BAC-WT - Bank of America Warrants

[stahleyp]

There is an article in Barron's this week about the TARP issues, if anyone wants further background. Not much if anything new for reads of the forum, though.

[philassor]

There is an article in Barron's this week about the TARP issues, if anyone wants further background. Not much if anything new for reads of the forum, though.

Here is the article:

http://online.barrons.com/article/SB50001424053111903697804575574241608256292.html

Also regarding WEB he was quick to disassociate himself from the BAC investment ( it was a Simpson pick). Berkshire only owns about 50 million dollars worth of BAC and it represents 0.15% of the stock portfolio.

This being said I would think that at the current price the upside looks much more probable than the downside and I too have the itch to buy.

[ERICOPOLY]

Uccmal - not saying either way, but I believe BAC trades 2013 leaps.  Has anyone here analyzed the near the money leap calls as a better % gainer play?

-Dan

This thread got me interested and I bought some BAC warrants on Thursday and Friday.

 I thought about those 2013 leaps.  Decided to go with the warrants given it's the only place I can get long term leverage with no financing risk for 8.25 years.  Someplace else in my portfolio I'll buy some 2013 calls on another name.

This gives me diversification of maturities.

I have started to contradict myself now.  I'm keeping the warrants but I'm adding some $10 strike 2013 calls.  They break even at $13.65, and tangible book value is nearly $13 today.  I used margin to buy the calls (not a dangerous amount of margin).  

I figure by 2013 the tangible book value will be higher than $13.65, so mentally I'm writing this down as an investment two years from now below tangible book value.  By then hopefully I will have the cash to take delivery if that is necessary -- from trimming other investments like SSW which should have worked out by then.

So this is sort of like staking a claim for what I can reinvest in two years from now.  

Downside risk... don't you think they could easily raise $10b to $20b of equity capital at current prices if it comes to that? 10% or 20% dilution isn't exactly going to make the shares worthless.  Aside from this repurchase risk, BofA shares were trading much higher than today for most of the year, and two years from now you'd be adding accrued earnings and a brighter outlook as they'd have shed another two years worth of bad loans and added two more years of good ones.  

[ERICOPOLY]

There is some news here about the dividend policy -- see page 25:

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9Njg5MDV8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1

They state that they want to pay out about 30% on trailing earnings as a dividend.  They do not want to do acquisitions.  They plan to use the rest of the excess capital for share repurchases and special dividends.

Thus far in 2010, their tangible common equity has grown by 15% -- not bad for 9 months.  That's $17b.

[stahleyp]

Eric,

I appreciate your posts. You use very good logic and I'm glad you post here. Just wanted to let you know. You've also changed my views a bit about risk. I especially liked it when you were discussing investing in something with a huge return, ie fairfax options. From my view, you said one should look at the dollar amount for an investment should be view as basically the time it took to save, rather than the sheer dollar amount. I liked that a lot, so thanks for being a great member of the board!

[menlo]

For what it's worth, I found this report helpful in explaining the MBS market and the big banks' potential exposure to the put back issue (click through the ZeroHedge and scroll down to the Iridian report). 

http://www.zerohedge.com/article/iridian-asset-management-devotes-entire-q3-update-letter-mbs-crisis

[ERICOPOLY]

For what it's worth, I found this report helpful in explaining the MBS market and the big banks' potential exposure to the put back issue (click through the ZeroHedge and scroll down to the Iridian report). 

http://www.zerohedge.com/article/iridian-asset-management-devotes-entire-q3-update-letter-mbs-crisis

This year's pace suggests an increase of 50b tangible common equity over next two years -- that covers the 50b settlement proposed in that document.  Their analysis assumes no increase in tangible equity.

BofA stated they intend to challenge claims in the courts -- how many years does that buy them?

[Myth465]

Extremely interesting post.

http://valueinvestorcanada.blogspot.com/2010/11/why-id-avoid-or-maybe-even-short-bank.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CanadianValueInvesting-StudyOfBuffett+%28Canadian+Value+Investing+-+Study+of+Buffett%29&utm_content=Google+Feedfetcher

Let me know what you think. I have no dog in the fight, but knew along time ago I could never understand these banks. Hopefully you guys are smarter.

[stahleyp]

Myth, thanks for the article.

For me, it's a speculative position. Because of it's speculative nature, it should only be small portion of assets.

I think the risk/reward trade off is pretty good. You have a very long term option on a stock that many great investors see as undervalued, like Berkowitz and Chou with the warrants.

Many institutions can't buy warrants so the prices one pays should be a little better than the common.

Again, it's a speculative position that I feel has a good risk/return trade off.

8 years from now, most of this stuff should be in the rear view mirror. BAC should either be bankrupt, or much higher than it is now.

If we assume that BV stays the same over the next 8 years, and the company just gets back to BV, that would be about breakeven with a very small profit by buying the warrants.

If BV increases or even doubles (really, that should be more than doable over 8 years) and the stock still trades at .6 of BV (or just gets back to its 5 year average BV), you'd earn about a 6% return. Klarman feels that over the next decade that we would be lucky to experience low single digit returns. If it starts to pay a dividend, things get a bit better.


Or, it could be worthless and there is a small loss!

[Uccmal]

Myth, The artlicle you posted is kind of conflicted.  I looked up Iridian AM and their large cap fund has nearly a 5% weighting in BAC - long - as of June 30.  Maybe they have changed this.  Their results in their large cap and mid cap funds were barely above 0% over five years.  Their small cap fund had fared better with about 9% over five years.  So, I guess you gotta take the article with a grain of salt.

I agree that BAC is hard to understand.  I am working my way through the 2009 10 K right now.  In the short term there will be headwinds.  After the CW putbacks were tossed out by the court late last week you begin to realize how long this process could draw out.  BAC can drag much of this out in court for alot longer than 2 years I expect.  In the meantime the core BAC and ML businesses are recovering nicely. 

I dont see their Teir 1 capital ratios being in any danger as a result of this.  The cash is going to keep pouring onto the balance sheet and they are handling it conservatively for now.

As Stahleyp has indicated this is a speculative position and I am treating it as such (keep the position small).  However, I figure the probability of
a bankruptcy is minimal.  I think the worst case scenario is dead money for 8 years which being about 3% of my total holdings via the warrants is not too threatening.  IMHO the upside is pretty big.