shares will be $ 7.0).

Today selloff was about 20% of the outstanding shares and most likely most of today sales were shorts, at first sight this is a no brainer short: either the company goes bankrupt and the value of the shares goes to $0 or there is a new capital injection (PLUS the “full ratchet” compensation) that will dilute the value of the shares considerably, so there is no way to lose …

But let’s remember that someone is buying at the other side of those short sales… What would happen if some of the friends of Mr Bonderman are actually buying those shares?… What would happen if Mr Bonderman does inject the needed capital AND offers to buy the remainder shares at around $ 7.0 dollars (The new book value) in order to take the company private?

Oh boy, that would be the perfect short squeeze! The mother of all Bear Traps

Mr. Bonderman friends don’t need to sell any time soon. The shares will jump in value to the $ 10’s because there wouldn’t be many shares left to sell and many of those shorters may want to cover their bets…

No matter if Mr Bonderman does indeed buy the remainder shares or not… the shares will be around $7.0 for a 100% return of his investment… And if they manage to pass the storm the bank could easily reach $ 15 in 2 or 3 years down the road…