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General Category => Investment Ideas => Topic started by: ValueBuff on October 19, 2010, 10:54:28 AM

Title: BAC-WT - Bank of America Warrants
Post by: ValueBuff on October 19, 2010, 10:54:28 AM
I know I have seen some ideas regarding these.  I figured I would create the thread here.

The warrant that is most interesting to me is BAC.  The reason is the strike price adjustment for any dividend paid over 0.01$ per share.  At some point, the major US bank will start to repay shareholders.  Either by dividends (falling strike price on warrant) or buybacks (increase EPS) the BAC warrant offer the best bang as it is the only one that is adjusted downwards after 1 cent.

Thoughts?
Title: Re: BAC-WT - Bank of America Warrants
Post by: Ballinvarosig Investors on October 20, 2010, 05:37:41 PM
Am I the only one who is scared by a Texas Ratio of over 100%?
Title: Re: BAC-WT - Bank of America Warrants
Post by: Rabbitisrich on October 20, 2010, 07:46:09 PM
Are you talking about BAC? According to the last 10-Q, they have a Texas ratio of 21%
Title: Re: BAC-WT - Bank of America Warrants
Post by: SmallCap on October 21, 2010, 05:58:37 AM
Excuse my ignorance but what do you mean by a Texas ratio?
Title: Re: BAC-WT - Bank of America Warrants
Post by: biaggio on October 21, 2010, 06:03:53 AM
Excuse my ignorance but what do you mean by a Texas ratio?

I did not know either, but thanks to google search:

The Texas ratio is a measure of a bank's credit troubles. Developed by Gerard Cassidy and others at RBC Capital Markets, it is calculated by dividing the value of the lender's non-performing assets (Non performing loans + Real Estate Owned) by the sum of its tangible common equity capital and loan loss reserves.
In analyzing Texas banks during the early 1980s recession, Cassidy noted that banks tended to fail when this ratio reached 1:1, or 100%. He noted a similar pattern among New England banks during the recession of the early 1990s.
Title: Re: BAC-WT - Bank of America Warrants
Post by: SmallCap on October 21, 2010, 08:03:03 AM
Thanks, that helps a lot.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on October 22, 2010, 07:01:50 AM
I have looked at and own the warrants for BAC and WFC.  I have reviewed the prospecti for each of these companies.  I haven't looked further into warrants from other US banks.  Part of the reason for this is that I have followed both companies since at least the credit crisis and have used their stores everywhere over the years.

The warrants allow me to buy BAC at 13.30.  So for an average of about $6.50 so far I get to buy BAC some time by January 2019 for 13.30.  Right now the break even price would be 13.30 + 6.50 = 19.80.  I would recoup some money with the stock price somewhere between $14.00 and the 19.80. 

Here are the problems I see with investing in BAC, warrants or common:
1) It is not really clear, and in fact, nearly incomprehensible, as to what may still be lurking on their balance sheet.
2) The stock could implode due to bad banking practices as in observation 1)
3) The bank could be forced into asset sales to bolster its balance sheet at some point in the future reducing its book value.
4) Regulation could wipe out profitability for years going forward. 
5) As per number 1 - BV could be vastly inflated due to toxic waste on the balance sheet.

Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on October 22, 2010, 07:14:24 AM
The flip side of the negative outlook is the following:

1) Most of what is dangerous on BACs balance sheet is probably well known and visible now. 
2) BAC was a go to bank for the US government when they needed someone to take Merril Lynch private
3) Their capital position appears strong at this point in time and their operating earnings appear to be improving. 
4) They are already taking write downs related to regulatory changes with regards to fee income. 
5) Regulation will have some short term effect on profitability but I am quite confident that the big banks will find ways to make money hitherto unknown.
6) Mortage securities - someone mentioned on the other thread that we are now fighting the last battle.  I tend to agree.  There is little chance of BAC losing 50B on a re-buy scenario. 

So looking at the stock and the warrants.  A return to book value, assumming some percentage of impairment brings the stock price today up to say $17.  Growth of 10% average in earnings over the next 9 years brings me to a price of $34.00.  That brings the price of my warrants in 9 years to about $20.00.  6.50 to $20.00 in 9 years is not a bad return.  Should they increase the dividend at all along the way then my returns will be greater than that.  On a conservative basis I estimate that the returns on the warrants should be 15% per year or greater. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: Bronco on October 22, 2010, 07:19:35 AM
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
Title: Re: BAC-WT - Bank of America Warrants
Post by: Ravi on October 22, 2010, 08:37:16 AM
Did you think about the repurchase risk of buying back of the bad loans they originated including from country wide from Fannie/Freddie and other investors. This is a serious risk as some other lenders are already purchasing back.
Title: Re: BAC-WT - Bank of America Warrants
Post by: RRJ on October 22, 2010, 12:56:39 PM
Uccmal,

Thanks.  This was almost exactly my own analysis.  The only other thing I'd add is that I figure with the BAC warrants (which I don't own yet, as I like WFC as a bank and culture much more), they are likely to raise the dividend back up, and anything above $.01 per quarter is subtracted from the strike price.  If, in 2012, they go to a 2% dividend yield on today's price (of around $12.00 per share), then raise the dividend 5% per year, you get dividends of roughly $.24, $.25, .26, .27, .28 and .30 and .31 in 2018.  Strike price is reduced each year by total annual dividend minus $.04.  That's a cumulative reduction in the strike price of $1.62, give or take on these assumptions, which I think are conservative.

This gives an adjusted strike price of $11.68, or just above where BAC trades at today ($11.43 as of 3:50 pm).  So your warrant cost of $6.00 buys you essentially all the upside in B of A's common from today's price through 2018.  From this low valuation point, I like those odds, but I do see far more risk in B of A than in Wells, largely the risks you list.  All in all, I see more risk than Wells due to lack of discipline, inferior management (which is amplified in banking just as in insurance), and not as good a possible upside.  I'll probably pass, but it's likely to work out okay.     

Title: Re: BAC-WT - Bank of America Warrants
Post by: biaggio on October 22, 2010, 02:51:51 PM
" I estimate that the returns on the warrants should be 15% per year or greater"

Warrants seem like a better deal than the common.

Would 15% ( it may be more) per year be enough return for perceived risk you may be taking?
Title: Re: BAC-WT - Bank of America Warrants
Post by: ValueBuff on October 23, 2010, 07:25:25 AM
the only risk is B of A not being above the strike+warrant cost.  IT will be around, I think the US gov. has proven that.

To me, what makes these things attractive, especially the B of A, is the dividends come off the strike.   In B of A's case, it is the only one with the 0.01$ limit.  I think the WFC warrants are around 0.32-0.34$, than strike price drops.
Title: Re: BAC-WT - Bank of America Warrants
Post by: SmallCap on October 23, 2010, 08:59:15 AM
Does anyone know where I can find the dividend policy for each of the tarp warrants? I know what it is for BAC and WFC but can't find it for the others.

Also does anyone know what happens to these warrants in change of control or dilution of equity situations?

SmallCap
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on October 23, 2010, 01:27:43 PM
Does anyone know where I can find the dividend policy for each of the tarp warrants? I know what it is for BAC and WFC but can't find it for the others.

Also does anyone know what happens to these warrants in change of control or dilution of equity situations?


i) no
ii) The Warrants are adjusted accordingly to keep up with changes.  I would think a change of control for BAC or WFC is unlikely, and I cant speak to the others.

Valuebuff, I would think the dividend increase with WFC is just as likely, if not more so.  I guess a case could be made that the dividend for BAC has some catch-up potential.   
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on October 23, 2010, 02:18:10 PM
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.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ValueBuff on October 24, 2010, 01:16:27 PM
Does anyone know where I can find the dividend policy for each of the tarp warrants? I know what it is for BAC and WFC but can't find it for the others.

Also does anyone know what happens to these warrants in change of control or dilution of equity situations?


i) no
ii) The Warrants are adjusted accordingly to keep up with changes.  I would think a change of control for BAC or WFC is unlikely, and I cant speak to the others.

Valuebuff, I would think the dividend increase with WFC is just as likely, if not more so.  I guess a case could be made that the dividend for BAC has some catch-up potential.   



I do agree with you that WFC has a better potential to increase the dividend over BAC.  However, will WFC raise it by more than 0.32$ in order to get the drop in strike price? That i do not know.


I would rather own the WFC common and the BAC warrants
Title: Re: BAC-WT - Bank of America Warrants
Post by: biaggio on October 24, 2010, 06:31:51 PM
John Paulson: How Are You Calculating Intrinsic Value For Bank Of America?

http://www.gurufocus.com/news.php?id=110254
Title: Re: BAC-WT - Bank of America Warrants
Post by: pilaniman on October 25, 2010, 10:27:27 PM
I own BAC and have been acquiring it since April for a fund I manage and yes, I am down so far. I invest with 3+yr horizon so what I say next should be viewed with that time horizon in mind.
(i) I NEVER respected the prior CEO given all the acquisitions he had done over ten years and destroyed the franchise value. Among all the large banks, I got most positive on BAC with the arrival of new CEO as he comes from a strong pedigree - Bank of Boston had a solid track record and I give him credit for being part of that success story. If you read the WSJ story around the time he became the CEO, he was never the first choice. Therefore, he has something to prove and I like a 'hungry' CEO. It did not surprise me that he took all these write-off – after all it's all the goodwill Ken built from the MBNA acquisition and other bone-headed deals. It is not uncommon for new guy to clean the balance sheet and take charges – it seems almost a rite of passage in the corner suite. I also like the fact that the board is completely revamped and the new CFO has been through several turnarounds. Mr. Moynihan seems to be surrounding himself with a competent professional team. As Buffett has said before (and someone else mentioned it on this thread), in the financials - banks, insurance, etc. - one has to be very comfortable with the CEO. I also like his strategy of changing the rules around checking accounts etc. to drive customer loyalty rather than stuffing them with unnecessary surcharges if there balances run low. All in all, Mr. Moynihan gets A in my book so far.

(ii) ML franchise continues to hum along fine. I was looking at the Dimon's presentation recently and was surprised to see that ML rates among top five banks in all key IB rankings. It's also good to know we have an ex-GS guy running the joint.

(iii) Countrywide business line is an issue but I think the Branch Hill presentation is more noise than substance. I doubt if Fed will take down a core 'too big to fail' bank at this juncture in the economic cycle given what they have to do on the QE2 front and the general economic malaise they are dealing with. It is common knowledge that credit losses have peaked so the only risk is the put-backs that Fannie/Freddie or the private investors will execute and whether BAC has the balance sheet to absorb those losses from countrywide business.
(iv) It will be interesting to see if they start losing deposits or not and how the customers respond to the new strategy. I think majority of the regulatory headwinds are known and the only unknown is how the long-term profitability is impacted from CARD Act and other new regulations like Basel III, etc.
(iv) From a quantitative standpoint, they are trading below tangible BV - my favorite valuation metric for banks and the business is generating a low ROA - my favorite operating benchmark. Good banks have ROA of over 1% and currently BAC is at .25% or so. Clearly, there is lot of room to improve execution and my assessment is that the CEO is headed in the right direction. Good banks generally trade at north of 2.0x TBV (e.g. USB is at 2.5x TBV) and if BAC continue to grow its earnings, it will get a 2 handle in due course.
Overall, it seems to me there is more upside here than any other large bank in the US if one is patient and monitors how the new strategy unfolds. MOST IMPORTANTLY, the downside is very limited at the current price level.
  
Title: Re: BAC-WT - Bank of America Warrants
Post by: biaggio on October 26, 2010, 07:47:53 AM
http://www.forbes.com/2010/09/24/citi-goldman-sachs-bove-intelligent-investing-video.html

Interview with Dick Bove-overview of banking industry, bank reform, etc

-predicts a lot of takeovers in 2011
-talks about concentration of assets, mortgage origination amongst 3 players
-he's never seen banks so cheap. Cash on their balance sheets, like in the 1930's. Largest discount to BV.
-sounds like large banks have advantage over smaller ones, who will get taken out

I thought it was good info for someone like myself who has limited knowledge of banking industry.

Also,

http://www.gurufocus.com/StockBuy.php?symbol=BAC

A lot of insider buying in August + also impressive buys by various "guru's".

Biggest argument against buying BAC, WFC, etc is that one does not know what's on their balance sheet i.e. you really don t know what you re buying.

Is it wise to assume that their balance sheets have been thoroughly "washed out" of toxic assets by the actions of these insiders + big investors who have been buying in? Even WEB as a small position in BAC.
Title: Re: BAC-WT - Bank of America Warrants
Post by: stahleyp on October 31, 2010, 07:25:58 AM
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.
Title: Re: BAC-WT - Bank of America Warrants
Post by: philassor on October 31, 2010, 10:51:48 AM
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.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on November 01, 2010, 08:40:07 AM
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.  


Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on November 04, 2010, 09:35:21 AM
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.



Title: Re: BAC-WT - Bank of America Warrants
Post by: stahleyp on November 04, 2010, 09:39:03 AM
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! :)
Title: Re: BAC-WT - Bank of America Warrants
Post by: menlo on November 04, 2010, 09:47:42 AM
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 (http://www.zerohedge.com/article/iridian-asset-management-devotes-entire-q3-update-letter-mbs-crisis)
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on November 04, 2010, 10:58:28 AM
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 (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?
Title: Re: BAC-WT - Bank of America Warrants
Post by: Myth465 on November 09, 2010, 02:37:38 PM
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.
Title: Re: BAC-WT - Bank of America Warrants
Post by: stahleyp on November 09, 2010, 04:05:42 PM
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! :P

Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on November 09, 2010, 05:29:42 PM
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.
Title: Re: BAC-WT - Bank of America Warrants
Post by: treasurehunt on November 09, 2010, 05:42:23 PM
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.


The entire report from Iridian Asset Management that is referenced at valueinvestorcanada.blogspot.com is available at Zero Hedge: http://www.zerohedge.com/article/iridian-asset-management-devotes-entire-q3-update-letter-mbs-crisis

Makes for interesting reading, but I think the numbers are wildly inflated. Admittedly I am not enough of an expert to be sure about this, however. You can also see the big banks' views on mortgage repurchases that they presented at the recent BancAnalysts conference in Boston: http://www.wsw.com/webcast/baab10/. Registration is needed for access; alternatively, you can go to the investor relations site of BofA, JPM, WFC etc and view the slides.

I think WFC and JPM make a good case that their repurchase liability is manageable. BofA not so much.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on November 09, 2010, 06:29:40 PM
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.

Regardless of how this plays out, what risks are remaining after this is behind them?  I mean, on an income per share basis, they are headed in the right direction today -- absent this repurchase liability.

In the absolute worst case they lay out, at what price per share do you think they could recapitalize (to pay the liability).  The very next day after the liability is lifted, there won't be a ratings overhang on the bank and it can then be valued on an earnings per share basis.  

And I expect this liability won't be settled for at least a couple of years as BofA intends to fight in court -- that gives time for earnings to approach normalization as credit losses decline (assumes they do).

I mention this because John Paulson has stated that he holds the shares long with a target EPS of about $2.70 in 2012 -- that would be a bit more than a double from today's price level at a 10x P/E.  I figure it would be worth 10x P/E if this liability were behind it and if they were earning a strong $2.70 per share.

That assumes Paulson is being reasonable in his estimate.  Now, given that today it trades under tangible book... do you think it reasonable that a bank with a healthy earnings stream would trade at a discount to tangible bank the day after recapitalization?  I don't find it reasonable... in that case, I assume they would recapitalize at a price higher than today, and due to dilution the full $27 wouldn't be realized.  But if it's 50% dilution, then the new value per share (post recapitalization) is still in the high teen, probably at least $20 to account for accrued earnings over the next few years.  

So how do they (Iridian) make money on the short side if a recapitalization two years from now would likely happen higher than the current price per share?

What is Iridian's pedigree -- is this just another hedge fund to buy CDS and then pump and dump?  Notice they speculate on where CDS spreads will go and only talk about worst case scenarios -- including mention recapitalization in a 2008/2009 type environment, even though we'd be 4 years removed from the credit panic by then.  They just smell bad -- I sense a huge agenda in their independent research.


















Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on November 09, 2010, 06:59:36 PM
I would have to check but I believe the Warrants are protected in the event of a dilution.  i.e. If the dilution was 50% each warrant would convert to 1.5 shares at 13.30 instead of 1.0 shares now.  The common is actually at more risk than the warrants with alot of events.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Myth465 on November 10, 2010, 04:48:12 AM
I think buying CDS insurance is a bit extreme also unless its 1% or less of a port. I can say I dont know what will happen or what anything is worth, I can also say it would be hard for me to get really comfortable with most of the mega banks given my time constraints and lack of interest in the business.

Long banks seems to be basically long economic recovery at some point after muddling around for a while. I think its a good move but will find other ways to play it. We sure do have quite a few smart people going long banks right now though.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ECCO on November 10, 2010, 05:45:45 AM


I would have to check but I believe the Warrants are protected in the event of a dilution.  i.e. If the dilution was 50% each warrant would convert to 1.5 shares at 13.30 instead of 1.0 shares now.  The common is actually at more risk than the warrants with alot of events.


Could you tell us where you saw that, it is the first time I read something about a protection in case of a dilution.

Thanks!
Title: Re: BAC-WT - Bank of America Warrants
Post by: valuecfa on November 10, 2010, 06:03:08 AM


I would have to check but I believe the Warrants are protected in the event of a dilution.  i.e. If the dilution was 50% each warrant would convert to 1.5 shares at 13.30 instead of 1.0 shares now.  The common is actually at more risk than the warrants with alot of events.


Could you tell us where you saw that, it is the first time I read something about a protection in case of a dilution.

Thanks!

You can find the adjustment provisions beginning on page S-28 of the prospectus:

http://www.sec.gov/Archives/edgar/data/70858/000119312510044940/d424b7.htm
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on November 10, 2010, 07:31:01 AM


I would have to check but I believe the Warrants are protected in the event of a dilution.  i.e. If the dilution was 50% each warrant would convert to 1.5 shares at 13.30 instead of 1.0 shares now.  The common is actually at more risk than the warrants with alot of events.
http://www.sec.gov/Archives/edgar/data/70858/000119312510044940/d424b7.htm

My mistake... Warrants are subject to dilution in the event of any stock issuance.  Same as any stock option, or common stock for that matter.  The warrants readjust for the increasing dividend and any stock splits or consolidations, the same as a normal call or put option. Al.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on November 12, 2010, 07:26:10 AM
Iridian admits that BofA can earn the expected loss over the next couple of years -- their thesis is that BofA won't have the capital to bring these loans back onto their balance sheet.  It's merely the issue of trying to fund an expanding balance sheet that Iridian says will cause BofA to go to the capital markets.

So... doesn't this immediately lead you to ask whether BofA can instead just sell assets to raise cash?  On this point, BofA says that they are planning to pay down $150b in debt in the next few years, and by the end of 2011 they expect to pay down about $75b to $100b.  Where do they get $75b-$100b by the end of 2011?  The answer has to be asset sales.

See page 9 from BofA's recent presentation:
http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9Njg5MDV8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1

Instead of paying down debt, can't they use that cash to take back these loans (if forced to do so)?

Notice that Iridian doesn't even mention BofA's debt reduction plan -- why not?




Title: Re: BAC-WT - Bank of America Warrants
Post by: calonego on November 12, 2010, 07:56:31 AM
Or that most of these issues are likely in a sub that they have no capital in, that's probably non-recorse.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on November 12, 2010, 09:31:41 AM
I've sold this -- I want to think more about it.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on November 13, 2010, 02:21:18 PM
There is one curiosity operating here that I started to think about.  BAC.WS.A trades as around $7 right now and the common is bouncing between 12 and 14.  So, the leverage one is getting from the warrant is limited.  Now if a dividend is added into the mix then the leverage will improve.   

From this standpoint it would be better to hold the WFC.WS warrants relative to its stock where the stock is 27 and the warrants are around $8.00.  The downside of course is that you lose out on the WFCs existing dividend.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Junto on November 14, 2010, 05:51:05 AM
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.


The entire report from Iridian Asset Management that is referenced at valueinvestorcanada.blogspot.com is available at Zero Hedge: http://www.zerohedge.com/article/iridian-asset-management-devotes-entire-q3-update-letter-mbs-crisis

Makes for interesting reading, but I think the numbers are wildly inflated. Admittedly I am not enough of an expert to be sure about this, however. You can also see the big banks' views on mortgage repurchases that they presented at the recent BancAnalysts conference in Boston: http://www.wsw.com/webcast/baab10/. Registration is needed for access; alternatively, you can go to the investor relations site of BofA, JPM, WFC etc and view the slides.

I think WFC and JPM make a good case that their repurchase liability is manageable. BofA not so much.

Numbers are widely inflated. Why don't you look at more reputable firm's research like Goldman Sachs and the likes. No one has heard of these guys and their assumptions are not well founded. I am long here. Hedgeanalyst.com - bit.ly/abtDP3 (http://bit.ly/abtDP3) and Stifel - http://bit.ly/chCd3R

Title: Re: BAC-WT - Bank of America Warrants
Post by: claphands22 on May 12, 2011, 11:15:56 PM
There is one curiosity operating here that I started to think about.  BAC.WS.A trades as around $7 right now and the common is bouncing between 12 and 14.  So, the leverage one is getting from the warrant is limited.  Now if a dividend is added into the mix then the leverage will improve.   

From this standpoint it would be better to hold the WFC.WS warrants relative to its stock where the stock is 27 and the warrants are around $8.00.  The downside of course is that you lose out on the WFCs existing dividend.


Looks like Mohnish has succumbed to the warrant idea. He now owns 14K WFC warrants.

http://www.sec.gov/Archives/edgar/data/1173334/000095012311045783/c64521e13fvhrza.txt

Interesting since I think this is the first time he has bought anything but common stocks for his fund (sans the loan he gave to DFC)
Title: Re: BAC-WT - Bank of America Warrants
Post by: biaggio on June 09, 2011, 02:39:44 PM
http://www.cnbc.com/id/43343328

Video of interview (video is 1/4 down the page) with Bruce Berkowitz. Discussion re financials especialy BAC
Title: Re: BAC-WT - Bank of America Warrants
Post by: finetrader on July 09, 2011, 01:37:25 PM
After listening to those two interviews I've decided to put 5% of my assets in BAC options jan 2013 10$ strike.

http://www.gurufocus.com/news/137706/berkowitz-discusses-why-he-likes-financials-and-st-joe
http://www.cnbc.com/id/43671706/page/3/

I might buy more.

Cheers!
Title: Re: BAC-WT - Bank of America Warrants
Post by: moore_capital54 on July 09, 2011, 10:17:08 PM
Ive been buying BAC as well. It is a screaming buy here.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Rabbitisrich on July 10, 2011, 01:33:34 AM
If I could just buy depository lender I would snap it up in a heatbeat, litigation headaches and all. But, even though it may be the wrong environment to worry about this, I still can't get comfortable with $2 trillion + notional exposure, albeit hedged, and whatever is going on inside Merrill Lynch's day to day operations. It's easy to focus so much upon earnings power that you forget about losing power, and there is plenty to lose in a financial superstore model (which I still believe is the trend for these guys, management rhetoric aside).

Again, I acknowledge that this is probably the wrong environment to be worrying about such things with household deleveraging, shadow finance breakdown, Basel II+, liquidity preference, etc... There just seem to be plenty of bargains in the plain jane world of boring lenders.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Kraven on July 10, 2011, 07:48:12 AM
But, even though it may be the wrong environment to worry about this, I still can't get comfortable with $2 trillion + notional exposure, albeit hedged, and whatever is going on inside Merrill Lynch's day to day operations.

My view is that BAC is probably cheap at these levels and I go along with the Berkowitz analysis.  That being said, I think that you have to take a leap of faith on the derivatives, structured products, off shore vehicles, etc.  I personally believe that it is impossible to accurately value these assets other than with making a boatload of assumptions, any one of which can change the outcome.  I don't think Berkowitz or anyone else can do it.  Someone sitting there with the 10-K is fooling themselves to even try.  I am familiar with these types of assets and I don't believe that even the people inside the institution can accurately value them.  In fact the guys who did the deals can't accurately value them.  The truth of it is is that if things remain ok in the economy then stocks like BAC are probably home runs.  If we go into a big tailspin again like in 2008, then who knows.  More so than most other stocks, it really is a bet on the economy stabilizing and improving.  Even a double dip, if not serious, probably doesn't tank it.  But there is no way, in my view, to say read BAC's 10-K and accurately value their assets.   
Title: Re: BAC-WT - Bank of America Warrants
Post by: Rabbitisrich on August 08, 2011, 06:43:02 PM
A good updated summary of BAC's legal woes:

http://newsandinsight.thomsonreuters.com/Legal/News/2011/08_-_August/On_a_very_dark_day,_BofA_s_dim_ray_of_hope/ (http://newsandinsight.thomsonreuters.com/Legal/News/2011/08_-_August/On_a_very_dark_day,_BofA_s_dim_ray_of_hope/)

The AIG fraud complaint is also a canny document. The suit lumps together allegations against Countrywide, Merrill Lynch, and BofA, painting all of them with the same tarry brush even though Countrywide and Merrill Lynch committed a good chunk of the alleged wrongdoing before they became part of BofA. Quinn includes public record information about their manifestly-deficient underwriting practices, but has brought the case as a fraud suit-not a contract case accusing BofA, Countrywide, and Merrill of breaching the representations and warranties on the mortgage loans underlying the securitizations AIG invested in. That way, AIG doesn't have to show that it controls 25 percent of the voting rights, the threshold for standing in a securitization contract case. But under the causes of action the complaint asserts-state-law claims and federal claims under the Securities Act of 1933--Quinn Emanuel doesn't have to show that BofA, Countrywide, and Merrill acted with fraudulent intent.

Patrick said that deal supporters were encouraged by Friday's hearing, at which Judge Kapnick seemed to be well-versed in the filings and eager to move things along. A transcript suggests that Gibbs & Bruns; BofA counsel from Wachtell, Lipton, Rosen & Katz; and BNY Mellon lawyers from Mayer Brown took a smart course when they filed the case as an Article 77 trust proceeding, under which the court is supposed to pay deference to the trustee unless objectors can show the trustee acted unreasonably or breached its duty.

"That's the proceeding they brought," Kapnick said, after noting that she had to look up the obscure Article 77 in the New York code. "It's not, it's not a class action. There aren't provisions in there to opt out that you are talking about. That's not what this is. If you started it, maybe that's what you would have done, but they started it and that's what they did. I have to work, at least now, within the confines of the proceeding that is before me." (A lawyer from the New York Attorney General's office was at the hearing, according to the transcript, but didn't remind Judge Kapnick that the case now has additional fraud and Martin Act implications, thanks to the AG's counterclaims against BNY Mellon.)
Title: Re: BAC-WT - Bank of America Warrants
Post by: anders on August 31, 2011, 03:36:24 AM
Im thinking of switching my BAC common to the warrants but I am not sure about the price level of the warrants.. According to B&S formula it should be trading around 2.15-2.30..

What am I missing ?  ???
Title: Re: BAC-WT - Bank of America Warrants
Post by: Ross812 on August 31, 2011, 06:39:21 AM
The formula does not take into account the reduction in strike price if dividends are raised above 1 cent. I'm not sure how much of a premium this should add though...
Title: Re: BAC-WT - Bank of America Warrants
Post by: anders on August 31, 2011, 06:50:08 AM
Many thanks.. then the current price indicates a reduction in strike to around $6 to justify the price.. ? meaning approx $1 per year in dividend from jan 2012.. if they start increasing the dividend that is..

Thoughts?
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on August 31, 2011, 09:31:17 AM
The formula does not take into account the reduction in strike price if dividends are raised above 1 cent. I'm not sure how much of a premium this should add though...

The BS model accounts for regular dividends, zero in this case.  Therefore, the current BS model price is not out of line with the BS methodology.  The protection the warrants offer for some of the possible dilution from the payment of future dividends is a plus, but this feature is not enough to move the needle much for a company that needs to strengthen its balance sheet quite a bit before paying substantial dividends.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on August 31, 2011, 10:30:11 AM
There is probably a supply&demand component. 

Anybody can write a call, but not anyone can write a warrant.

So if the market is not pricing the warrants the way it would price an option, perhaps that's why?
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on August 31, 2011, 12:20:17 PM
There is probably a supply&demand component. 

Anybody can write a call, but not anyone can write a warrant.

So if the market is not pricing the warrants the way it would price an option, perhaps that's why?

This is a great opportunity to delta hedge if the HTB interest rate is not too high to short the warrants.  The prices of the two instruments should tend to rationalize once the recent high volatility regresses to the mean.  :)
Title: Re: BAC-WT - Bank of America Warrants
Post by: beerbaron on September 14, 2011, 05:34:38 PM
I have got a few questions about BAC.

-US bank's problems are similar to Japan bank in the 90s. They are trying to rebuild their balance sheet. How long did it take for the big Japan banks to get to acceptable loan losses (1%) and Tier one to a decent size?

-Looking at past numbers for valuing their earnings is quite hard. But what I'd be interested to know is what kind of ROE banks were able to achieve in similar situations (low rate/stagflation/no growth)? Japan again seems like a good example... Anybody has some figures?

-I'm not done reading their Annual Reports but I can't help but notice their credit card business is bleeding money. Why are they still bleeding money... it's not like they could not cancel or reduce limits of their customers. I would hurt their business but subsidising their banking with their credit cards seems like a bad plan. Maybe that explain why they sold MBNA Canada to TD... BAC has no other business in Canada so it would not hurt their business.

Just some quick toughs.

BeerBaron
Title: Re: BAC-WT - Bank of America Warrants
Post by: jjsto on September 14, 2011, 05:48:53 PM
"-Looking at past numbers for valuing their earnings is quite hard. But what I'd be interested to know is what kind of ROE banks were able to achieve in similar situations (low rate/stagflation/no growth)? Japan again seems like a good example... Anybody has some figures?"

I am not sure if this has been posted on here or not, but this is not a very pretty chart...

http://ftalphaville.ft.com/blog/2011/08/12/652026/are-us-banks-turning-japanese/
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on September 14, 2011, 06:11:22 PM
"-Looking at past numbers for valuing their earnings is quite hard. But what I'd be interested to know is what kind of ROE banks were able to achieve in similar situations (low rate/stagflation/no growth)? Japan again seems like a good example... Anybody has some figures?"

I am not sure if this has been posted on here or not, but this is not a very pretty chart...

http://ftalphaville.ft.com/blog/2011/08/12/652026/are-us-banks-turning-japanese/

But read what he says in the analysis:

and US banks’ balance sheet problem is squarely a real estate one — non-real estate loan growth remains positive.


Now if you look at Citigroup, it doesn't really have that much USA real estate exposure relative to it's earnings power.  Other banks have more exposure.  I actually swapped some of my BAC for C today.  Initially I had swapped out of C for some tax losses, but a month has gone by now so I can swap back in.
Title: Re: BAC-WT - Bank of America Warrants
Post by: finetrader on September 14, 2011, 06:27:49 PM
I'm not sure about C's exposure to Europe. So till someone gives me a good picture of C I will stay away.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Rabbitisrich on September 14, 2011, 07:00:25 PM
Japanese banks also had some issues with provisioning and asset composition. We'll have to see whether U.S. real estate moderates but the Case-Shiller 20 city index has been flattish since '09 and commercial real-estated backed delinquencies are declining. The Moodys/REAL indices show moderation in office and apartments.

Here are a couple of papers with useful appendices:

www.nber.org/2004japanconf/hamao.pdf (http://www.cornerofberkshireandfairfax.ca/forum/www.nber.org/2004japanconf/hamao.pdf)

www.imf.org/external/pubs/ft/wp/2000/wp0007.pdf (http://www.cornerofberkshireandfairfax.ca/forum/www.imf.org/external/pubs/ft/wp/2000/wp0007.pdf)


The second link is a good review of Japan in the 90s from a banking perspective.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Rabbitisrich on September 14, 2011, 07:04:18 PM
I'm not sure about C's exposure to Europe. So till someone gives me a good picture of C I will stay away.

The presentations and 10-Q from 2Q cover European CDS and asset exposure. You have to trust their netting arrangement. I think I read somewhere that most of their CDS written involve bilateral contracts, but I don't know if that implies some protection in the event of counterparty default.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Cardboard on September 14, 2011, 07:28:48 PM
I really like Citigroup here. Many were happy to hear Moynihan discussing about a smaller and more focused Bank of America. This kind of stuff has been going on at Citi for over 2 years now. The restructuring is much more advanced. I see no threat of dilution. Earnings should keep on improving and disappointments should become much less.

European exposure should be put into perspective. This bank has much better capital ratios (Tier 1, equity to assets, tangible equity, etc.) than most European banks and with its international presence (Asia, Latin America, the U.S.) should be much less exposed to Europe than European based banks. Derivatives could turn into a huge monster, but I think that the way Pandit has managed this bank and the amount of time that this European issue has been discussed that it would be quite surprising to see them go under because of some trade gone bad. They should not be first in the domino sequence if it happens.

It is the second time I enter C. Last time was a profitable "trade", but this time I think it will be much better. It was around $40 (adjusted for the reverse split), now it is at $27. Same company, just better now and cheaper.

Cardboard



Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on September 14, 2011, 07:38:19 PM
CitiHoldings is getting small enough now where the loan growth in Citicorp over then next 12 months should overshadow the portfolio runoff of Citiholdings.

The headlines can read more like "Wow, a TBTF US bank with loan growth".  The past 12 months the headlines kept talking about declining loan growth at Citigroup, even though Citicorp total loans grew 16% YOY.


Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on September 14, 2011, 07:59:35 PM
I'm not sure about C's exposure to Europe. So till someone gives me a good picture of C I will stay away.

From page 32 of the 7/21/11 presentation linked here: 
http://www.citigroup.com/citi/fin/index.htm



Citigroup – Net Exposure to GIIPS
 As of June 30, 2011, Citi’s net funded exposure to the sovereign entities of Greece, Ireland, Italy, Portugal and Spain (GIIPS), as well as financial institutions and corporations domiciled in these countries, totaled $13B based on our internal risk management measures
 Of the $13B in existing net exposure: – About $2B is in assets held in trading portfolios and Available-for-Sale portfolios, which are marked-to-
market daily; trading portfolio exposure levels vary as we maintain inventory consistent with our customer
needs – The remaining $11B is net credit exposure, mostly in the form of funded loans comprised of:
 a little more than $1B to sovereigns;  approximately $6B to financial institutions of which 70% represents parent guaranteed short-term, off-shore
placements with these financial institutions’ non-GIIPS subsidiaries or fully collateralized by high quality,
primarily non-GIIPS collateral;  and approximately $4B to corporates of which 2/3rds is to multi-national corporations domiciled in the GIIPS
 We also have $9B unfunded exposure, primarily to multinational corporations headquartered in these countries. Like other banks, we also provide settlement and clearing facilities for a variety of clients in these countries, and are actively monitoring and managing these intra-day exposures
 Citi also has additional, locally-funded exposure in these countries to retail customers and small businesses, as part of our local lending activities. The vast majority of this is in Citi Holdings (Spain and Greece) and has been previously disclosed
 The sovereign entities of Greece, Ireland, Italy, Portugal and Spain, as well as the financial institutions and corporations domiciled in these countries, are an important part of the global Citi franchise. We fully expect to maintain our long-standing relationships with these entities going forward, and to continue to maintain a presence in these markets to service all of our global customers
Title: Re: BAC-WT - Bank of America Warrants
Post by: Kiltacular on September 14, 2011, 09:08:55 PM
Quote
I'm not done reading their Annual Reports but I can't help but notice their credit card business is bleeding money. Why are they still bleeding money... it's not like they could not cancel or reduce limits of their customers. I would hurt their business but subsidising their banking with their credit cards seems like a bad plan. Maybe that explain why they sold MBNA Canada to TD... BAC has no other business in Canada so it would not hurt their business.

BeerBaron,

Perhaps I'm misreading things, but the card business appears to be doing well in 2011.  In the 2nd quarter 10Q, net income from Global Card Services is: $3.77 billion in the first six months versus $1.794 billion for the first six months of 2010.

It actually appears to be their most profitable segment currently. 

I'm looking at table 3, segment results on page 11 of the Q.   

The related notes:
Quote
Global Card Services net income increased for the three and six months ended June 30, 2011 compared to the same periods in the prior year due primarily to a decrease in the provision for credit losses. Revenue decreased as a result of a decline in net interest income from lower average loans and yields as well as lower noninterest income. Provision for credit losses decreased reflecting improving economic conditions and continued expectations of improving delinquency, collection and bankruptcy trends.

On a related matter, BoA also has massive non-interest income that shouldn't necessarily be crushed by a poor interest rate environment.  Using the numbers for 2010 (without the 2011 subtractions for huge increase in reps. & warranties in 2011), shows that they had over $34 billion in non-interest income -- well over 50% of their non-interest plus interest income.

Am i looking at something different than everyone else? 
Title: Re: BAC-WT - Bank of America Warrants
Post by: vinod1 on September 15, 2011, 06:20:03 AM

Now if you look at Citigroup, it doesn't really have that much USA real estate exposure relative to it's earnings power.  Other banks have more exposure.  I actually swapped some of my BAC for C today.  Initially I had swapped out of C for some tax losses, but a month has gone by now so I can swap back in.

Eric

Do you invest directly in stock or did you buy options? I have bought 2013 35 calls.

Vinod
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on September 15, 2011, 06:59:26 AM
This time I just bought the stock.  I had the calls originally and got out of them for a tax loss on the way down as volatility spiked.  Now I'm back in at $27.  I gained about 20% IV out of this trade (compared to my original position before the crash).

Title: Re: BAC-WT - Bank of America Warrants
Post by: vinod1 on September 15, 2011, 07:09:06 AM
I gained about 20% IV out of this trade (compared to my original position before the crash).

 :) How did you do that?
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on September 15, 2011, 08:05:33 AM
I gained about 20% IV out of this trade (compared to my original position before the crash).

 :) How did you do that?

I owned the deep-in-the-money $2.50 strike calls.  When the stock was at $4.50, there was hardly any volatility premium compared to when I traded out of them.  The rising volatility premium softened the fall.  The stock is a bit cheaper too, but that's luck.

Title: Re: BAC-WT - Bank of America Warrants
Post by: txlaw on September 16, 2011, 08:44:01 AM
Article you fellows might want to read about BAC:

http://www.bloomberg.com/news/2011-09-16/bofa-said-to-keep-bankruptcy-as-option-for-countrywide-unit.html

So do skeptics still think BAC is a zero?

I love how Branch Hill Capital is quoted everywhere in the media when it comes to BAC litigation.  Also think it's hilarious the extent to which ZH is pushing for an MBIA settlement.

http://www.zerohedge.com/news/bank-america-implodes-mbia-volkwsagen-short-squeeze-candidate

Disclosure: Long BAC and MBI
Title: Re: BAC-WT - Bank of America Warrants
Post by: lessthaniv on September 16, 2011, 11:49:58 AM
The summary legal opinion is worth the read. Page 37

http://www.cwrmbssettlement.com/docs/Opinion%20Regarding%20Corporate%20Separateness.pdf

Long BAC,

<IV
Title: Re: BAC-WT - Bank of America Warrants
Post by: BargainValueHunter on September 16, 2011, 04:22:19 PM
It is particularly hilarious how ZH, which has been bashing Berkowitz on the way down, goes out of its way to not name him as an obvious squeeze beneficiary (aka "smart guy") in the article.
Article you fellows might want to read about BAC:

http://www.bloomberg.com/news/2011-09-16/bofa-said-to-keep-bankruptcy-as-option-for-countrywide-unit.html

So do skeptics still think BAC is a zero?

I love how Branch Hill Capital is quoted everywhere in the media when it comes to BAC litigation.  Also think it's hilarious the extent to which ZH is pushing for an MBIA settlement.

http://www.zerohedge.com/news/bank-america-implodes-mbia-volkwsagen-short-squeeze-candidate

Disclosure: Long BAC and MBI
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on September 17, 2011, 10:07:08 AM
Surprising how closely the declines of C and BAC have tracked one another:

http://moneycentral.msn.com/investor/charts/chartdl.aspx?PT=6&showchartbt=Redraw+chart&compsyms=c&D4=1&DD=1&D5=0&DCS=2&MA0=0&MA1=0&CF=0&D7=&D6=&symbol=BAC&nocookie=1&SZ=0

Is BAC really down because of the lawsuit headlines?  Okay, then, maybe so -- but why is Citi down by almost as much?  It looks like the market is punishing BAC barely more than it is punishing C (which doesn't have any scary headlines).
 
So perhaps Mr. Market isn't really buying into all the headline hype around BAC. 

Title: Re: BAC-WT - Bank of America Warrants
Post by: txlaw on September 17, 2011, 10:10:06 AM
I really like Citigroup here. Many were happy to hear Moynihan discussing about a smaller and more focused Bank of America. This kind of stuff has been going on at Citi for over 2 years now. The restructuring is much more advanced. I see no threat of dilution. Earnings should keep on improving and disappointments should become much less.

European exposure should be put into perspective. This bank has much better capital ratios (Tier 1, equity to assets, tangible equity, etc.) than most European banks and with its international presence (Asia, Latin America, the U.S.) should be much less exposed to Europe than European based banks. Derivatives could turn into a huge monster, but I think that the way Pandit has managed this bank and the amount of time that this European issue has been discussed that it would be quite surprising to see them go under because of some trade gone bad. They should not be first in the domino sequence if it happens.

It is the second time I enter C. Last time was a profitable "trade", but this time I think it will be much better. It was around $40 (adjusted for the reverse split), now it is at $27. Same company, just better now and cheaper.

Cardboard

The only reason why I'm now wholly in BAC versus C is because I believe BAC is cheaper with less risk (yes, less risk) because of its exposure to the US versus all these other foreign markets, and because I think there is a catalyst with BAC.

Also, I really like what I hear out of Moynihan, whereas some of the things Pandit has said give me pause. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: sswan11 on September 17, 2011, 06:34:01 PM
Not that I agree but the market I think is worried about Citi's European assets. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on September 17, 2011, 07:31:04 PM
Not that I agree but the market I think is worried about Citi's European assets.

Possibly, but the charts of C and BAC are almost identical.  And BAC has basically no exposure to Europe.

Here is a summary of C's exposure:

 As of June 30, 2011, Citi’s net funded exposure to the sovereign entities of Greece, Ireland, Italy, Portugal and Spain (GIIPS), as well as financial institutions and corporations domiciled in these countries, totaled $13B based on our internal risk management measures
 Of the $13B in existing net exposure: – About $2B is in assets held in trading portfolios and Available-for-Sale portfolios, which are marked-to-
market daily; trading portfolio exposure levels vary as we maintain inventory consistent with our customer
needs – The remaining $11B is net credit exposure, mostly in the form of funded loans comprised of:
 a little more than $1B to sovereigns;  approximately $6B to financial institutions of which 70% represents parent guaranteed short-term, off-shore
placements with these financial institutions’ non-GIIPS subsidiaries or fully collateralized by high quality,
primarily non-GIIPS collateral;  and approximately $4B to corporates of which 2/3rds is to multi-national corporations domiciled in the GIIPS
 We also have $9B unfunded exposure, primarily to multinational corporations headquartered in these countries. Like other banks, we also provide settlement and clearing facilities for a variety of clients in these countries, and are actively monitoring and managing these intra-day exposures
 Citi also has additional, locally-funded exposure in these countries to retail customers and small businesses, as part of our local lending activities. The vast majority of this is in Citi Holdings (Spain and Greece) and has been previously disclosed
 The sovereign entities of Greece, Ireland, Italy, Portugal and Spain, as well as the financial institutions and corporations domiciled in these countries, are an important part of the global Citi franchise. We fully expect to maintain our long-standing relationships with these entities going forward, and to continue to maintain a presence in these markets to service all of our global customers
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on September 18, 2011, 10:36:08 AM
The only reason why I'm now wholly in BAC versus C is because I believe BAC is cheaper with less risk (yes, less risk) because of its exposure to the US versus all these other foreign markets, and because I think there is a catalyst with BAC.

Also, I really like what I hear out of Moynihan, whereas some of the things Pandit has said give me pause.


I have liked what both of the men are saying in general.  However if you look at actions taken, Pandit shows to be more prudent thus far IMO.

Moynihan wanted to start returning capital to shareholders long before he is even meeting the Basel III requirements, and long before he even knows what his ultimate putback costs will be.  Lo and behold, now he's diluting the shareholders giving a sweetheart deal to Buffett.

All along Pandit has been saying no dividend until they exceed Basel III by a large cushion.  As he pointed out, they also needed to wait to see what the regulators are actually going to require!  That doesn't stop Moynihan though.

I am heavily long BAC though.

I like Moynihan's plan for the future:  no more acquisitions.  Given a slow growth lending environment in the US, this means we'll be getting our hands on the earnings via dividends and share buybacks.

Citi on the other hand has tremendous growth opportunity in Asia and Latin America.  Perhaps it will be the one trading at a higher multiple to BAC years down the road for this reason.
Title: Re: BAC-WT - Bank of America Warrants
Post by: txlaw on September 19, 2011, 12:33:33 PM
The only reason why I'm now wholly in BAC versus C is because I believe BAC is cheaper with less risk (yes, less risk) because of its exposure to the US versus all these other foreign markets, and because I think there is a catalyst with BAC.

Also, I really like what I hear out of Moynihan, whereas some of the things Pandit has said give me pause.


I have liked what both of the men are saying in general.  However if you look at actions taken, Pandit shows to be more prudent thus far IMO.

Moynihan wanted to start returning capital to shareholders long before he is even meeting the Basel III requirements, and long before he even knows what his ultimate putback costs will be.  Lo and behold, now he's diluting the shareholders giving a sweetheart deal to Buffett.

All along Pandit has been saying no dividend until they exceed Basel III by a large cushion.  As he pointed out, they also needed to wait to see what the regulators are actually going to require!  That doesn't stop Moynihan though.

I am heavily long BAC though.

I like Moynihan's plan for the future:  no more acquisitions.  Given a slow growth lending environment in the US, this means we'll be getting our hands on the earnings via dividends and share buybacks.

Citi on the other hand has tremendous growth opportunity in Asia and Latin America.  Perhaps it will be the one trading at a higher multiple to BAC years down the road for this reason.

Moynihan definitely made a mistake by talking about reinstating a real dividend so early.

It's not that I think Pandit has said anything egregious.  Actually, I like most of what he's said.  But I tend to go with the Moynihan perspective in certain instances.  For example, when asked about Glass-Steagall and the separation of depository institutions from investment banks and proprietary trading operations, they've had similar responses with different rationales.

Both have argued that we do not need a new Glass-Steagall.  Moynihan has said that the problem was excesses at both types of firms, not the fact that they were housed under the same umbrella, and that customers want to have an integrated experience for raising capital (debatable points, I think, but I like the customer focus.)

Pandit has argued, in a different manner, that it's good to have asset diversification among loans, commodities, currencies, etc. and so it makes sense to have all of these business under one roof.

While I'm not sure I buy either of these guys' explanations, I do like Moynihan's focus more than Pandit's.  Pandit's take makes it a little too easy to rely on diversifying your risk away (among countries and asset classes) rather than really focusing on risk at a more micro level. 

So that's why I said some things Pandit has said give me pause.

The other thing about Citi is that the very reason for its attractiveness makes it less attractive for me at the same time.  I know a lot more about the US financial system and economy than I do about the economies and financial systems in many of the markets in which Citi operates.  I just have no idea if financial markets might blow up in some of the markets Citi is in, whereas I know that there won't be a financial blow up in the US for a while.

But, yeah, you're probably right that Citi will probably trade at a higher multiple at some point because of its being all over the world.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on September 19, 2011, 01:20:28 PM
Anyways, since we both own BAC and MBI, here's a question:

How high do you think MBI will trade by Jan 2013 and how high do you think BAC will trade?

For example, you can get at least $2.50 for the MBI $10 strike call, and turn around and buy the BAC $10 strike call for just under $1.  So if BAC gets to $20, that would be the same as MBI at $35.

Or you can buy one BAC call at $10 strike for every MBI written at $17.50.  Or more than one BAC $12.50 for every MBI call written at $20.
Title: Re: BAC-WT - Bank of America Warrants
Post by: txlaw on September 19, 2011, 04:43:51 PM
Anyways, since we both own BAC and MBI, here's a question:

How high do you think MBI will trade by Jan 2013 and how high do you think BAC will trade?

For example, you can get at least $2.50 for the MBI $10 strike call, and turn around and buy the BAC $10 strike call for just under $1.  So if BAC gets to $20, that would be the same as MBI at $35.

Or you can buy one BAC call at $10 strike for every MBI written at $17.50.  Or more than one BAC $12.50 for every MBI call written at $20.

Hmm, interesting question.

I think it's much less likely that MBI trades anywhere near $35 than BAC trading at $20 by Jan 2013, unless there is a bid for the company, which is entirely possible if MBIA starts writing business again. 

My guess is that BAC trades between $15 and $20 at Jan 2013.  My guess on MBI is that it trades at whatever National's equity value per share is at that time.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on September 19, 2011, 05:01:34 PM
To me it's interesting because $35 from an $8.50 MBI share price today is a 300% return.

With BAC today at $7 we need to get to $28 to have a 300% return. 

However it can be a 300% return when only getting to $20 in BAC if done using MBI as the downside risk (writing the covered $10 strike MBI and buying the $10 strike BAC with proceeds).

Sort of the same return you'd get if you could pick up BAC for $5, which you can't (thus far anyhow).
Title: Re: BAC-WT - Bank of America Warrants
Post by: NormR on September 19, 2011, 09:26:26 PM
To me it's interesting because $35 from an $8.50 MBI share price today is a 300% return.

With BAC today at $7 we need to get to $28 to have a 300% return. 

However it can be a 300% return when only getting to $20 in BAC if done using MBI as the downside risk (writing the covered $10 strike MBI and buying the $10 strike BAC with proceeds).

Sort of the same return you'd get if you could pick up BAC for $5, which you can't (thus far anyhow).

I don't touch options but I love reading your options musings.   :)
Title: Re: BAC-WT - Bank of America Warrants
Post by: txlaw on September 20, 2011, 07:18:40 AM
To me it's interesting because $35 from an $8.50 MBI share price today is a 300% return.

With BAC today at $7 we need to get to $28 to have a 300% return. 

However it can be a 300% return when only getting to $20 in BAC if done using MBI as the downside risk (writing the covered $10 strike MBI and buying the $10 strike BAC with proceeds).

Sort of the same return you'd get if you could pick up BAC for $5, which you can't (thus far anyhow).

but I love reading your options musings.   :)

Same.
Title: Re: BAC-WT - Bank of America Warrants
Post by: rjstc on September 20, 2011, 08:08:52 AM
To me it's interesting because $35 from an $8.50 MBI share price today is a 300% return.

With BAC today at $7 we need to get to $28 to have a 300% return. 

However it can be a 300% return when only getting to $20 in BAC if done using MBI as the downside risk (writing the covered $10 strike MBI and buying the $10 strike BAC with proceeds).

Sort of the same return you'd get if you could pick up BAC for $5, which you can't (thus far anyhow).

but I love reading your options musings.   :)

Same.
Same with me
Title: Re: BAC-WT - Bank of America Warrants
Post by: vinod1 on September 20, 2011, 08:12:33 AM
To me it's interesting because $35 from an $8.50 MBI share price today is a 300% return.

With BAC today at $7 we need to get to $28 to have a 300% return. 

However it can be a 300% return when only getting to $20 in BAC if done using MBI as the downside risk (writing the covered $10 strike MBI and buying the $10 strike BAC with proceeds).

Sort of the same return you'd get if you could pick up BAC for $5, which you can't (thus far anyhow).

but I love reading your options musings.   :)

Same.

+1. Eric's musings probably helped me more in thinking through options than in passing the CFA exams.

Vinod
Title: Re: BAC-WT - Bank of America Warrants
Post by: west on September 20, 2011, 10:18:27 AM
Fwiw, if you like Eric's thinking, I can't recommend the books Value Investing, by Bruce Greenwald, and You Can Be a Stock Market Genius, by Joel Greenblatt, highly enough.  With both of them you can build a really solid mental framework on how to think about valuing stocks versus their current price using the same sort of reasoning Eric's is above.  They helped me understand value investing way more than any finance or business valuation course I've ever taken.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Kraven on September 21, 2011, 08:45:26 AM
Pretty good article from Todd Sullivan over on Seeking Alpha about BAC's mortgage put back risk.

http://seekingalpha.com/article/294629-bank-of-america-s-mortgage-put-back-risk-what-are-investors-really-entitled-to
Title: Re: BAC-WT - Bank of America Warrants
Post by: merkhet on September 21, 2011, 09:05:29 AM

Pretty good article from Todd Sullivan over on Seeking Alpha about BAC's mortgage put back risk.

http://seekingalpha.com/article/294629-bank-of-america-s-mortgage-put-back-risk-what-are-investors-really-entitled-to


Great find, Kraven.  I remember watching this guy's videos on Howard Hughes Corp. -- I sat that one out since I figured real estate was outside my circle of competence at that time.
Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on September 21, 2011, 09:51:59 AM
Pretty good article from Todd Sullivan over on Seeking Alpha about BAC's mortgage put back risk.

http://seekingalpha.com/article/294629-bank-of-america-s-mortgage-put-back-risk-what-are-investors-really-entitled-to

He sums up the essence. I bought BAC yesterday with new cash. Yes, pro timing, I know...

http://www.bloomberg.com/news/2011-09-21/bank-of-america-credit-rating-downgraded-by-moody-s-on-waning-u-s-support.html
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on September 21, 2011, 11:00:58 AM
The rationale for the rating downgrades seems kind of perverse.  In effect we dont see the government stepping in to support them because they are strong enough to stand on their own now, so we downgraded them.  I just dont understand it.

As an aside, can anyone reflect on this for me:  Am I correct that the ratings agencies can only use publicly available information or are they privy to things that only insiders have access to?
Title: Re: BAC-WT - Bank of America Warrants
Post by: Kraven on September 21, 2011, 11:10:41 AM
The rationale for the rating downgrades seems kind of perverse.  In effect we dont see the government stepping in to support them because they are strong enough to stand on their own now, so we downgraded them.  I just dont understand it.

As an aside, can anyone reflect on this for me:  Am I correct that the ratings agencies can only use publicly available information or are they privy to things that only insiders have access to?

Agreed.  The rationale was strange and rather weak.

Typically the rating agencies are privy to non-public information.  The only time this wouldn't be the case is if they are rating something and the company, entity, sovereign, etc. does not want to be rated by them.  That is, there is no legal requirement that anyone be rated say by Moody's or S&P or Fitch, for example.  They could decide to get rated by one of them, but not the others.  In which case, they don't need to cooperate, but then they run the risk of the rating not being based on all the relevant facts and data.  The rating agencies can always rate whatever they want even if there is no cooperation by the thing being rated.  Usually people want to cooperate.  Even if it's going to be a negative result, better to have your voice heard than not.  But this isn't always the case.
Title: Re: BAC-WT - Bank of America Warrants
Post by: merkhet on September 21, 2011, 12:03:55 PM
I look at it this way...

If the ratings agencies downgrade Bank of America, and it does well anyway -- well, kudos to Moynihan for steering it out of "disaster."

If the ratings agencies maintain Bank of America, and it doesn't do well -- look at those ratings agencies asleep at the wheel again.

(The other two combinations are self-explanatory.)
Title: Re: BAC-WT - Bank of America Warrants
Post by: oec2000 on September 21, 2011, 01:06:35 PM
We are still paying attention to the ratings agencies?!  ??? ??? ???
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on September 21, 2011, 01:13:24 PM
OEC, Not really, just curious. 

I see that WFC is now below book and in the single digit PE range. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: BargainValueHunter on September 21, 2011, 01:16:23 PM
The rationale for the rating downgrades seems kind of perverse.  In effect we dont see the government stepping in to support them because they are strong enough to stand on their own now, so we downgraded them.  I just dont understand it.

As an aside, can anyone reflect on this for me:  Am I correct that the ratings agencies can only use publicly available information or are they privy to things that only insiders have access to?

After 2007-2008 no sane, rational human being should take the "ratings agencies" seriously.

Quote
Moody’s (MCO)

Holding Value: $929.2 million
Shares: 28,415,250
Stake in Company: 12.46 percent

It hurts Mr. Buffett's public image that Berkshire still owns a huge chunk of Moody's.
Title: Re: BAC-WT - Bank of America Warrants
Post by: biaggio on September 21, 2011, 01:34:17 PM
We are still paying attention to the ratings agencies?!  ??? ??? ???

with their track record, I would feel good about your holdings (BAC bound to go up)
Title: Re: BAC-WT - Bank of America Warrants
Post by: oec2000 on September 21, 2011, 02:17:27 PM
OEC, Not really, just curious. 

I see that WFC is now below book and in the single digit PE range.

I prefer to use tangible book - better for making comparisons between banks and for normalising ROEs. WFC is still at a premium to tangible book. GS, admittedly a different kettle of fish, looks cheaper at a 20% discount to tangible book.

Many financials do look cheap. Wonder though whether flattening yield curve (especially if FFH's deflation thesis works out) in the US will hurt bank margins significantly going forward - the steep yield curve has helped banks turn in very strong PTPP earnings in the past few quarters.
Title: Re: BAC-WT - Bank of America Warrants
Post by: biaggio on September 21, 2011, 03:30:56 PM
Pretty good article from Todd Sullivan over on Seeking Alpha about BAC's mortgage put back risk.

http://seekingalpha.com/article/294629-bank-of-america-s-mortgage-put-back-risk-what-are-investors-really-entitled-to
[/quote

Thanks for posting.

Can anyone here verify that how he describes the put backs is actually how they work. I have no idea. Has anyone dug into the actual paperwork. I assume they would be posted on Sec.gov.

Very good article + basically is the same as Fairholmes theory on BAC in that the bank as earnings power of $3 per share and will be allowed to earn their way thru the bad loans, putbacks etc. ie they will be able to write off or pay $30b per year from their earnings + then have a corp earning $3 per share per year as this is best for all concerned, especially those who are owed money.

Basically selling for 2 x earnings today. Wow.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Rabbitisrich on September 21, 2011, 04:33:25 PM
Pretty good article from Todd Sullivan over on Seeking Alpha about BAC's mortgage put back risk.

http://seekingalpha.com/article/294629-bank-of-america-s-mortgage-put-back-risk-what-are-investors-really-entitled-to
[/quote

Thanks for posting.

Can anyone here verify that how he describes the put backs is actually how they work. I have no idea. Has anyone dug into the actual paperwork. I assume they would be posted on Sec.gov.

Very good article + basically is the same as Fairholmes theory on BAC in that the bank as earnings power of $3 per share and will be allowed to earn their way thru the bad loans, putbacks etc. ie they will be able to write off or pay $30b per year from their earnings + then have a corp earning $3 per share per year as this is best for all concerned, especially those who are owed money.

Basically selling for 2 x earnings today. Wow.

Typically the reps and warranties language allows for putbacks if the originator's mistakes/lies qualify as material and adverse. Sullivan is probably referring to the difficulty of separating impairment due to misrepresentations from non-covered factors. There is also a fraud issue that may be separately raised.

Title: Re: BAC-WT - Bank of America Warrants
Post by: Rabbitisrich on September 21, 2011, 04:36:29 PM
Alison Frankel at Thomson Reuters is a good source for updates on investor/trustee suits:

http://newsandinsight.thomsonreuters.com/Legal/OnTheCase/ (http://newsandinsight.thomsonreuters.com/Legal/OnTheCase/)
Title: Re: BAC-WT - Bank of America Warrants
Post by: vinod1 on September 21, 2011, 05:39:11 PM
Pretty good article from Todd Sullivan over on Seeking Alpha about BAC's mortgage put back risk.

http://seekingalpha.com/article/294629-bank-of-america-s-mortgage-put-back-risk-what-are-investors-really-entitled-to

<I> We now have to add the $63,840k in payments received over the 4 years. Since investors are not entitled to interest payments, just return of principal, the full $63k comes off the loan making the actual “loss” $50,160. </I>

This is not the way it works. Interest paid does not come of the principal amount. The defective loan should be made whole either via cash payment or a substitute loan. So of the monthly payments made the loan would only be reduced by the principal repayments made. On a mortgage loan in the early years it is not going to be that significant. I agree that actual losses to BAC are a fraction of the original loan amount but the author is incorrectly reducing the exposure by the amount of interest payments made.

Agree with the rest of the article.

Thanks

Vinod
Title: Re: BAC-WT - Bank of America Warrants
Post by: biaggio on September 21, 2011, 07:55:19 PM
Thanks Rabbitisrich and Vinod
Title: Re: BAC-WT - Bank of America Warrants
Post by: rranjan on September 21, 2011, 08:23:54 PM

This is not the way it works. Interest paid does not come of the principal amount. The defective loan should be made whole either via cash payment or a substitute loan. So of the monthly payments made the loan would only be reduced by the principal repayments made. On a mortgage loan in the early years it is not going to be that significant. I agree that actual losses to BAC are a fraction of the original loan amount but the author is incorrectly reducing the exposure by the amount of interest payments made.

Agree with the rest of the article.

Thanks

Vinod

That's the first thought came in my mind while reading it. I thought some investors might have special claws which might make author claim plausible but that should not be the norm. I am not even sure if any mortgage originator will agree to these terms but then again stranger things have heppened in past in this industry.
Title: Re: BAC-WT - Bank of America Warrants
Post by: tooskinneejs on September 23, 2011, 08:31:59 AM
Dallas County (and maybe other counties to follow) wants BAC to pay back-filing fees for unrecorded loan assignments that went through the MERS system...

http://www.bloomberg.com/news/2011-09-22/bank-of-america-filing-fee-case-may-open-new-front-in-mortgage-lawsuits.html

Title: Re: BAC-WT - Bank of America Warrants
Post by: Grenville on September 28, 2011, 08:42:18 AM
Any thoughts on this lawsuit in regards to the Merrill Acq and the lack of disclosure about losses. It seems to have more teeth and require a much larger settlement.

"A $50 Billion Claim of Havoc Looms for Bank of America"
http://www.cnbc.com/id/44700101 (http://www.cnbc.com/id/44700101)
Title: Re: BAC-WT - Bank of America Warrants
Post by: merkhet on September 28, 2011, 10:17:55 AM
Any thoughts on this lawsuit in regards to the Merrill Acq and the lack of disclosure about losses. It seems to have more teeth and require a much larger settlement.

"A $50 Billion Claim of Havoc Looms for Bank of America"
http://www.cnbc.com/id/44700101 (http://www.cnbc.com/id/44700101)

It's been a while since my law days, but it seems to me that there's a big leap between "losses should have disclosed" vs. "damages of $50 billion."  I'm pretty sure it's not strict liability in this case -- assuming that the $15 billion of losses were known AND disclosed, was there evidence that shareholders would have voted in favor anyway?

(I'm a bit out of my depth here law-wise, so I'd love if someone with more securities law experience would step in...)
Title: Re: BAC-WT - Bank of America Warrants
Post by: benchmark on September 29, 2011, 08:28:45 AM
How does the warrant compare with Jan 13, 10 leap? it seems to me that the leap at 0.8 offers more upside in a year than warrant. You can easily double your money in a year.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on September 29, 2011, 08:42:46 AM
How does the warrant compare with Jan 13, 10 leap? it seems to me that the leap at 0.8 offers more upside in a year than warrant. You can easily double your money in a year.

or you can lose your entire investment in a year. the warrant buys time, which is something that could be extremely valuable as the "turn" is taking way way longer than many expected.

By "entire investment", keep in mind that the LEAP trades for 28% of the price of a class A warrant. 

Using this terminology, you can lose more than your entire investment if the warrant declines by more than 28% by the time that LEAP expires.



Title: Re: BAC-WT - Bank of America Warrants
Post by: benchmark on October 01, 2011, 01:02:58 AM
I guess 'losing all' is a possibility, so far BAC hasn't show any life, even after buffet's investment. Warrant might give you peace of mind, while the leap can give you some quick return that are still long term gain
Title: Re: BAC-WT - Bank of America Warrants
Post by: beerbaron on October 01, 2011, 07:13:55 AM
I guess 'losing all' is a possibility, so far BAC hasn't show any life, even after buffet's investment. Warrant might give you peace of mind, while the leap can give you some quick return that are still long term gain

This is a all or nothing bet, I don't know why anyone would buy the common. Your risk is much higher then 2013 leaps. The next 2 years will define if BAC survives or not.

BeerBaron
Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on October 01, 2011, 08:06:50 AM
I guess 'losing all' is a possibility, so far BAC hasn't show any life, even after buffet's investment. Warrant might give you peace of mind, while the leap can give you some quick return that are still long term gain

This is a all or nothing bet, I don't know why anyone would buy the common. Your risk is much higher then 2013 leaps. The next 2 years will define if BAC survives or not.

BeerBaron

The next two years? I think the leaps expire in January of 2013? That is 15 months.

I believe more time will be needed to fix BAC and for it's value to come out. 15 months isn't that much and in the meantime a lot can happen maybe making the leaps almost worthless but the common maintaining their value.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on October 01, 2011, 09:26:52 AM
I took a lot of large cap bank names off the top of my head and plotted them on a chart together.  They all seem to go up together and fall together.  From the looks of things, BAC would be down at least 30% this year just by virtue of being a bank. 

I included BAC, C, JPM, STD. 

STD has about 50% upside based on the past 6 month trading range (the equivalent of BAC going to $9).  It yields 11%.  I figure if you bought that one along with the BAC $10 strike 2013 calls you have a dividend that will reimburse you for the calls and you have a downside that doesn't include BAC's mortgage risk. 

Any thoughts on STD's downside risks?  I believe they only have a couple of hundred million in greek sovereign risk and their Spain/Portugal exposure is small relative to their size.  They have healthy South American exposure in Brazil.  I also discovered that they have a program whereby you can elect to have shares distributed to you in lieu of cash dividends -- thus the Spanish government won't withhold tax on the dividend because they only do so on cash dividends.  You would then sell the shares once you get them (to manufacture your dividend).

What I'm getting at here is finding investments that have enough yield to pay for the $10 strike calls, but also have enough upside to get you enough of a boost to simulate the first leg up (BAC going from $6 to $10).
Title: Re: BAC-WT - Bank of America Warrants
Post by: ubuy2wron on October 01, 2011, 11:20:44 AM
BAC which I own really needs to dislodge the never ending series of lawsuits. Everyone who has lost money because of the real estate crash is suing BAC. They are being sued by home owners for being to agressive with foreclosures they are being sued by mortgage holders for not being aggressive enough I think that putting Country wide into run-off or bankruptcy may be the only thing that will stop the madness.
Title: Re: BAC-WT - Bank of America Warrants
Post by: benchmark on October 01, 2011, 11:30:44 AM
I guess 'losing all' is a possibility, so far BAC hasn't show any life, even after buffet's investment. Warrant might give you peace of mind, while the leap can give you some quick return that are still long term gain

This is a all or nothing bet, I don't know why anyone would buy the common. Your risk is much higher then 2013 leaps. The next 2 years will define if BAC survives or not.

BeerBaron

The next two years? I think the leaps expire in January of 2013? That is 15 months.

I believe more time will be needed to fix BAC and for it's value to come out. 15 months isn't that much and in the meantime a lot can happen maybe making the leaps almost worthless but the common maintaining their value.

The all-or-nothing aspect is a bit scary, though BAC could easily go to 12-15 if Europe stables itself (which I think it will, after letting greece/spain go), and they put country wide into Bk
Title: Re: BAC-WT - Bank of America Warrants
Post by: BargainValueHunter on October 01, 2011, 12:05:24 PM
My gut feeling is that we are closer to another March 6, 2009 than another September 15, 2008...

http://www.youtube.com/watch?v=0ubjv_HQ7vk
Title: Re: BAC-WT - Bank of America Warrants
Post by: PLynchJr on October 03, 2011, 10:00:50 AM
Wow.  New 52 week low.  Down to $5.87.  Anyone buying more?

Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on October 03, 2011, 10:37:42 AM
Well, I'm glad I don't have any leverage but it sure is tempting.
Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on October 03, 2011, 11:46:00 AM
Bought some common just now. Crazy!

Falling knife but the fear is beyond absurd.
Title: Re: BAC-WT - Bank of America Warrants
Post by: NormR on October 03, 2011, 12:35:57 PM
When do higher margin requirements hit.  $5 or $3?  I keep forgetting (good thing I don't use leverage) ...
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on October 03, 2011, 12:45:12 PM
When do higher margin requirements hit.  $5 or $3?  I keep forgetting (good thing I don't use leverage) ...

I think it is $3.  Perhaps Citigroup's decision to reverse split wasn't so useless.
Title: Re: BAC-WT - Bank of America Warrants
Post by: biaggio on October 03, 2011, 01:42:12 PM
a lot of companies (pensions + mutual funds) not allowed to hold stock <$5 in price, so can we expect further downside if price crosses $5 ?
Title: Re: BAC-WT - Bank of America Warrants
Post by: ubuy2wron on October 13, 2011, 05:09:01 AM
Has there been any discussions anywhere about the spin off of Merrill Lynch given the Volker Rule. Should GS and Morgan Stanley give up their bank charters in a Glass Steagal? lite future.
Title: Re: BAC-WT - Bank of America Warrants
Post by: sswan11 on October 15, 2011, 09:56:41 AM
Barron's:  Buy the banks

http://online.barrons.com/article/barrons_cover.html#articleTabs_panel_article%3D1

Warrants or common?
Title: Re: BAC-WT - Bank of America Warrants
Post by: Mephistopheles on October 18, 2011, 12:58:11 AM
Hi,

Can anyone recommend a broker through which I can buy these warrants? Currently I am using Merrill Edge, which is crap, but I get free trading and so I use it. I don't think I am able to buy the warrants through it, unless I am mistaken. So through what brokers have you all bought the warrants?

Thank you!
Title: Re: BAC-WT - Bank of America Warrants
Post by: claphands22 on October 18, 2011, 01:00:37 AM
I'm guessing you should be able to buy them through Merril Edge. The stock ticker is different depending on what brokerage you are using. I would call them up to see what the ticker is for their system.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Kraven on October 18, 2011, 03:15:46 AM
Hi,

Can anyone recommend a broker through which I can buy these warrants? Currently I am using Merrill Edge, which is crap, but I get free trading and so I use it. I don't think I am able to buy the warrants through it, unless I am mistaken. So through what brokers have you all bought the warrants?

Thank you!

There is nothing special about these warrants.  You should be able to buy them through any broker.  Just make sure you have the right symbol.  Just call them up and ask.
Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on November 01, 2011, 02:59:49 PM
Does anyone know where I can see the price history of the warrants for more than the last 5 days? Or isn't that possible?


I own BAC common stock now but nothing prevents me from buying some BAC-WTA when utter despair hits the markets.
Title: Re: BAC-WT - Bank of America Warrants
Post by: enoch01 on November 01, 2011, 03:07:58 PM
Does anyone know where I can see the price history of the warrants for more than the last 5 days? Or isn't that possible?


http://www.investorpoint.com/stock/BAC.WS.A-BANK%20OF%20AMERICA%20WARRANTS/chart/?qm_page=25639
Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on November 01, 2011, 03:19:10 PM
Thanks enoch.

Why are the warrants less volatile lately? The BAC-WTA gained less from low to latest high than common stock!  :o


Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on November 01, 2011, 04:11:22 PM
Also, how do I measure time value for warrants?

Because if I just look at what returns (not adjusted for dividends) can be when just looking at end value in 2019 the difference in performance is really weak. As long as BAC trades under $30 in 2019 there is almost no extra return with the warrants it seems.

For example:

Quote
Bought at price common $6 or price BAC-WTA $3 (seems about right):

2019 price $15
common -> 2,5x
warrants -> 0,56x

2019 price $20
common -> 3,3x
warrants -> 2,23x

2019 price $30
common -> 5x
warrants -> 5,56x

2019 price $40
common -> 6,67x
warrants -> 8,9x

2019 price $50
common -> 8,3x
warrants -> 12,23x


Looks like you can only have a reasonable chance of doing much better with the warrants if the time value is high and you sell at an opportunistic time. But I assume this is the case and there is significant time value present? Can anyone give me an indication and am I missing something else?
Title: Re: BAC-WT - Bank of America Warrants
Post by: pilaniman on November 01, 2011, 05:10:28 PM

Looks like you can only have a reasonable chance of doing much better with the warrants if the time value is high and you sell at an opportunistic time. But I assume this is the case and there is significant time value present? Can anyone give me an indication and am I missing something else?


Think of these warrants like any other option which has two components: intrinsic value (strike price - stock price) and time value. There is no intrinsic value is these warrants because the strike price (or conversion price for the warrant) is significantly higher than the current stock price. What you see is ALL time value of the warrant because it has eight yrs to expire. The BAC warrant is similar to a long-term out-of-the-money call option.

I have not seen a robust option valuation method for long-term options like these but directionally as the time goes by, it will lose time value (called time decay) and as the stock price of BAC gets closer to the conversion/strike price, the warrant will increase in value. The moves are not linear.

Hope it helps.
Title: Re: BAC-WT - Bank of America Warrants
Post by: rranjan on November 01, 2011, 05:16:07 PM
Thanks enoch.

Why are the warrants less volatile lately? The BAC-WTA gained less from low to latest high than common stock!  :o

Supply demand equation might have something to do with it. Also when volatility is high you will get spike in call/put price so if BAC went down a lot in short period due to high volatility then call/warrant will not go down in same proportion. It has to do with the way call/put/warrants  are priced.

As far as commons making more money than warrants till price reaches $30, you are forgetting one thing. In your example you can buy two warrants or one common by spending $6. When you compare warrants vs common breakeven point then you have to take this into account. having said that , the risk is also different in two scenario.
Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on November 01, 2011, 05:35:51 PM
Thanks guys, makes sense!

Not sure about the two warrants vs one common thing tho. Doesn't change return? If you buy only 1 warrant you're profit will only be $13,7 (at 2019 price of $30) against $24 with common. Right? Buy two and it's $27,4.

It's late here so I could be saying some very wrong things.
Title: Re: BAC-WT - Bank of America Warrants
Post by: rranjan on November 02, 2011, 11:55:10 AM
Thanks guys, makes sense!

Not sure about the two warrants vs one common thing tho. Doesn't change return? If you buy only 1 warrant you're profit will only be $13,7 (at 2019 price of $30) against $24 with common. Right? Buy two and it's $27,4.

It's late here so I could be saying some very wrong things.

Not sure about what you are trying to convey but using your numbers as example,

If you spend $6 to buy common --> at $30 you make $24 bucks profit.
If you spend $6 to buy two warrants --> at $30 you make $27 bucks profit

We can ignore the dividend or buyback here because they will effect the commons and warrants both in almost same way. I am assuming that $30 price reaches near warrant expiration date but if it reaches quite early then profit on commons at that time will be still $24 bucks but I will suspect that warrant will have higher price due to time value component. Both have different risk as well. Both, commons or warrants, will work out fine as long as thesis works out.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on November 02, 2011, 12:11:48 PM
A while back I switched to the common from the warrant.   And I have some out of the money calls as well.

Are you really going to want to remain 2:1 levered in the warrant when the stock is no longer trading with any perceived margin of safety?

You can go out and find a fairly valued stock pretty much anytime you want and lever it 2:1.  It doesn't feel very good.

That's where you'll be at when the stock is at $26.60.

Think ahead -- how will you really behave when you are at that point?

Let's say BAC is trading at $26.60 tomorrow morning.  Are you going to say it's time to load up 2:1 or are you going to say that you are a value investor and you'd rather be finding 50 cent dollars because of the margin of safety?


Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on November 02, 2011, 12:46:53 PM
Thanks guys, makes sense!

Not sure about the two warrants vs one common thing tho. Doesn't change return? If you buy only 1 warrant you're profit will only be $13,7 (at 2019 price of $30) against $24 with common. Right? Buy two and it's $27,4.

It's late here so I could be saying some very wrong things.

Not sure about what you are trying to convey but using your numbers as example,

If you spend $6 to buy common --> at $30 you make $24 bucks profit.
If you spend $6 to buy two warrants --> at $30 you make $27 bucks profit

We can ignore the dividend or buyback here because they will effect the commons and warrants both in almost same way. I am assuming that $30 price reaches near warrant expiration date but if it reaches quite early then profit on commons at that time will be still $24 bucks but I will suspect that warrant will have higher price due to time value component. Both have different risk as well. Both, commons or warrants, will work out fine as long as thesis works out.

Jup, that was what I meant. Thanks for the confirmation.

A while back I switched to the common from the warrant.   And I have some out of the money calls as well.

Are you really going to want to remain 2:1 levered in the warrant when the stock is no longer trading with any perceived margin of safety?

You can go out and find a fairly valued stock pretty much anytime you want and lever it 2:1.  It doesn't feel very good.

That's where you'll be at when the stock is at $26.60.

Think ahead -- how will you really behave when you are at that point?

Let's say BAC is trading at $26.60 tomorrow morning.  Are you going to say it's time to load up 2:1 or are you going to say that you are a value investor and you'd rather be finding 50 cent dollars because of the margin of safety?


Of course, I agree. Just looks to me you get all the leverage here without any significant extra upside when the most obvious gap is closed (from here to $15-25) and after that it is just silly to own the warrants anyway as you mentioned.

Do you own WFC Eric? Common or warrants? The story could be different there regarding the upside of the warrants.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on November 02, 2011, 01:56:20 PM
I suppose it's reasonable to make 5x in the WFC warrant -- stock needs to triple in 7 years' time.

But it's sort of the same thing -- once the stock hits $50 the obvious gap is closed.  Common and warrant are both returning 100% at that point.  To hold it from that point going forward you are taking on more than 2:1 leverage in a fairly valued stock.  More like 3:1 leverage









Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on November 02, 2011, 03:14:50 PM
Probably the same situation yes. Even when WFC is still reasonably undervalued at $50 in the future, the risk/reward profile seems inadequate.
Title: Re: BAC-WT - Bank of America Warrants
Post by: enoch01 on November 02, 2011, 03:30:51 PM
I suppose it's reasonable to make 5x in the WFC warrant -- stock needs to triple in 7 years' time.

But it's sort of the same thing -- once the stock hits $50 the obvious gap is closed.  Common and warrant are both returning 100% at that point.  To hold it from that point going forward you are taking on more than 2:1 leverage in a fairly valued stock.  More like 3:1 leverage

If the stock were to triple, what asset base is required to justify the market cap?  That's where I get stuck with the warrants for a big bank like WFC.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on November 02, 2011, 03:39:18 PM
I suppose it's reasonable to make 5x in the WFC warrant -- stock needs to triple in 7 years' time.

But it's sort of the same thing -- once the stock hits $50 the obvious gap is closed.  Common and warrant are both returning 100% at that point.  To hold it from that point going forward you are taking on more than 2:1 leverage in a fairly valued stock.  More like 3:1 leverage

If the stock were to triple, what asset base is required to justify the market cap?  That's where I get stuck with the warrants for a big bank like WFC.

It takes only the current asset base growing at 3% a year for the next 7 years.

They could earn $4 right now if losses were normalized and yield curve looked better.  The company stock could trade at 12x earnings.  That gets us to $48 per share.

Then let's say they buy back 3% of shares a year for next 7 years.  That gets us to $60 per share.

Then let's say they grow business/assets by 3% a year.

That gets us to $75 per share.
Title: Re: BAC-WT - Bank of America Warrants
Post by: enoch01 on November 02, 2011, 04:05:19 PM

If the stock were to triple, what asset base is required to justify the market cap?  That's where I get stuck with the warrants for a big bank like WFC.

It takes only the current asset base growing at 3% a year for the next 7 years.

They could earn $4 right now if losses were normalized and yield curve looked better.  The company stock could trade at 12x earnings.  That gets us to $48 per share.

Then let's say they buy back 3% of shares a year for next 7 years.  That gets us to $60 per share.

Then let's say they grow business/assets by 3% a year.

That gets us to $75 per share.

Fair enough.  With certain assumptions on buybacks, yield curve, and market valuation, the asset base only needs to increase about 25%.  Those inputs have a pretty wide range though.
Title: Re: BAC-WT - Bank of America Warrants
Post by: meiroy on November 02, 2011, 09:19:45 PM
Thanks guys, makes sense!

Not sure about the two warrants vs one common thing tho. Doesn't change return? If you buy only 1 warrant you're profit will only be $13,7 (at 2019 price of $30) against $24 with common. Right? Buy two and it's $27,4.

It's late here so I could be saying some very wrong things.

Not sure about what you are trying to convey but using your numbers as example,

If you spend $6 to buy common --> at $30 you make $24 bucks profit.
If you spend $6 to buy two warrants --> at $30 you make $27 bucks profit

We can ignore the dividend or buyback here because they will effect the commons and warrants both in almost same way. I am assuming that $30 price reaches near warrant expiration date but if it reaches quite early then profit on commons at that time will be still $24 bucks but I will suspect that warrant will have higher price due to time value component. Both have different risk as well. Both, commons or warrants, will work out fine as long as thesis works out.

there is a pretty good chance when bac hits $30 there will be 4 years of time value left on those warrants. maybe 5. to give you an idea of what can happen, Paulson's original bac thesis called for a price of $30 in 2011/2012 time frame. The company has enormous earnings power.

Going over the last few posts, I find myself somewhat confused. My understanding is that the play with these warrants is for the [hopeful] extra time value on top of the basic value, and not to be held till expiration. In Ericopoly's example, if we say it happens well before the expiration date, than surely conversion to the common will not be considered and due to the extra time value the warrant itself should be sold.  (In addition if it's at 50 or whatever, the warrant has the protection if for example the common crashes to 10 you "lose" 40 while on the warrant it's just the 8.5 or whatever it is now. Of course that's temporary loss compared to actual loss of capital) (EDIT: pardon, I was using the WFC-WT values)

Please clarify, thanks.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on November 02, 2011, 09:56:01 PM
Yes the gains will be higher with the warrant vs the common I expect.  You will get some time value.  Warrant might be worth $11 if the stock is at $20 by end of 2012.  I'm granting it 5% time value per annum  -- thus $4 of time value if 6 years are left.  Maybe 5% annualized is too low?  What's other's opinion on what the time value is worth for deep-in-the-money warrant? 

That would be a gain of 3.39x in the warrant and a gain of 3x in the common.
Title: Re: BAC-WT - Bank of America Warrants
Post by: meiroy on November 02, 2011, 10:05:51 PM
Yes the gains will be higher with the warrant vs the common I expect.  You will get some time value.  Warrant might be worth $11 if the stock is at $20 by end of 2012.  I'm granting it 5% time value per annum  -- thus $4 of time value if 6 years are left.  Maybe 5% annualized is too low?  What's other's opinion on what the time value is worth for deep-in-the-money warrant? 

That would be a gain of 3.39x in the warrant and a gain of 3x in the common.

Got it. Thanks!

So, if everyone and their grandma are holding onto this (assuming it would be actually worth it to hold it in the first place), and will probably sell it at a certain time frame, who would buy it on the other side? For whom such a warrant would be valuable? Could it be for the issuing entity itself?
Title: Re: BAC-WT - Bank of America Warrants
Post by: rranjan on November 02, 2011, 10:20:49 PM
Yes the gains will be higher with the warrant vs the common I expect.  You will get some time value.  Warrant might be worth $11 if the stock is at $20 by end of 2012.  I'm granting it 5% time value per annum  -- thus $4 of time value if 6 years are left.  Maybe 5% annualized is too low?   What's other's opinion on what the time value is worth for deep-in-the-money warrant? 

That would be a gain of 3.39x in the warrant and a gain of 3x in the common.

Given the low interest rate right now, 5% annualized time value should not be too low. Equation might change a bit if we get a spike in interest rate but I don't think fed would allow high interest rates for few years. I hold commons, warrant and leaps in different accounts. Leaps might run out of time but they can be rolled over at right price. Commons and warrants should have roughly same returns but warrants might provide bit better returns. Difference should not be very huge though. Off course, the commons have less risk than the warrants but 7 years is long time.

For WFC warrants, you lose lot in dividend ( roughly $9 bucks) so I hold commons for WFC and will buy some leaps. Well, WFC is not so cheap but more safe. It still gives 15% annulized returns from here with very average scenario. Though warrants will give more upside if WFC does reasonably well.
Title: Re: BAC-WT - Bank of America Warrants
Post by: rranjan on November 02, 2011, 10:37:01 PM
Yes the gains will be higher with the warrant vs the common I expect.  You will get some time value.  Warrant might be worth $11 if the stock is at $20 by end of 2012.  I'm granting it 5% time value per annum  -- thus $4 of time value if 6 years are left.  Maybe 5% annualized is too low?  What's other's opinion on what the time value is worth for deep-in-the-money warrant? 

That would be a gain of 3.39x in the warrant and a gain of 3x in the common.

Got it. Thanks!

So, if everyone and their grandma are holding onto this (assuming it would be actually worth it to hold it in the first place), and will probably sell it at a certain time frame, who would buy it on the other side? For whom such a warrant would be valuable? Could it be for the issuing entity itself?

These warrants have enough liquidity. Warrants does not have to be necessarily very valuable to get buyers. Taking account of interest rate even a thin margin will be enough to have buyers. Just leave something for the next owner. Only question you need to ask - if you will get any love for bank stocks in next 7 years? Most of them are priced for doom and gloom so even a average scenario will produce good returns. I am not banking on better than average scenario for making investments but last few years loans have much higher quality but no one is giving any credit for that at this moment.
Title: Re: BAC-WT - Bank of America Warrants
Post by: returnonmycapital on November 03, 2011, 07:01:15 AM
I have bought BAC wts (class A) with 13.30 strike at an average of 2.75. I have also bought BAC pfd (series L) at an average price of 750 (yield 9.67%). Per $1,000 par of pfd., I have bought 75 wts per par of pfd (1,000 / 13.3 = 75). This has created a reasonably low strike convertible pfd security. My total cost per $1,000 par is 956.25 which earns close to 7.6% yield. My assumption is that the pfd. will eventually trade at par and the business will eventually earn 1% on assets of about $150 - $200 per share (putting the common fair value at about $20, imo, given interest rates today). 

The wts currently trade at about 45% premium to the stock. I expect that premium to decline approx. 6% per annum. Netting out the premium decay fromt the pfd dividend receivable gives a net 1.6% yield. Which gives a 1% yield advantage over the common. Should dividends increase on the commn, the wt strike will decline $1 for $1 (unlike WFC wts). This hedges, to some extent, the wt's premium decay.

If the pfd is money-good and eventually trades at par, this operation should result in profit, even if the wts expire worthless. If you leverage the pfd., with an attractive spread and it proves to be money-good and the common gets through the strike price by 2019, this should offer a superior operation to holding the common. And finally, because the series L pfd is already a perpetual convertible, should the common later rise well past $20, you might get some extra kick from the pfd rising through par. Example, given a $750 pfd cost, option breakeven on the common is $37.50 per share.

And, while not wanting to dwell on the negatives, it's no small thing to have even marginally better terms to the common in any prospective liquidation scenario.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on November 06, 2011, 03:04:17 PM
I wrote a script to illustrate my thoughts on the leverage in the warrant.  I did this because I wanted to see how much leverage the warrant really brings to the table vs the common.

The script compares a margin-leveraged common stock position to the warrant.  It assumes that you hold the warrant to maturity and provides the return as if the warrant had just expired -- and the leverage you would need to hold if you were to take delivery on the shares rather than sell the warrants.  It tells you how much leverage you have at any given stock price.  Unfortunately the script is a bit unrealistic in that it assumes the margin interest rate is 0%.  So it will overstate returns from the stock to some degree.

The script assumes that whenever the stock goes up by a full $1 you buy more shares to maintain the target (initial) level of leverage.  So as the stock rises (or when dividends are paid) you keep on buying, but if the stock drops you hold onto the shares (never selling).  The idea is to maintain the starting leverage level.

Stock price begins at $6.49 and warrant price at $3.14.

The output from the script with 1.2x stock leverage.  The warrant doesn't catch up with the leveraged common until $45 is surpassed.

C:\Users\*****>cscript bac.js 1.20
Microsoft (R) Windows Script Host Version 5.7
Copyright (C) Microsoft Corporation. All rights reserved.


INITIAL STOCK LEVERAGE: 1.20

BAC: $7  STOCK_LEVERAGE: 1.183 STOCK_RETURN: 1.09 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00
BAC: $8  STOCK_LEVERAGE: 1.173 STOCK_RETURN: 1.28 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00
BAC: $9  STOCK_LEVERAGE: 1.178 STOCK_RETURN: 1.48 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00
BAC: $10  STOCK_LEVERAGE: 1.180 STOCK_RETURN: 1.67 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00
BAC: $11  STOCK_LEVERAGE: 1.182 STOCK_RETURN: 1.87 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00
BAC: $12  STOCK_LEVERAGE: 1.183 STOCK_RETURN: 2.08 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00
BAC: $13  STOCK_LEVERAGE: 1.185 STOCK_RETURN: 2.29 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00
BAC: $14  STOCK_LEVERAGE: 1.186 STOCK_RETURN: 2.50 WARRANT_LEVERAGE: 20.000 WARRANT_RETURN: 0.22
BAC: $15  STOCK_LEVERAGE: 1.187 STOCK_RETURN: 2.71 WARRANT_LEVERAGE: 8.824 WARRANT_RETURN: 0.54
BAC: $16  STOCK_LEVERAGE: 1.187 STOCK_RETURN: 2.93 WARRANT_LEVERAGE: 5.926 WARRANT_RETURN: 0.86
BAC: $17  STOCK_LEVERAGE: 1.188 STOCK_RETURN: 3.15 WARRANT_LEVERAGE: 4.595 WARRANT_RETURN: 1.18
BAC: $18  STOCK_LEVERAGE: 1.189 STOCK_RETURN: 3.37 WARRANT_LEVERAGE: 3.830 WARRANT_RETURN: 1.50
BAC: $19  STOCK_LEVERAGE: 1.189 STOCK_RETURN: 3.60 WARRANT_LEVERAGE: 3.333 WARRANT_RETURN: 1.82
BAC: $20  STOCK_LEVERAGE: 1.190 STOCK_RETURN: 3.83 WARRANT_LEVERAGE: 2.985 WARRANT_RETURN: 2.13
BAC: $21  STOCK_LEVERAGE: 1.190 STOCK_RETURN: 4.06 WARRANT_LEVERAGE: 2.727 WARRANT_RETURN: 2.45
BAC: $22  STOCK_LEVERAGE: 1.191 STOCK_RETURN: 4.29 WARRANT_LEVERAGE: 2.529 WARRANT_RETURN: 2.77
BAC: $23  STOCK_LEVERAGE: 1.191 STOCK_RETURN: 4.52 WARRANT_LEVERAGE: 2.371 WARRANT_RETURN: 3.09
BAC: $24  STOCK_LEVERAGE: 1.192 STOCK_RETURN: 4.76 WARRANT_LEVERAGE: 2.243 WARRANT_RETURN: 3.41
BAC: $25  STOCK_LEVERAGE: 1.192 STOCK_RETURN: 5.00 WARRANT_LEVERAGE: 2.137 WARRANT_RETURN: 3.73
BAC: $26  STOCK_LEVERAGE: 1.192 STOCK_RETURN: 5.24 WARRANT_LEVERAGE: 2.047 WARRANT_RETURN: 4.04
BAC: $27  STOCK_LEVERAGE: 1.193 STOCK_RETURN: 5.48 WARRANT_LEVERAGE: 1.971 WARRANT_RETURN: 4.36
BAC: $28  STOCK_LEVERAGE: 1.193 STOCK_RETURN: 5.73 WARRANT_LEVERAGE: 1.905 WARRANT_RETURN: 4.68
BAC: $29  STOCK_LEVERAGE: 1.193 STOCK_RETURN: 5.97 WARRANT_LEVERAGE: 1.847 WARRANT_RETURN: 5.00
BAC: $30  STOCK_LEVERAGE: 1.193 STOCK_RETURN: 6.22 WARRANT_LEVERAGE: 1.796 WARRANT_RETURN: 5.32
BAC: $31  STOCK_LEVERAGE: 1.194 STOCK_RETURN: 6.47 WARRANT_LEVERAGE: 1.751 WARRANT_RETURN: 5.64
BAC: $32  STOCK_LEVERAGE: 1.194 STOCK_RETURN: 6.72 WARRANT_LEVERAGE: 1.711 WARRANT_RETURN: 5.96
BAC: $33  STOCK_LEVERAGE: 1.194 STOCK_RETURN: 6.97 WARRANT_LEVERAGE: 1.675 WARRANT_RETURN: 6.27
BAC: $34  STOCK_LEVERAGE: 1.194 STOCK_RETURN: 7.22 WARRANT_LEVERAGE: 1.643 WARRANT_RETURN: 6.59
BAC: $35  STOCK_LEVERAGE: 1.194 STOCK_RETURN: 7.48 WARRANT_LEVERAGE: 1.613 WARRANT_RETURN: 6.91
BAC: $36  STOCK_LEVERAGE: 1.194 STOCK_RETURN: 7.74 WARRANT_LEVERAGE: 1.586 WARRANT_RETURN: 7.23
BAC: $37  STOCK_LEVERAGE: 1.195 STOCK_RETURN: 7.99 WARRANT_LEVERAGE: 1.561 WARRANT_RETURN: 7.55
BAC: $38  STOCK_LEVERAGE: 1.195 STOCK_RETURN: 8.25 WARRANT_LEVERAGE: 1.538 WARRANT_RETURN: 7.87
BAC: $39  STOCK_LEVERAGE: 1.195 STOCK_RETURN: 8.51 WARRANT_LEVERAGE: 1.518 WARRANT_RETURN: 8.18
BAC: $40  STOCK_LEVERAGE: 1.195 STOCK_RETURN: 8.78 WARRANT_LEVERAGE: 1.498 WARRANT_RETURN: 8.50
BAC: $41  STOCK_LEVERAGE: 1.195 STOCK_RETURN: 9.04 WARRANT_LEVERAGE: 1.480 WARRANT_RETURN: 8.82
BAC: $42  STOCK_LEVERAGE: 1.195 STOCK_RETURN: 9.31 WARRANT_LEVERAGE: 1.463 WARRANT_RETURN: 9.14
BAC: $43  STOCK_LEVERAGE: 1.195 STOCK_RETURN: 9.57 WARRANT_LEVERAGE: 1.448 WARRANT_RETURN: 9.46
BAC: $44  STOCK_LEVERAGE: 1.195 STOCK_RETURN: 9.84 WARRANT_LEVERAGE: 1.433 WARRANT_RETURN: 9.78
BAC: $45  STOCK_LEVERAGE: 1.196 STOCK_RETURN: 10.11 WARRANT_LEVERAGE: 1.420 WARRANT_RETURN: 10.10


Then I ran it again with 1.15x leverage -- warrant catches up with the leveraged common at $35.

C:\Users\*****>cscript bac.js 1.15
Microsoft (R) Windows Script Host Version 5.7
Copyright (C) Microsoft Corporation. All rights reserved.


INITIAL STOCK LEVERAGE: 1.15

BAC: $7  STOCK_LEVERAGE: 1.138 STOCK_RETURN: 1.09 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00
BAC: $8  STOCK_LEVERAGE: 1.130 STOCK_RETURN: 1.27 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00
BAC: $9  STOCK_LEVERAGE: 1.133 STOCK_RETURN: 1.45 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00
BAC: $10  STOCK_LEVERAGE: 1.135 STOCK_RETURN: 1.64 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00
BAC: $11  STOCK_LEVERAGE: 1.136 STOCK_RETURN: 1.83 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00
BAC: $12  STOCK_LEVERAGE: 1.137 STOCK_RETURN: 2.02 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00
BAC: $13  STOCK_LEVERAGE: 1.138 STOCK_RETURN: 2.21 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00
BAC: $14  STOCK_LEVERAGE: 1.139 STOCK_RETURN: 2.41 WARRANT_LEVERAGE: 20.000 WARRANT_RETURN: 0.22
BAC: $15  STOCK_LEVERAGE: 1.140 STOCK_RETURN: 2.61 WARRANT_LEVERAGE: 8.824 WARRANT_RETURN: 0.54
BAC: $16  STOCK_LEVERAGE: 1.141 STOCK_RETURN: 2.81 WARRANT_LEVERAGE: 5.926 WARRANT_RETURN: 0.86
BAC: $17  STOCK_LEVERAGE: 1.141 STOCK_RETURN: 3.01 WARRANT_LEVERAGE: 4.595 WARRANT_RETURN: 1.18
BAC: $18  STOCK_LEVERAGE: 1.142 STOCK_RETURN: 3.21 WARRANT_LEVERAGE: 3.830 WARRANT_RETURN: 1.50
BAC: $19  STOCK_LEVERAGE: 1.142 STOCK_RETURN: 3.42 WARRANT_LEVERAGE: 3.333 WARRANT_RETURN: 1.82
BAC: $20  STOCK_LEVERAGE: 1.142 STOCK_RETURN: 3.63 WARRANT_LEVERAGE: 2.985 WARRANT_RETURN: 2.13
BAC: $21  STOCK_LEVERAGE: 1.143 STOCK_RETURN: 3.83 WARRANT_LEVERAGE: 2.727 WARRANT_RETURN: 2.45
BAC: $22  STOCK_LEVERAGE: 1.143 STOCK_RETURN: 4.04 WARRANT_LEVERAGE: 2.529 WARRANT_RETURN: 2.77
BAC: $23  STOCK_LEVERAGE: 1.143 STOCK_RETURN: 4.26 WARRANT_LEVERAGE: 2.371 WARRANT_RETURN: 3.09
BAC: $24  STOCK_LEVERAGE: 1.144 STOCK_RETURN: 4.47 WARRANT_LEVERAGE: 2.243 WARRANT_RETURN: 3.41
BAC: $25  STOCK_LEVERAGE: 1.144 STOCK_RETURN: 4.68 WARRANT_LEVERAGE: 2.137 WARRANT_RETURN: 3.73
BAC: $26  STOCK_LEVERAGE: 1.144 STOCK_RETURN: 4.90 WARRANT_LEVERAGE: 2.047 WARRANT_RETURN: 4.04
BAC: $27  STOCK_LEVERAGE: 1.144 STOCK_RETURN: 5.11 WARRANT_LEVERAGE: 1.971 WARRANT_RETURN: 4.36
BAC: $28  STOCK_LEVERAGE: 1.145 STOCK_RETURN: 5.33 WARRANT_LEVERAGE: 1.905 WARRANT_RETURN: 4.68
BAC: $29  STOCK_LEVERAGE: 1.145 STOCK_RETURN: 5.55 WARRANT_LEVERAGE: 1.847 WARRANT_RETURN: 5.00
BAC: $30  STOCK_LEVERAGE: 1.145 STOCK_RETURN: 5.77 WARRANT_LEVERAGE: 1.796 WARRANT_RETURN: 5.32
BAC: $31  STOCK_LEVERAGE: 1.145 STOCK_RETURN: 5.99 WARRANT_LEVERAGE: 1.751 WARRANT_RETURN: 5.64
BAC: $32  STOCK_LEVERAGE: 1.145 STOCK_RETURN: 6.22 WARRANT_LEVERAGE: 1.711 WARRANT_RETURN: 5.96
BAC: $33  STOCK_LEVERAGE: 1.145 STOCK_RETURN: 6.44 WARRANT_LEVERAGE: 1.675 WARRANT_RETURN: 6.27
BAC: $34  STOCK_LEVERAGE: 1.146 STOCK_RETURN: 6.66 WARRANT_LEVERAGE: 1.643 WARRANT_RETURN: 6.59
BAC: $35  STOCK_LEVERAGE: 1.146 STOCK_RETURN: 6.89 WARRANT_LEVERAGE: 1.613 WARRANT_RETURN: 6.91
BAC: $36  STOCK_LEVERAGE: 1.146 STOCK_RETURN: 7.12 WARRANT_LEVERAGE: 1.586 WARRANT_RETURN: 7.23
BAC: $37  STOCK_LEVERAGE: 1.146 STOCK_RETURN: 7.34 WARRANT_LEVERAGE: 1.561 WARRANT_RETURN: 7.55
BAC: $38  STOCK_LEVERAGE: 1.146 STOCK_RETURN: 7.57 WARRANT_LEVERAGE: 1.538 WARRANT_RETURN: 7.87
BAC: $39  STOCK_LEVERAGE: 1.146 STOCK_RETURN: 7.80 WARRANT_LEVERAGE: 1.518 WARRANT_RETURN: 8.18
BAC: $40  STOCK_LEVERAGE: 1.146 STOCK_RETURN: 8.03 WARRANT_LEVERAGE: 1.498 WARRANT_RETURN: 8.50
BAC: $41  STOCK_LEVERAGE: 1.146 STOCK_RETURN: 8.26 WARRANT_LEVERAGE: 1.480 WARRANT_RETURN: 8.82
BAC: $42  STOCK_LEVERAGE: 1.146 STOCK_RETURN: 8.49 WARRANT_LEVERAGE: 1.463 WARRANT_RETURN: 9.14
BAC: $43  STOCK_LEVERAGE: 1.147 STOCK_RETURN: 8.73 WARRANT_LEVERAGE: 1.448 WARRANT_RETURN: 9.46
BAC: $44  STOCK_LEVERAGE: 1.147 STOCK_RETURN: 8.96 WARRANT_LEVERAGE: 1.433 WARRANT_RETURN: 9.78
BAC: $45  STOCK_LEVERAGE: 1.147 STOCK_RETURN: 9.20 WARRANT_LEVERAGE: 1.420 WARRANT_RETURN: 10.10
BAC: $46  STOCK_LEVERAGE: 1.147 STOCK_RETURN: 9.43 WARRANT_LEVERAGE: 1.407 WARRANT_RETURN: 10.41
BAC: $47  STOCK_LEVERAGE: 1.147 STOCK_RETURN: 9.67 WARRANT_LEVERAGE: 1.395 WARRANT_RETURN: 10.73
BAC: $48  STOCK_LEVERAGE: 1.147 STOCK_RETURN: 9.90 WARRANT_LEVERAGE: 1.383 WARRANT_RETURN: 11.05
BAC: $49  STOCK_LEVERAGE: 1.147 STOCK_RETURN: 10.14 WARRANT_LEVERAGE: 1.373 WARRANT_RETURN: 11.37
Title: Re: BAC-WT - Bank of America Warrants
Post by: beerbaron on November 06, 2011, 04:34:28 PM
I'm not sure I understand you process here Eric. Can you help elaborate?

Thanks
BeerBaron
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on November 06, 2011, 05:28:14 PM
I'm not sure I understand you process here Eric. Can you help elaborate?

Thanks
BeerBaron

Just figuring out the return of the warrant vs other forms of leverage. 

The trouble I have with the warrant is the high strike.  Meaning that if you hold it all the way until $45 per common share (maybe 7-10 years including warrant exercise), you'll be in a highly leveraged position the entire time.  Even at $45 you still have 1.42x leverage.  When it gets just a few years from expiration it will be a nail biter. 

Would it feel better to start out leveraged common at a very low price and have the leverage wind down as the stock price rises?  The trick is finding leverage that isn't risky at this low price.  I guess there is call options but it's expensive leverage.

Here is another output (below) where you start off with 1.5x leverage in the common and let it wind down to 1.1x and keep it there.

Note that this strategy takes on 1.5x when the stock is very discounted versus the warrant strategy which is still 1.5x leveraged when the stock is at $40 and 1.8x leveraged at $30.

Would you rather be 1.5x leveraged today at $6.49 when a margin of safety theoretically still exists and have it wind down to just 1.2x leveraged at $13 (the strike of the warrant) and then let it fall to 1.1x by $23 per common share?  Or would you rather have the warrant strategy and be 20x leveraged at common price of $14, 1.8x at $30, and be 1.5x leveraged at common price of $40?

I mean, the risks are different of course.  You can't leverage in the common completely safely unless you buy puts (expensive).  That's why I modeled it with 1.2x leverage as it takes a very large plunge to generate a problem.

But it's interesting to learn that 1.2x constant leverage throughout is the same as taking on 1.5x initially and winding it down to 1.1x through natural decay.

The thing is, the warrants look great if you assume very high prices -- but how good will it feel to be 1.8x leveraged at $30?

I'm just trying to work out to myself what will be the easier and smoother ride.  How risky is 1.2x really as an initial holding in the stock, and if I maintain that throughout I can get the same return at $45 per common share as the warrant.  The warrant will be relatively very volatile and bumpy when the time to maturity approaches -- can I have a better ride in another vehicle?  That's my question, and I'm just modeling the alternatives.

Here is 1.5x initial leverage that is naturally decayed to 1.1x leverage and then maintained.  It beats the warrant all the way to $45.

C:\Users\Admin>cscript bac.js 1.1 1.5
Microsoft (R) Windows Script Host Version 5.7
Copyright (C) Microsoft Corporation. All rights reserved.


INITIAL STOCK LEVERAGE: 1.5


MAINTENANCE STOCK LEVERAGE: 1.1

BAC: $7  STOCK_LEVERAGE: 1.447 STOCK_RETURN: 1.12 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00
BAC: $8  STOCK_LEVERAGE: 1.371 STOCK_RETURN: 1.35 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00
BAC: $9  STOCK_LEVERAGE: 1.316 STOCK_RETURN: 1.58 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00
BAC: $10  STOCK_LEVERAGE: 1.276 STOCK_RETURN: 1.81 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00
BAC: $11  STOCK_LEVERAGE: 1.245 STOCK_RETURN: 2.04 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00
BAC: $12  STOCK_LEVERAGE: 1.220 STOCK_RETURN: 2.27 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00
BAC: $13  STOCK_LEVERAGE: 1.200 STOCK_RETURN: 2.50 WARRANT_LEVERAGE: 0.000 WARRANT_RETURN: 0.00
BAC: $14  STOCK_LEVERAGE: 1.183 STOCK_RETURN: 2.74 WARRANT_LEVERAGE: 20.000 WARRANT_RETURN: 0.22
BAC: $15  STOCK_LEVERAGE: 1.169 STOCK_RETURN: 2.97 WARRANT_LEVERAGE: 8.824 WARRANT_RETURN: 0.54
BAC: $16  STOCK_LEVERAGE: 1.156 STOCK_RETURN: 3.20 WARRANT_LEVERAGE: 5.926 WARRANT_RETURN: 0.86
BAC: $17  STOCK_LEVERAGE: 1.146 STOCK_RETURN: 3.43 WARRANT_LEVERAGE: 4.595 WARRANT_RETURN: 1.18
BAC: $18  STOCK_LEVERAGE: 1.137 STOCK_RETURN: 3.66 WARRANT_LEVERAGE: 3.830 WARRANT_RETURN: 1.50
BAC: $19  STOCK_LEVERAGE: 1.128 STOCK_RETURN: 3.89 WARRANT_LEVERAGE: 3.333 WARRANT_RETURN: 1.82
BAC: $20  STOCK_LEVERAGE: 1.121 STOCK_RETURN: 4.12 WARRANT_LEVERAGE: 2.985 WARRANT_RETURN: 2.13
BAC: $21  STOCK_LEVERAGE: 1.115 STOCK_RETURN: 4.35 WARRANT_LEVERAGE: 2.727 WARRANT_RETURN: 2.45
BAC: $22  STOCK_LEVERAGE: 1.109 STOCK_RETURN: 4.58 WARRANT_LEVERAGE: 2.529 WARRANT_RETURN: 2.77
BAC: $23  STOCK_LEVERAGE: 1.104 STOCK_RETURN: 4.82 WARRANT_LEVERAGE: 2.371 WARRANT_RETURN: 3.09
BAC: $24  STOCK_LEVERAGE: 1.099 STOCK_RETURN: 5.05 WARRANT_LEVERAGE: 2.243 WARRANT_RETURN: 3.41
BAC: $25  STOCK_LEVERAGE: 1.096 STOCK_RETURN: 5.28 WARRANT_LEVERAGE: 2.137 WARRANT_RETURN: 3.73
BAC: $26  STOCK_LEVERAGE: 1.096 STOCK_RETURN: 5.51 WARRANT_LEVERAGE: 2.047 WARRANT_RETURN: 4.04
BAC: $27  STOCK_LEVERAGE: 1.096 STOCK_RETURN: 5.74 WARRANT_LEVERAGE: 1.971 WARRANT_RETURN: 4.36
BAC: $28  STOCK_LEVERAGE: 1.096 STOCK_RETURN: 5.98 WARRANT_LEVERAGE: 1.905 WARRANT_RETURN: 4.68
BAC: $29  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 6.21 WARRANT_LEVERAGE: 1.847 WARRANT_RETURN: 5.00
BAC: $30  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 6.45 WARRANT_LEVERAGE: 1.796 WARRANT_RETURN: 5.32
BAC: $31  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 6.69 WARRANT_LEVERAGE: 1.751 WARRANT_RETURN: 5.64
BAC: $32  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 6.92 WARRANT_LEVERAGE: 1.711 WARRANT_RETURN: 5.96
BAC: $33  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 7.16 WARRANT_LEVERAGE: 1.675 WARRANT_RETURN: 6.27
BAC: $34  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 7.40 WARRANT_LEVERAGE: 1.643 WARRANT_RETURN: 6.59
BAC: $35  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 7.64 WARRANT_LEVERAGE: 1.613 WARRANT_RETURN: 6.91
BAC: $36  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 7.88 WARRANT_LEVERAGE: 1.586 WARRANT_RETURN: 7.23
BAC: $37  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 8.12 WARRANT_LEVERAGE: 1.561 WARRANT_RETURN: 7.55
BAC: $38  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 8.36 WARRANT_LEVERAGE: 1.538 WARRANT_RETURN: 7.87
BAC: $39  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 8.60 WARRANT_LEVERAGE: 1.518 WARRANT_RETURN: 8.18
BAC: $40  STOCK_LEVERAGE: 1.097 STOCK_RETURN: 8.85 WARRANT_LEVERAGE: 1.498 WARRANT_RETURN: 8.50
BAC: $41  STOCK_LEVERAGE: 1.098 STOCK_RETURN: 9.09 WARRANT_LEVERAGE: 1.480 WARRANT_RETURN: 8.82
BAC: $42  STOCK_LEVERAGE: 1.098 STOCK_RETURN: 9.33 WARRANT_LEVERAGE: 1.463 WARRANT_RETURN: 9.14
BAC: $43  STOCK_LEVERAGE: 1.098 STOCK_RETURN: 9.58 WARRANT_LEVERAGE: 1.448 WARRANT_RETURN: 9.46
BAC: $44  STOCK_LEVERAGE: 1.098 STOCK_RETURN: 9.82 WARRANT_LEVERAGE: 1.433 WARRANT_RETURN: 9.78
BAC: $45  STOCK_LEVERAGE: 1.098 STOCK_RETURN: 10.07 WARRANT_LEVERAGE: 1.420 WARRANT_RETURN: 10.10



Title: Re: BAC-WT - Bank of America Warrants
Post by: hyten1 on November 14, 2011, 06:47:09 PM
pabrai owns 7,053,551 shares of BAC
Title: Re: BAC-WT - Bank of America Warrants
Post by: lessthaniv on November 15, 2011, 04:17:25 PM
John Paulson increased too.

Here is the slide deck for today's presentation:

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDQ3ODAyfENoaWxkSUQ9NDcxNjkzfFR5cGU9MQ==&t=1

Title: Re: BAC-WT - Bank of America Warrants
Post by: biaggio on November 15, 2011, 04:36:19 PM
for what it is worth- CNBC just had a feature on the wealth of congress.

I did not realize that there are several congressmen that are worth several hundred million dollars.

They said that they don t make a big salary being a rep but a lot of them make money trading stock

There 3rd favorite stock is BAC..good news for you guys holding BAC considering that these guys often trade on insider information which is legal for them but not for us. i.e they must know something (56 congressmen own BAC)
Title: Re: BAC-WT - Bank of America Warrants
Post by: meiroy on November 15, 2011, 04:47:20 PM
for what it is worth- CNBC just had a feature on the wealth of congress.

I did not realize that there are several congressmen that are worth several hundred million dollars.

They said that they don t make a big salary being a rep but a lot of them make money trading stock

There 3rd favorite stock is BAC..good news for you guys holding BAC considering that these guys often trade on insider information which is legal for them but not for us. i.e they must know something (56 congressmen own BAC)

It seems to me it goes well beyond the congressmen.

"these guys" use brokers for purchasing and selling their holdings, correct? Even if these brokers are not advised of the reasoning for purchasing or selling, they are at least aware that it is happening. If a certain broker has as a client more than one of "these guys", he would have a very good indication that something might be going on and act accordingly on behalf of himself or his other clients. Would that be legal?
Title: Re: BAC-WT - Bank of America Warrants
Post by: biaggio on November 15, 2011, 05:34:46 PM
maybe they should publish when these guys buy something like other insiders
Title: Re: BAC-WT - Bank of America Warrants
Post by: BargainValueHunter on November 15, 2011, 05:38:09 PM
for what it is worth- CNBC just had a feature on the wealth of congress.

I did not realize that there are several congressmen that are worth several hundred million dollars.

They said that they don t make a big salary being a rep but a lot of them make money trading stock

There 3rd favorite stock is BAC..good news for you guys holding BAC considering that these guys often trade on insider information which is legal for them but not for us. i.e they must know something (56 congressmen own BAC)

http://www.cbsnews.com/video/watch/?id=7388205n
Title: Re: BAC-WT - Bank of America Warrants
Post by: vinod1 on November 15, 2011, 05:47:10 PM
John Paulson increased too.

Here is the slide deck for today's presentation:

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDQ3ODAyfENoaWxkSUQ9NDcxNjkzfFR5cGU9MQ==&t=1

One thing that needs to be watched regarding Basel 3 is if companies rush to meet 2019 targets in the next couple of years. If one or two SIFI's do this, others would be forced to follow and in that case there could be dilution risk at BAC.

Vinod
Title: Re: BAC-WT - Bank of America Warrants
Post by: txlaw on November 15, 2011, 06:05:59 PM
John Paulson increased too.

Here is the slide deck for today's presentation:

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDQ3ODAyfENoaWxkSUQ9NDcxNjkzfFR5cGU9MQ==&t=1

One thing that needs to be watched regarding Basel 3 is if companies rush to meet 2019 targets in the next couple of years. If one or two SIFI's do this, others would be forced to follow and in that case there could be dilution risk at BAC.

Vinod

This is exactly what Ericopoly has suggested, I believe in another thread.

Specifically, he noted that BAC has indicated in its latest 10-Q that it might issue common in order to redeem TRUPS.  Why would they do this?  Maybe because they want to boost their capital levels for the Basel 3 transition such that they are allowed to resume their dividend at the same time as WFC, JPM, C, and other SIFIs.

Given that I've paid such a low price for all my BAC exposure, I don't mind a little dilution if we are able to resume our dividend at the same time as the other US SIFIs.  Because I'm thinking that will boost the share price.
Title: Re: BAC-WT - Bank of America Warrants
Post by: claphands22 on November 15, 2011, 08:15:52 PM
for what it is worth- CNBC just had a feature on the wealth of congress.

I did not realize that there are several congressmen that are worth several hundred million dollars.

They said that they don t make a big salary being a rep but a lot of them make money trading stock

There 3rd favorite stock is BAC..good news for you guys holding BAC considering that these guys often trade on insider information which is legal for them but not for us. i.e they must know something (56 congressmen own BAC)

I see the 60 minutes video but not the cnbc special. If anyone has a link to the cnbc special it would be much appreciated.

The 60 minute special made me sick. Looking forward to researching the Stanford professor/researcher tonight. I wonder where they get their information.
Title: Re: BAC-WT - Bank of America Warrants
Post by: biaggio on November 16, 2011, 05:47:11 AM
for what it is worth- CNBC just had a feature on the wealth of congress.

I did not realize that there are several congressmen that are worth several hundred million dollars.

They said that they don t make a big salary being a rep but a lot of them make money trading stock

There 3rd favorite stock is BAC..good news for you guys holding BAC considering that these guys often trade on insider information which is legal for them but not for us. i.e they must know something (56 congressmen own BAC)


I see the 60 minutes video but not the cnbc special. If anyone has a link to the cnbc special it would be much appreciated.



The 60 minute special made me sick. Looking forward to researching the Stanford professor/researcher tonight. I wonder where they get their information.


I think this is it  http://video.cnbc.com/gallery/?video=3000057523
Title: Re: BAC-WT - Bank of America Warrants
Post by: claphands22 on November 16, 2011, 06:30:35 AM
Thanks for the link biaggio.
Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on November 18, 2011, 01:06:05 PM
A Look at The Big Four Banks

http://www.valuewalk.com/2011/11/big-banks/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+valuewalk%2FtNbc+%28Value+Walk%29#.TsbIGcMUq7s
Title: Re: BAC-WT - Bank of America Warrants
Post by: Rabbitisrich on November 18, 2011, 05:48:58 PM
John Paulson increased too.

Here is the slide deck for today's presentation:

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDQ3ODAyfENoaWxkSUQ9NDcxNjkzfFR5cGU9MQ==&t=1

One thing that needs to be watched regarding Basel 3 is if companies rush to meet 2019 targets in the next couple of years. If one or two SIFI's do this, others would be forced to follow and in that case there could be dilution risk at BAC.

Vinod

This is exactly what Ericopoly has suggested, I believe in another thread.

Specifically, he noted that BAC has indicated in its latest 10-Q that it might issue common in order to redeem TRUPS.  Why would they do this?  Maybe because they want to boost their capital levels for the Basel 3 transition such that they are allowed to resume their dividend at the same time as WFC, JPM, C, and other SIFIs.

Given that I've paid such a low price for all my BAC exposure, I don't mind a little dilution if we are able to resume our dividend at the same time as the other US SIFIs.  Because I'm thinking that will boost the share price.

I hope that isn't the reason for the dilution, if only for the implication that Moynihan is letting short term pressures divert his recovery efforts. Another culprit might be discussions with the ratings agencies who possess strong leverage against BAC at this point. Ex-government backing, Moody's rates BAC's senior unsecured debt as junk. From the 3Q supplements, Moynihan will be applying nearly every dollar of earnings and sales proceeds towards debt reduction. Someone is applying the pressure, whether it be regulators, ratings agencies, or disgruntled employees. Not so long ago, Moynihan committed to maintaining a position in CCB. Now he sells most of the remainder and issues 186 million shares for a fairly slim improvement in the Tier 1 Common ratio.

A dividend target seems like a relatively static issue compared to the shifting announcements of management.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Rabbitisrich on November 18, 2011, 05:55:11 PM
A Look at The Big Four Banks

http://www.valuewalk.com/2011/11/big-banks/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+valuewalk%2FtNbc+%28Value+Walk%29#.TsbIGcMUq7s

That's a bit of a generous look at BAC. Whether you are for or against the investment, it isn't a good idea to rely upon one quarter of GAAP earnings to make your case.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on November 19, 2011, 10:14:01 AM
I hope that isn't the reason for the dilution, if only for the implication that Moynihan is letting short term pressures divert his recovery efforts.

We all know that BAC already committed a false start in trying to get the dividend boosted earlier this year. 

A)  Does this imply that they are conservative and will only resume the dividend only when dark clouds are lifted? 
     --->  My answer is "No".

This is why I think they are trying to just buy the great rack from a plastic surgeon instead of hitting the gym.

Part of this is probably to maintain appearances -- because they do matter, to customers.  If you can get the regulators and the Fed to let you raise your dividend, it's a vote of confidence.  But if you look like the Fed and regulators think you are shaky, then it's not looking good to customers.

I'm trying to be generous here -- if it's not about maintaining show for customers, then they are just plain stupid to want to pay out their capital early in 2011 only to be trying to raise even more later in the same year.  What's going on?


Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on November 19, 2011, 10:29:25 AM
"Banks have to get there sooner," added a financial institutions group banker about reaching Basel III guidelines by 2019. "That's because of the equity pressure on banks to say to the market that they have the adequate capital. As we all know there is a race among the banks to not be the one singled out as having an issue with this."
Normally a bank would be better off phasing the new capital ratios in over time. "But in this environment it is all optics," said the FIG banker. "You have to say you can get to levels ahead of time because the view is it will make big clients think of you as the strongest and best bank to give their business to."



https://news.fidelity.com/news/news.jhtml?articleid=201107011428RTRSNEWSCOMBINED_TRE7604Q3_1&IMG=N&cat=Top.Investing.RT&ccsource=rss-Top.Investing.RT

Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on November 19, 2011, 10:39:03 AM
Morgan Stanley analyst Betsy Graseck, argues that BofA can get to a 10% Basel III common equity Tier 1 ratio in 2013 sometime.
"Over the next three years, we expect 300bp to come from earnings, 110bp from RWA shrinkage, 110bp from reduced capital deductions, 40bp from a gain on CCB's (China Construction Bank) sale" and another 40bp from other methods, said Graseck in a recent report.


https://news.fidelity.com/news/news.jhtml?articleid=201107011428RTRSNEWSCOMBINED_TRE7604Q3_1&IMG=N&cat=Top.Investing.RT&ccsource=rss-Top.Investing.RT
Title: Re: BAC-WT - Bank of America Warrants
Post by: BargainValueHunter on November 19, 2011, 02:18:30 PM
Also interesting re: BAC's future compliance...

http://dailycapitalist.com/2011/11/15/heloc-hell-jeopardizes-banks-tier-i-capital/

Quote
B of A estimates that only about $5 billion, or 4 percent, of its home equity portfolio is current but subordinate to a delinquent first mortgage. Similarly, JPMorgan Chase estimates that about $4 billion, or 5 percent, is current but subordinate to a late or modified first mortgage, excluding the impaired loans it acquired when it bought Washington Mutual.

(http://dailycapitalist.com/wp-content/uploads/2011/11/Parsing-the-home-equity-loan-bubble.png)

Quote
At Bank of America, underwater home equity loans were equal to 45 percent of Tier 1 common, including a $12.3 billion portfolio picked up in the company’s purchase of Countrywide Financial. (Net of loss allowances, B of A carries those loans at about half of their unpaid principal balance.)
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on November 20, 2011, 04:03:22 AM
internally bac looked at things and said "things look good". however, they did not anticipate that externally, people were being hyper critical. all the stuff they are doing is for them. if you are in a beauty pageant, you don't wear what you like you wear what the judges will like.

Or what you think the judges will like.  The truth is that investors as a group are not dumb.  ( although they do exhibit herding behavior) Investors will usually give much weight to what they perceive is the future and ignore window dressing.
Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on November 21, 2011, 03:51:14 AM
Apologies if I'm duplicating


Fairholme BAC case study/presentation
http://www.scribd.com/doc/73256120/Fairholme-Stays-the-Course
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on November 21, 2011, 08:31:43 PM
Well this might be behind the recent share dilution:

http://finance.yahoo.com/news/BofA-warned-regulators-get-rb-3697619540.html?x=0&l=1
Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on November 22, 2011, 09:58:29 AM
Trading at 52 week low. Chart attached.
Title: Re: BAC-WT - Bank of America Warrants
Post by: onyx1 on November 22, 2011, 11:54:37 AM
Well this might be behind the recent share dilution:

http://finance.yahoo.com/news/BofA-warned-regulators-get-rb-3697619540.html?x=0&l=1

Hmmm..... anonymous sources referencing a non-public document between BAC and bank regulators in Washington DC.  Smells like a political hit to me.
Title: Re: BAC-WT - Bank of America Warrants
Post by: tnp20 on November 22, 2011, 12:14:18 PM
Do we now get momentum to take it below $5 so MMs can take out margined stock and some funds that are limited by $5 threshold.
Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on November 28, 2011, 02:04:05 AM
Secret Fed Loans Gave Banks Undisclosed $13B
http://www.bloomberg.com/news/2011-11-28/secret-fed-loans-undisclosed-to-congress-gave-banks-13-billion-in-income.html
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on November 28, 2011, 06:03:05 AM
internally bac looked at things and said "things look good". however, they did not anticipate that externally, people were being hyper critical. all the stuff they are doing is for them. if you are in a beauty pageant, you don't wear what you like you wear what the judges will like.

Or what you think the judges will like.  The truth is that investors as a group are not dumb.  ( although they do exhibit herding behavior) Investors will usually give much weight to what they perceive is the future and ignore window dressing.

except they can be incredibly and massively wrong at inflection points. take a look at LCAPA in late 2008 for example of just how wrong they can be. that's one example.

Frightened herds may stampeed over a cliff.  A stampeed that winds up in a box canyon will mill around for awhile and then come back out of it.  :)
Title: Re: BAC-WT - Bank of America Warrants
Post by: sswan11 on November 29, 2011, 06:51:12 PM
S&P downgrades;  might be an interesting day tomorrow:

http://finance.yahoo.com/news/S-P-cuts-ratings-big-banks-reuters-2017198224.html?x=0
Title: Re: BAC-WT - Bank of America Warrants
Post by: meiroy on November 30, 2011, 04:53:32 AM
S&P downgrades;  might be an interesting day tomorrow:

http://finance.yahoo.com/news/S-P-cuts-ratings-big-banks-reuters-2017198224.html?x=0

Following recent market movements it probably means a serious rally of the banks. Reason being is that they are all considered to be triple FFF while all of a sudden people see this A** thing and rejoice, things are much better than previously assumed. Or not.

On the other hand they upgraded two Chinese banks; what is their new method for ranking, NPL < 10% downgrade, NPL > 40% upgrade?
Title: Re: BAC-WT - Bank of America Warrants
Post by: moore_capital54 on November 30, 2011, 06:20:57 AM
If you look at the methodology it appears the biggest contributor to the downgrade for US banks was the sovereign exposure. S&P in their new methodology use the host nations Soveriegn Rating as the foundation and work their way up, and given the US was downgraded this is now reflected in the ratings of all US Banks.
Title: Re: BAC-WT - Bank of America Warrants
Post by: berkshiremystery on November 30, 2011, 06:24:03 AM
Fed, Five Central Banks Cut Rate on Dollar Swaps

The interest rate has been reduced to the dollar overnight index swap rate plus 50 basis points, or half a percentage point, from 100 basis points, and the program was extended to Feb. 1, 2013, the Fed said in a statement in Washington. The Fed will coordinate with the European Central Bank in the program, which was also joined by the Bank of Canada, Bank of England, Bank of Japan (8301), and Swiss National Bank. (SNBN)

http://online.wsj.com/article/SB10001424052970204012004577069960192509068.html?mod=WSJ_hp_LEFTTopStories (http://online.wsj.com/article/SB10001424052970204012004577069960192509068.html?mod=WSJ_hp_LEFTTopStories)

http://www.bloomberg.com/news/2011-11-30/fed-five-central-banks-lower-interest-rate-on-dollar-swaps.html (http://www.bloomberg.com/news/2011-11-30/fed-five-central-banks-lower-interest-rate-on-dollar-swaps.html)
Title: Re: BAC-WT - Bank of America Warrants
Post by: meiroy on November 30, 2011, 07:53:59 PM
S&P downgrades;  might be an interesting day tomorrow:

http://finance.yahoo.com/news/S-P-cuts-ratings-big-banks-reuters-2017198224.html?x=0

Following recent market movements it probably means a serious rally of the banks.

First, for the record, it should be noticed how my un-ambiguous prediction manifested itself in yesterday's banks rally (/sarcasm) .

moore_capital54,


I understand your comment, thanks, but not why they upgraded the Chinese Banks all of a sudden. I'm sure it's absolutely impossible for S&P to analyze them. They did it based on what data? Probably 90% of the information related to the bank is filed under "state secrets" and would not be accessible to them. Do they reckon Chinese official statistics and numbers are dependable? Is there even any doubt that these banks have huge amounts of NPLs and would be NPLs hidden in their books somewhere? That would be just the edge of the ice-burg.


Title: Re: BAC-WT - Bank of America Warrants
Post by: racemize on December 03, 2011, 07:08:34 AM
Hi all, I stumbled upon this message board a few days ago and have been reading everything in sight.  As a relatively new investor (value investing for just over a year now), this has been a breath of fresh air and I finally have a new favorite reading source over seeking alpha. 

Ignoring the pleasantries above, I've been trying to get a handle on BAC, whether it be warrants or common stock.  Other than the mortgage litigation issue and potential book value decreases (which I think I can get past given the current price), my main concern has been with respect to the very large CDS portfolio they picked up with the Merrill Lynch acquisition.  I'm sure everyone has read the crazy high gross notional CDS values for the 5 big banks (e.g., in the 244 trillion range) and I realize that net is much lower.  I also realize that the CDS exposure to European countries is lower than that amount and that a fair amount of those exposures are not necessarily directed to sovereign debt.  Regardless, with the possibility of European Crisis being large enough to consider, I worry about catastrophic failure (e.g., disorderly CDS resolution, similar to AIG/Lehman), particularly with respect to BAC.  In other words, even if the likelihood of BAC being a home run is 95%, I worry about the 5% chance of losing the capital. 

Moreover, the CDS market has been increasing since 2008, and I would like to have some reasons on how this CDS market is different than it was before, other than merely hoping that they have it better managed this time--I generally find hoping that someone has learned their lesson is not one to rely on.

I would be happy to hear your opinions on this, particularly those of you that are long BAC.

Disclosure: I'm long ~5% BAC right now.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ubuy2wron on December 03, 2011, 09:11:49 AM
Hi all, I stumbled upon this message board a few days ago and have been reading everything in sight.  As a relatively new investor (value investing for just over a year now), this has been a breath of fresh air and I finally have a new favorite reading source over seeking alpha. 

Ignoring the pleasantries above, I've been trying to get a handle on BAC, whether it be warrants or common stock.  Other than the mortgage litigation issue and potential book value decreases (which I think I can get past given the current price), my main concern has been with respect to the very large CDS portfolio they picked up with the Merrill Lynch acquisition.  I'm sure everyone has read the crazy high gross notional CDS values for the 5 big banks (e.g., in the 244 trillion range) and I realize that net is much lower.  I also realize that the CDS exposure to European countries is lower than that amount and that a fair amount of those exposures are not necessarily directed to sovereign debt.  Regardless, with the possibility of European Crisis being large enough to consider, I worry about catastrophic failure (e.g., disorderly CDS resolution, similar to AIG/Lehman), particularly with respect to BAC.  In other words, even if the likelihood of BAC being a home run is 95%, I worry about the 5% chance of losing the capital. 

Moreover, the CDS market has been increasing since 2008, and I would like to have some reasons on how this CDS market is different than it was before, other than merely hoping that they have it better managed this time--I generally find hoping that someone has learned their lesson is not one to rely on.

I would be happy to hear your opinions on this, particularly those of you that are long BAC.

Disclosure: I'm long ~5% BAC right now.
Of the 5 major U.S. banks with CDS exposure it appears that BAC has the lowest relative exposure to stated capital levels. BAC also is the only bank which has been very active in raising capital in the last 3 months. The mkt perceives this as a sign of weakness  as a long I perceive this as a sign of prudence. If a string of dominoes starts to fall the cost of capital raises will increase exponentialy. In both the banking and insurance business a fortress balance sheet is required to finish the race which is an never ending marathon.
Title: Re: BAC-WT - Bank of America Warrants
Post by: alertmeipp on December 03, 2011, 09:30:03 AM
I have made some reflections last few days, my take is JPM is better play. JPM have nice dividend and they should be able to increase divi and buy back more shares at discount soon.

BAC is at 6x next year earning, JPM is the same. You may argue BAC's normalized earning is 3-4 bucks while JPM won't 15-20 bucks.  But JPM's earning should enjoy higher multiple and BAC has higher risk to achieve normalized earning than JPM - i.e. equity offering, asset sales that work against long term profitability.

Having said that I have more BAC than JPM. I have problem buying the worst in the worst.. what I should be doing is buying the best at the worst sector.
Title: Re: BAC-WT - Bank of America Warrants
Post by: kevin4u2 on December 03, 2011, 09:59:28 AM

Ignoring the pleasantries above, I've been trying to get a handle on BAC, whether it be warrants or common stock.  Other than the mortgage litigation issue and potential book value decreases (which I think I can get past given the current price), my main concern has been with respect to the very large CDS portfolio they picked up with the Merrill Lynch acquisition.  I'm sure everyone has read the crazy high gross notional CDS values for the 5 big banks (e.g., in the 244 trillion range) and I realize that net is much lower.  I also realize that the CDS exposure to European countries is lower than that amount and that a fair amount of those exposures are not necessarily directed to sovereign debt.  Regardless, with the possibility of European Crisis being large enough to consider, I worry about catastrophic failure (e.g., disorderly CDS resolution, similar to AIG/Lehman), particularly with respect to BAC.  In other words, even if the likelihood of BAC being a home run is 95%, I worry about the 5% chance of losing the capital. 

Moreover, the CDS market has been increasing since 2008, and I would like to have some reasons on how this CDS market is different than it was before, other than merely hoping that they have it better managed this time--I generally find hoping that someone has learned their lesson is not one to rely on.

I would be happy to hear your opinions on this, particularly those of you that are long BAC.


Hi Racemize,

Can you please provide sources for your numbers?  For instance that the big 5 banks have CDS exposure of $244 trillion?  I think you might be confusing CDS exposure to total notional derivatives at the big 5 banks.  For instance BAC has $68.2 trillion in total notional derivatives outstanding.  What is interesting is 86% of these are interest rate contracts.  Specifically, looking at the CDS exposure, they have written about $2 trillion in CDS and have also purchased $2 trillion in CDS contracts.  Actual net exposure is about 100 billion CDS written and 100 billion CDS purchased.  At the end of the day netting CDS assets from liabilities gives an asset of $5.6 billion down from $6.6 billion and the beginning of the year. 

Now the real question is who/what are the CDS contracts written on AND who/what are the CDS contracts purchased on?  If you know I would like to know.  When people talk about banks being black boxes this is exactly what they mean (or should mean). 

Many say banks are black boxes because of the removal of mark to market (FASB 157), which is not true.  Mark to market still applies unless the market is illiquid or non existent.  For BAC Level 3 assets (the ones marked to fantasy) are 2.9% of total assets and 4.8% of risk weighted assets (RWA).  Ironically, these are the best among the large US banks, including WFC, JPM, C.  So when pundits toot their horn saying you can't believe the balance sheet, this is the part they are talking about.  This brings me to my next point. 

Many people claim that JPM has a rock solid balance sheet.  This includes newspapers and the nut jobs running around over at seeking alpha that either post OR comment out of ignorance.  Level 3 assets are 5.0% of total assets and 9.3% of risk weighted assets at JPM.  That is enough to drive a truck through.  They also have the largest notional amount of derivatives outstanding and the largest amount of trading assets.  If anyone says JPM has a rock solid balance sheet (including Jamie Dimon), are talking their own book or don't know the facts.  The only company with a rock solid balance sheet is Wells Fargo, the only one that didn't need tarp.   

Now I am long BAC.  The reason why I am long is because the numbers just say they are too cheap.  If they earned 1% on assets or 10% on equity that would be $22 billion profits vs a $55 billion market cap.  Even if the market cap doubled to $110 billion that stsill would only be 5 times average earnings.  The math isn't hard.  But i'll be honest; the reason why BAC is a crappy company is management.  How many screwups in the past year?  You can't even count them on all your fingers and all of your toes. 

Anyway getting back to the CDS stuff, it's not nearly as big as you think and if you have any details on who/what then that would be of value.  From what BAC has broke out on Europe in Q3 they have $1.5 billion in derivatives outstanding on Italian sovereign debt (likely CDS written) and have purchased $1.2 billion in CDS protection.  The net is about 300 million or not enough to worry about.  They also have some exposure Portugal and Spain in the tens of millions, but they are totally covered by CDS protection purchased. 

Just to put the European debt crisis in perspective, the US debt crisis was $15 trillion of bad mortgage loans against a $15 trillion dollar economy.  Huge.  If you add up all the sovereign debt of the PIIGS, it's $4 trillion at risk against a $15 trillion dollar economy (european union).  In my opinion, Italy and Spain won't default and they contribute $2.2 trillion and $0.9 trillion respectively to that $4 trillion total.  So the rough $1 trillion that's left isn't as much as the pundits make it out to be.  Now if the creditors accept a 50% haircut that further brings it down to $500 billion, something still very large but not unmanageable.  The real reason why Europe is a mess is because of the political structure and the inability to run a printing press to bail them out. 

Best Regards,
Kevin

canadianvalueinvesting.blogspot.com
Title: Re: BAC-WT - Bank of America Warrants
Post by: Grenville on December 03, 2011, 11:09:33 AM
Here is a good thread on Derivative exposure at the big banks:

http://www.cornerofberkshireandfairfax.ca/forum/index.php?topic=5312.msg57086#msg57086

My extra thoughts:

The netting of derivative exposure is a complicated thing. Ultimately it depends on the quality of the counter party. In addition, collateral is usually passed through in regards to most of the derivatives that helps mitigate the overall exposure. The worry would be in a extreme situation where the collateral isn't balanced or there is delay when the reference security defaults. (My worry is in this extreme situation given the interconnected system we have today.) It is clear that governments and central banks will stand behind these too big too fail institutions but politically someone has to lose whether that is equity holders, bond holders, or the tax payers. It is not entirely clear who that will be the next time we have a big stress at the too big too fail.

The other thing I look for is whether the derivatives are exchange traded or OTC (over the counter). The OTC stuff is not standardized and does not pass through a central clearing system that helps mitigate the counter party default risk. In addition, the exchange traded contracts have standardized terms regarding collateral and margin requirements. They are mostly all mark to market daily whereas the OTC depends on the contract. Exchange traded contracts are not devoid of risk because the member organizations must collectively support the clearing corporation if one of the counter parties defaults and the clearing corporation is exposed to loss.

Take all I say with a grain of salt and do your own research into all the issues. For me, the CDS exposures and lack of clarity on who counter parties are make it hard for me to invest in the equity of most of the big banks. If I could ignore the CDS exposure, then the banks are trading at cheap prices and I would go long bank equity. I will say I am long some of the banks through my exposure to Berkshire and Fairfax who own bank stocks and preferreds.
Title: Re: BAC-WT - Bank of America Warrants
Post by: racemize on December 03, 2011, 01:04:43 PM
I have made some reflections last few days, my take is JPM is better play. JPM have nice dividend and they should be able to increase divi and buy back more shares at discount soon.

BAC is at 6x next year earning, JPM is the same. You may argue BAC's normalized earning is 3-4 bucks while JPM won't 15-20 bucks.  But JPM's earning should enjoy higher multiple and BAC has higher risk to achieve normalized earning than JPM - i.e. equity offering, asset sales that work against long term profitability.

Having said that I have more BAC than JPM. I have problem buying the worst in the worst.. what I should be doing is buying the best at the worst sector.

I'm mostly in WFC (I think ~20%) by the same logic (e.g., best in beaten down area), but have been looking at others with cheaper valuations/higher reward.  My concern with all of them is essentially this same CDS issue, particularly JPM which isn't as cheap as BAC (though I think it is in better shape overall).
Title: Re: BAC-WT - Bank of America Warrants
Post by: racemize on December 03, 2011, 01:18:53 PM

Ignoring the pleasantries above, I've been trying to get a handle on BAC, whether it be warrants or common stock.  Other than the mortgage litigation issue and potential book value decreases (which I think I can get past given the current price), my main concern has been with respect to the very large CDS portfolio they picked up with the Merrill Lynch acquisition.  I'm sure everyone has read the crazy high gross notional CDS values for the 5 big banks (e.g., in the 244 trillion range) and I realize that net is much lower.  I also realize that the CDS exposure to European countries is lower than that amount and that a fair amount of those exposures are not necessarily directed to sovereign debt.  Regardless, with the possibility of European Crisis being large enough to consider, I worry about catastrophic failure (e.g., disorderly CDS resolution, similar to AIG/Lehman), particularly with respect to BAC.  In other words, even if the likelihood of BAC being a home run is 95%, I worry about the 5% chance of losing the capital. 

Moreover, the CDS market has been increasing since 2008, and I would like to have some reasons on how this CDS market is different than it was before, other than merely hoping that they have it better managed this time--I generally find hoping that someone has learned their lesson is not one to rely on.

I would be happy to hear your opinions on this, particularly those of you that are long BAC.


Hi Racemize,

Can you please provide sources for your numbers?  For instance that the big 5 banks have CDS exposure of $244 trillion?  I think you might be confusing CDS exposure to total notional derivatives at the big 5 banks.  For instance BAC has $68.2 trillion in total notional derivatives outstanding.  What is interesting is 86% of these are interest rate contracts.  Specifically, looking at the CDS exposure, they have written about $2 trillion in CDS and have also purchased $2 trillion in CDS contracts.  Actual net exposure is about 100 billion CDS written and 100 billion CDS purchased.  At the end of the day netting CDS assets from liabilities gives an asset of $5.6 billion down from $6.6 billion and the beginning of the year. 

Now the real question is who/what are the CDS contracts written on AND who/what are the CDS contracts purchased on?  If you know I would like to know.  When people talk about banks being black boxes this is exactly what they mean (or should mean). 

Many say banks are black boxes because of the removal of mark to market (FASB 157), which is not true.  Mark to market still applies unless the market is illiquid or non existent.  For BAC Level 3 assets (the ones marked to fantasy) are 2.9% of total assets and 4.8% of risk weighted assets (RWA).  Ironically, these are the best among the large US banks, including WFC, JPM, C.  So when pundits toot their horn saying you can't believe the balance sheet, this is the part they are talking about.  This brings me to my next point. 

Many people claim that JPM has a rock solid balance sheet.  This includes newspapers and the nut jobs running around over at seeking alpha that either post OR comment out of ignorance.  Level 3 assets are 5.0% of total assets and 9.3% of risk weighted assets at JPM.  That is enough to drive a truck through.  They also have the largest notional amount of derivatives outstanding and the largest amount of trading assets.  If anyone says JPM has a rock solid balance sheet (including Jamie Dimon), are talking their own book or don't know the facts.  The only company with a rock solid balance sheet is Wells Fargo, the only one that didn't need tarp.   

Now I am long BAC.  The reason why I am long is because the numbers just say they are too cheap.  If they earned 1% on assets or 10% on equity that would be $22 billion profits vs a $55 billion market cap.  Even if the market cap doubled to $110 billion that stsill would only be 5 times average earnings.  The math isn't hard.  But i'll be honest; the reason why BAC is a crappy company is management.  How many screwups in the past year?  You can't even count them on all your fingers and all of your toes. 

Anyway getting back to the CDS stuff, it's not nearly as big as you think and if you have any details on who/what then that would be of value.  From what BAC has broke out on Europe in Q3 they have $1.5 billion in derivatives outstanding on Italian sovereign debt (likely CDS written) and have purchased $1.2 billion in CDS protection.  The net is about 300 million or not enough to worry about.  They also have some exposure Portugal and Spain in the tens of millions, but they are totally covered by CDS protection purchased. 

Just to put the European debt crisis in perspective, the US debt crisis was $15 trillion of bad mortgage loans against a $15 trillion dollar economy.  Huge.  If you add up all the sovereign debt of the PIIGS, it's $4 trillion at risk against a $15 trillion dollar economy (european union).  In my opinion, Italy and Spain won't default and they contribute $2.2 trillion and $0.9 trillion respectively to that $4 trillion total.  So the rough $1 trillion that's left isn't as much as the pundits make it out to be.  Now if the creditors accept a 50% haircut that further brings it down to $500 billion, something still very large but not unmanageable.  The real reason why Europe is a mess is because of the political structure and the inability to run a printing press to bail them out. 

Best Regards,
Kevin

canadianvalueinvesting.blogspot.com

Thanks for your response Kevin, I did indeed misspeak above--I meant to write derivatives.  I had not caught on to the 86% being interest rate contracts, so that is fairly encouraging, but I also wonder if those contracts could be just as concerning in a default/disorderly default? 

Moreover, regarding the CDS contracts, I'm not too worried about the net amounts relative to the size of BAC, but I am worried about disorderly resolutions with defaulting parties, ala Lehmann, AIG.  I also agree with your assessment on the size of the debt issues relative to 2008, but weren't the CDS contracts the one's causing the number to increase even more, or was that part of the 15 trillion?  Also, if derivatives have increased since 2008, is it fair to assume that the CDS contracts on European debt could make that 4 trillion number even larger in terms of the finally result?

Other than that CDS concerns above, I'm totally on board and agree with your assessment on BAC's cheapness, I'm just worried about the low percentage catastrophic failure case.  Regarding management, I guess I've had a more positive view of Moynihan, other than the debit card fee fiasco--which mistakes are you referring to?

Thanks again for your detailed response.
Title: Re: BAC-WT - Bank of America Warrants
Post by: racemize on December 03, 2011, 01:23:14 PM
Here is a good thread on Derivative exposure at the big banks:

http://www.cornerofberkshireandfairfax.ca/forum/index.php?topic=5312.msg57086#msg57086

My extra thoughts:

The netting of derivative exposure is a complicated thing. Ultimately it depends on the quality of the counter party. In addition, collateral is usually passed through in regards to most of the derivatives that helps mitigate the overall exposure. The worry would be in a extreme situation where the collateral isn't balanced or there is delay when the reference security defaults. (My worry is in this extreme situation given the interconnected system we have today.) It is clear that governments and central banks will stand behind these too big too fail institutions but politically someone has to lose whether that is equity holders, bond holders, or the tax payers. It is not entirely clear who that will be the next time we have a big stress at the too big too fail.

The other thing I look for is whether the derivatives are exchange traded or OTC (over the counter). The OTC stuff is not standardized and does not pass through a central clearing system that helps mitigate the counter party default risk. In addition, the exchange traded contracts have standardized terms regarding collateral and margin requirements. They are mostly all mark to market daily whereas the OTC depends on the contract. Exchange traded contracts are not devoid of risk because the member organizations must collectively support the clearing corporation if one of the counter parties defaults and the clearing corporation is exposed to loss.

Take all I say with a grain of salt and do your own research into all the issues. For me, the CDS exposures and lack of clarity on who counter parties are make it hard for me to invest in the equity of most of the big banks. If I could ignore the CDS exposure, then the banks are trading at cheap prices and I would go long bank equity. I will say I am long some of the banks through my exposure to Berkshire and Fairfax who own bank stocks and preferreds.

Thanks Grenville.  I had read that thread and thought it was excellent, but came here to see what the BAC longs thought about it in terms of their investments.  I essentially agree with your conclusion above and was hoping that I was missing something.  However, I have been investing fairly heavily in WFC since their global derivative exposure is much less than the others (at least from my reading), which include investment banking sides.
Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on December 03, 2011, 02:01:43 PM
You pay up for (some) certainty, especially when comparing with peers in a scary-looking sector with a lot of overall uncertainty. I don't think the difference in risk taken between BAC/C and WFC/JPM for example is correctly reflected by the market. Thus I have more BAC & C than I have WFC.

Take BAC. The uniqueness of it's situation (I'm referring to the large legal issues here of course), the fact that no one can really measure the ultimate destruction of value (again) and overall uncertainty, has completely driven off speculators, creating extremely low prices. There is no "air" in the stock, none. Because of this and the fear it creates, the chance that BAC's legal issues are underestimated by concensus is probably very small. Surprises happen when expectations are low, not the other way around.

The bear case doesn't add up and the potential reward is totally out of sync with risk taken imo. Especially for companies such as BAC because of the extra uncertainty but also for WFC, JPM, ...
Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on December 03, 2011, 02:09:37 PM


Other than that CDS concerns above, I'm totally on board and agree with your assessment on BAC's cheapness, I'm just worried about the low percentage catastrophic failure case.  Regarding management, I guess I've had a more positive view of Moynihan, other than the debit card fee fiasco--which mistakes are you referring to?


I'm not Kevin (not by a long shot, but great post Kevin!) but maybe also:

- Overpromising on dividends;
- the $5b dilutive deal after he said BAC doesn't need extra capital from equity offering  (I don't see it as such, but the market did and it (could) damages reputation?);
- .. ?

He is very new to the CEO-game so those were probably rookie mistakes. He doesn't seem all that bad, maybe he'll grow into it more. Or not. I'm also interested in Kevin's view.  8)
Title: Re: BAC-WT - Bank of America Warrants
Post by: kevin4u2 on December 03, 2011, 04:02:39 PM


Other than that CDS concerns above, I'm totally on board and agree with your assessment on BAC's cheapness, I'm just worried about the low percentage catastrophic failure case.  Regarding management, I guess I've had a more positive view of Moynihan, other than the debit card fee fiasco--which mistakes are you referring to?


I'm not Kevin (not by a long shot, but great post Kevin!) but maybe also:

- Overpromising on dividends;
- the $5b dilutive deal after he said BAC doesn't need extra capital from equity offering  (I don't see it as such, but the market did and it (could) damages reputation?);
- .. ?

He is very new to the CEO-game so those were probably rookie mistakes. He doesn't seem all that bad, maybe he'll grow into it more. Or not. I'm also interested in Kevin's view.  8)

Hey guys,

You have hit on the big ones, especially regarding the dividend. That lost them a pile of credibility.  Other problems would be the dilutions after harping on the matter for months he then turns around and gives Buffett a sweet deal.  Then in Q3 report more dilution talk at bottom of page 10, 400 million shares or $3 billion in new debt to retire some preferreds.  I know the amount of shares isn't very significant and it may just end up being converted to debt, it's the principle of the matter.  You don't say one thing then consistently do the other.  Honesty and candor counts big, at least for me, and Brian is having trouble keeping his word. 

Some more stuff that bothers me is the interview he did with Berkowitz.  He said no bankrupcy for countrywide.  I have subsequently read that it was discussed at a board meeting in July/August.  Obviously that may not be true but the buck has to stop somewhere.  State your plans and keep them.  Don't be wishy washy, saying one thing in public and scheming the opposite in private. 

I fully understand that most of what is reported is likely garbage on BAC, so why doesn't come out hard against it.  Jamie Dimon definitely does.  At this point it really doesn't matter because nobody would believe him.  As Buffett has said, it takes years to develop a reputation and it can all be lost in a moment.  How can Brian M get the respect of the market, I don't know if it can be done. 

Regards,
Kevin
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on December 03, 2011, 04:36:19 PM
Honesty and candor counts big, at least for me, and Brian is having trouble keeping his word. 

I'm not sure he ever said they wouldn't dilute.  I remember him saying that they could get to Basel III in time without needing to raise capital unless the economic outlook materially worsened.

A)  He could have been misleading on purpose by skillful choice of words
or
B)  Regulators might have pressured the bank to get their act together faster given the new worries about Europe and lower expectations for economic growth

It's not really lying if the situation changes.  My initial reaction was to not trust him anymore after the Buffett deal, but then that WSJ article about the regulators setting them straight over the summer helped me forgive him.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ubuy2wron on December 04, 2011, 10:26:46 AM

Ignoring the pleasantries above, I've been trying to get a handle on BAC, whether it be warrants or common stock.  Other than the mortgage litigation issue and potential book value decreases (which I think I can get past given the current price), my main concern has been with respect to the very large CDS portfolio they picked up with the Merrill Lynch acquisition.  I'm sure everyone has read the crazy high gross notional CDS values for the 5 big banks (e.g., in the 244 trillion range) and I realize that net is much lower.  I also realize that the CDS exposure to European countries is lower than that amount and that a fair amount of those exposures are not necessarily directed to sovereign debt.  Regardless, with the possibility of European Crisis being large enough to consider, I worry about catastrophic failure (e.g., disorderly CDS resolution, similar to AIG/Lehman), particularly with respect to BAC.  In other words, even if the likelihood of BAC being a home run is 95%, I worry about the 5% chance of losing the capital. 

Moreover, the CDS market has been increasing since 2008, and I would like to have some reasons on how this CDS market is different than it was before, other than merely hoping that they have it better managed this time--I generally find hoping that someone has learned their lesson is not one to rely on.

I would be happy to hear your opinions on this, particularly those of you that are long BAC.


Hi Racemize,

Can you please provide sources for your numbers?  For instance that the big 5 banks have CDS exposure of $244 trillion?  I think you might be confusing CDS exposure to total notional derivatives at the big 5 banks.  For instance BAC has $68.2 trillion in total notional derivatives outstanding.  What is interesting is 86% of these are interest rate contracts.  Specifically, looking at the CDS exposure, they have written about $2 trillion in CDS and have also purchased $2 trillion in CDS contracts.  Actual net exposure is about 100 billion CDS written and 100 billion CDS purchased.  At the end of the day netting CDS assets from liabilities gives an asset of $5.6 billion down from $6.6 billion and the beginning of the year. 

Now the real question is who/what are the CDS contracts written on AND who/what are the CDS contracts purchased on?  If you know I would like to know.  When people talk about banks being black boxes this is exactly what they mean (or should mean). 

Many say banks are black boxes because of the removal of mark to market (FASB 157), which is not true.  Mark to market still applies unless the market is illiquid or non existent.  For BAC Level 3 assets (the ones marked to fantasy) are 2.9% of total assets and 4.8% of risk weighted assets (RWA).  Ironically, these are the best among the large US banks, including WFC, JPM, C.  So when pundits toot their horn saying you can't believe the balance sheet, this is the part they are talking about.  This brings me to my next point. 

Many people claim that JPM has a rock solid balance sheet.  This includes newspapers and the nut jobs running around over at seeking alpha that either post OR comment out of ignorance.  Level 3 assets are 5.0% of total assets and 9.3% of risk weighted assets at JPM.  That is enough to drive a truck through.  They also have the largest notional amount of derivatives outstanding and the largest amount of trading assets.  If anyone says JPM has a rock solid balance sheet (including Jamie Dimon), are talking their own book or don't know the facts.  The only company with a rock solid balance sheet is Wells Fargo, the only one that didn't need tarp.   

Now I am long BAC.  The reason why I am long is because the numbers just say they are too cheap.  If they earned 1% on assets or 10% on equity that would be $22 billion profits vs a $55 billion market cap.  Even if the market cap doubled to $110 billion that stsill would only be 5 times average earnings.  The math isn't hard.  But i'll be honest; the reason why BAC is a crappy company is management.  How many screwups in the past year?  You can't even count them on all your fingers and all of your toes. 

Anyway getting back to the CDS stuff, it's not nearly as big as you think and if you have any details on who/what then that would be of value.  From what BAC has broke out on Europe in Q3 they have $1.5 billion in derivatives outstanding on Italian sovereign debt (likely CDS written) and have purchased $1.2 billion in CDS protection.  The net is about 300 million or not enough to worry about.  They also have some exposure Portugal and Spain in the tens of millions, but they are totally covered by CDS protection purchased. 

Just to put the European debt crisis in perspective, the US debt crisis was $15 trillion of bad mortgage loans against a $15 trillion dollar economy.  Huge.  If you add up all the sovereign debt of the PIIGS, it's $4 trillion at risk against a $15 trillion dollar economy (european union).  In my opinion, Italy and Spain won't default and they contribute $2.2 trillion and $0.9 trillion respectively to that $4 trillion total.  So the rough $1 trillion that's left isn't as much as the pundits make it out to be.  Now if the creditors accept a 50% haircut that further brings it down to $500 billion, something still very large but not unmanageable.  The real reason why Europe is a mess is because of the political structure and the inability to run a printing press to bail them out. 

Best Regards,
Kevin

canadianvalueinvesting.blogspot.com
GREAT POST KEVIN i AM REMINDED OF THE QUOTE WE HAVE NOTHING TO FEAR BUT FEAR ITSELF.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Hester on December 04, 2011, 11:21:22 AM

Ignoring the pleasantries above, I've been trying to get a handle on BAC, whether it be warrants or common stock.  Other than the mortgage litigation issue and potential book value decreases (which I think I can get past given the current price), my main concern has been with respect to the very large CDS portfolio they picked up with the Merrill Lynch acquisition.  I'm sure everyone has read the crazy high gross notional CDS values for the 5 big banks (e.g., in the 244 trillion range) and I realize that net is much lower.  I also realize that the CDS exposure to European countries is lower than that amount and that a fair amount of those exposures are not necessarily directed to sovereign debt.  Regardless, with the possibility of European Crisis being large enough to consider, I worry about catastrophic failure (e.g., disorderly CDS resolution, similar to AIG/Lehman), particularly with respect to BAC.  In other words, even if the likelihood of BAC being a home run is 95%, I worry about the 5% chance of losing the capital. 

Moreover, the CDS market has been increasing since 2008, and I would like to have some reasons on how this CDS market is different than it was before, other than merely hoping that they have it better managed this time--I generally find hoping that someone has learned their lesson is not one to rely on.

I would be happy to hear your opinions on this, particularly those of you that are long BAC.


Hi Racemize,

Can you please provide sources for your numbers?  For instance that the big 5 banks have CDS exposure of $244 trillion?  I think you might be confusing CDS exposure to total notional derivatives at the big 5 banks.  For instance BAC has $68.2 trillion in total notional derivatives outstanding.  What is interesting is 86% of these are interest rate contracts.  Specifically, looking at the CDS exposure, they have written about $2 trillion in CDS and have also purchased $2 trillion in CDS contracts.  Actual net exposure is about 100 billion CDS written and 100 billion CDS purchased.  At the end of the day netting CDS assets from liabilities gives an asset of $5.6 billion down from $6.6 billion and the beginning of the year. 

Now the real question is who/what are the CDS contracts written on AND who/what are the CDS contracts purchased on?  If you know I would like to know.  When people talk about banks being black boxes this is exactly what they mean (or should mean). 

Many say banks are black boxes because of the removal of mark to market (FASB 157), which is not true.  Mark to market still applies unless the market is illiquid or non existent.  For BAC Level 3 assets (the ones marked to fantasy) are 2.9% of total assets and 4.8% of risk weighted assets (RWA).  Ironically, these are the best among the large US banks, including WFC, JPM, C.  So when pundits toot their horn saying you can't believe the balance sheet, this is the part they are talking about.  This brings me to my next point. 

Many people claim that JPM has a rock solid balance sheet.  This includes newspapers and the nut jobs running around over at seeking alpha that either post OR comment out of ignorance.  Level 3 assets are 5.0% of total assets and 9.3% of risk weighted assets at JPM.  That is enough to drive a truck through.  They also have the largest notional amount of derivatives outstanding and the largest amount of trading assets.  If anyone says JPM has a rock solid balance sheet (including Jamie Dimon), are talking their own book or don't know the facts.  The only company with a rock solid balance sheet is Wells Fargo, the only one that didn't need tarp.   

Now I am long BAC.  The reason why I am long is because the numbers just say they are too cheap.  If they earned 1% on assets or 10% on equity that would be $22 billion profits vs a $55 billion market cap.  Even if the market cap doubled to $110 billion that stsill would only be 5 times average earnings.  The math isn't hard.  But i'll be honest; the reason why BAC is a crappy company is management.  How many screwups in the past year?  You can't even count them on all your fingers and all of your toes. 

Anyway getting back to the CDS stuff, it's not nearly as big as you think and if you have any details on who/what then that would be of value.  From what BAC has broke out on Europe in Q3 they have $1.5 billion in derivatives outstanding on Italian sovereign debt (likely CDS written) and have purchased $1.2 billion in CDS protection.  The net is about 300 million or not enough to worry about.  They also have some exposure Portugal and Spain in the tens of millions, but they are totally covered by CDS protection purchased. 

Just to put the European debt crisis in perspective, the US debt crisis was $15 trillion of bad mortgage loans against a $15 trillion dollar economy.  Huge.  If you add up all the sovereign debt of the PIIGS, it's $4 trillion at risk against a $15 trillion dollar economy (european union).  In my opinion, Italy and Spain won't default and they contribute $2.2 trillion and $0.9 trillion respectively to that $4 trillion total.  So the rough $1 trillion that's left isn't as much as the pundits make it out to be.  Now if the creditors accept a 50% haircut that further brings it down to $500 billion, something still very large but not unmanageable.  The real reason why Europe is a mess is because of the political structure and the inability to run a printing press to bail them out. 

Best Regards,
Kevin

canadianvalueinvesting.blogspot.com
GREAT POST KEVIN i AM REMINDED OF THE QUOTE WE HAVE NOTHING TO FEAR BUT FEAR ITSELF.

SNAKES ARE PRETTY SCARY THOUGH.
Title: Re: BAC-WT - Bank of America Warrants
Post by: SharperDingaan on December 04, 2011, 12:30:28 PM
Re Derivatives:

Keep in mind that derivatives artificially inflate values, & dissuade from real risk reduction. Your hedge against the adverse event is only as good as the collateral/credit of your counter-party (in practical terms, the collateral/credit of the global financial system), & if your counter-party goes down, the cumulative adverse impact of that failed hedge will hit you, & immediately. 

Example:
(1) Buy an asset at 100, & discover that it is worth only 20 were it liquidated today. You should liquidate, take the loss of 80, & move on. But you don’t ....
(2) Excellent hedge coy offers you a derivative that sets the asset value at 50, & promises to make good on any MTM < 50. They agree to post T-Bill collateral. You buy the hedge, value the position at 50, reduce the loss to 50 from 80 & get paid a bonus. The selling demand comes off the market & the market price rises accordingly. You are “bullet proof”, the market calms, but you still have asset.
(3) Global financial systems worsen, a counter-party goes down - & they take your counter-party with them. The global panic drives your assets value down to 10, you’re forced to liquidate, & suddenly you have a loss of 40 – on something that was supposedly “bullet proof”.  If you cannot cover that sudden loss of 40, you’re bankrupt.

SD
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on December 04, 2011, 01:52:32 PM
Good posts Kevin, raceMize. 

My take on the derivatves exposure at Bac was that it appears to net out.  Of course, one cannot know for sure due to counterparty risk.  The EU exposures not insured are very low. 

Regarding Moynihans perceived mistakes, I can forgive him for promising a dividend last year and not delivering.  Left up to himself, he would have honoured it.  He was told no by the regulators, after he had made that statement and has indicated he regretted the whole thing and would be very careful in the future.

He said he didn't need equity, then Buffett calls.  What would you do?  Do you think Warren would call back?  That was a one shot vote of confidence.  One does not turn that down.  Didn't need, and didn't want more capital are two different things. 

Converting preferreds to common is not Dilution.  It is designed to get them to Basel 3 faster. 

I can allow him some mistakes along the way when most actions are correct, and credible. 

Risk relative to price.  Each of the majors are probably on par in this regard, to where they are trading at.  My positions sizes in WFC, BAC, and JPM are about the same right now. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: ShahKhezri on December 04, 2011, 09:17:46 PM
Equity Residential, a Chicago-based real-estate investment trust, on Friday agreed to buy half of Barclays and Bank of America's stake for $1.33 billion, valuing Archstone around $16 billion, including about $11 billion in debt.

http://online.wsj.com/article/SB10001424052970204083204577078751820986334.html
Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on December 05, 2011, 03:19:02 AM
Racemize,
Kyle Bass likes to ask his audiences, how many people think Greece will default. Most hands tend to go up. He then asks them a very specific question like what is Greece's outstanding debt or what is Greece's annual interest payments. Usually nobody has the answer.

The same seems to be true for derivatives. Few people bother to look at the facts. Very few people tend to read the Comptroller of the Currency's report, so get ahead of 99% of people that opine on derivatives.

So derivatives must read: http://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq211.pdf
When reading don't confuse your billions and trillions.
Note Table 1

I don't buy into the benefits of netting, because 96% of derivatives are "held" by 5 banks and the problem is potentially bigger than the 5 of them.

Also, how will netting actually work? Legally it will be a nightmare http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1811164_code524668.pdf?abstractid=1476478&mirid=1 The paper is a bit of a slog, but worth the read.

Forgive me for doing this, but read pages 7-10 of this http://www.baobabglobalfund.com/Files/2010.pdf

In case it sounds like I am pontificating; I have spent many years looking at this issue and my conclusion is; "I know I don't know"




Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on December 05, 2011, 04:03:02 AM
Thanks for that MrB, i agree with your tag line.  I guess it boils down to ones comfort level with not knowing. 

If I look across a cross section of businesses I hold or have held there are plenty of things I dont know about each of them. 

Take a really simple business such as FBK Pulp.  I cant know future pulp prices, future wood chip prices, the sudden 50% dilution of shares that occurred, whether management may suddenly try to do an acquisition of a couple of crappy prices, or whether a couple of major shareholders decided to take a bath to get rid of their shares.

Arguably there are more knowables with a major bank than many other businesses due to high visibility of their operations.  We know they have x number of storefronts that generate ongoing business, that investment banking is alive, what they are lending and to whom, risk character of management, etc. 

So, it becomes up to me to assess the risks of total loss versus gain and take or not take a position accordingly.  Most investments including major banks I would not invest greater than5-10% of my total assets.  Occassionally there are businesses where I feel comfortable enough to go higher.  The big Us banks Are not among them.  Due to the liquid availability of Leaps I can take a flier on the future success of these entities and limit my downside loss. 


Title: Re: BAC-WT - Bank of America Warrants
Post by: racemize on December 05, 2011, 06:01:32 AM
Racemize,
Kyle Bass likes to ask his audiences, how many people think Greece will default. Most hands tend to go up. He then asks them a very specific question like what is Greece's outstanding debt or what is Greece's annual interest payments. Usually nobody has the answer.

The same seems to be true for derivatives. Few people bother to look at the facts. Very few people tend to read the Comptroller of the Currency's report, so get ahead of 99% of people that opine on derivatives.

So derivatives must read: http://www.occ.gov/topics/capital-markets/financial-markets/trading/derivatives/dq211.pdf
When reading don't confuse your billions and trillions.
Note Table 1

I don't buy into the benefits of netting, because 96% of derivatives are "held" by 5 banks and the problem is potentially bigger than the 5 of them.

Also, how will netting actually work? Legally it will be a nightmare http://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1811164_code524668.pdf?abstractid=1476478&mirid=1 The paper is a bit of a slog, but worth the read.

Forgive me for doing this, but read pages 7-10 of this http://www.baobabglobalfund.com/Files/2010.pdf

In case it sounds like I am pontificating; I have spent many years looking at this issue and my conclusion is; "I know I don't know"

Mr. B, thanks for all the links--I've gone through the BIS and clearing house reports and read similar articles as above and, similar to you, realized I just didn't know.  I was hoping I was just ignorant (which is probably still true anyway), but I guess it's comforting to come here and have you folks say the same thing.

However, one thing I had not realized, per Kevin's response, is that 86% of the derivatives are interest rate swaps.  Am I correct in assuming the notional values pretty much do not come into play during a default for those contracts (e.g., since they appear to be only interesting in the interest rate difference)?  Chopping the total CDS notional amounts down to only two trillion (did not think I'd ever write that phrase) certainly seems to help the situation some.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Junto on December 05, 2011, 06:31:15 AM
Here is a discussion on derivatives and netting which I found quite interesting: http://epicureandealmaker.blogspot.com/2011/11/known-unknowns.html

Quote
Let’s look at the example of Bank A hedging some exposure by trading with Bank B. Let’s say

(1) Bank A has bought $100mm of CDS from Bank B,
(2) The CDS is currently worth 65 points (i.e. the $100mm notional contract is worth $65mm),
(3) Bank B has posted $60mm of collateral to Bank A.

What is Bank A’s direct exposure to Bank B? I would argue that the correct number is $5mm. If Bank B were to default and have 0 recovery, Bank A would post an immediate loss of $5mm, since Bank A already has the $60mm in collateral.

The point is that direct counterparty risk only exists on the uncollateralized portion of any exposure. One term for this is “gap risk.” This is relevant because in your example, Bank A would not try to hedge out its exposure to Bank B by buying protection on Bank B from Bank C. Almost all of Bank A’s exposure to Bank B is already covered by collateral. As for the remaining part, generally the amount of uncollateralized exposure that Bank A has to Bank B is not correlated to Bank B’s credit rating, especially if there are a large number of trades in multiple asset classes between the two banks. Bank A can’t know a priori what the uncollateralized amount will be if Bank B defaults; it’s just as likely that the CDS in the above example has moved from 60 points to 55 points and Bank A actually owes Bank B collateral. Also note that since this is essentially portfolio risk, doubling the number of trades with Bank B doesn’t actually double the exposure, especially if (as is common) many of the new trades are offsetting in risk. There’s no gross buildup of residual risk; this just boils down to net risk against the counterparty.

Why was AIG different? The above is a fairly accurate stylized approximation of what happens for relatively liquid CDS (which do increasingly go through central clearinghouses anyway). Something like a corporate or sovereign CDS is a distinct product that trades and has an observable market price. In the AIG case, most of AIG’s CDS exposure came from much more bespoke deals on structured products. A typical AIG CDS contract might be on some particular complex mortgage product, for which the only CDS trade was the one in which AIG wrote the protection. It has no observable market price and has to be priced using model assumptions on the underlying. This contrasts with e.g. sovereign CDS, where a price can be observed in the market and multiple trades happen on the same CDS; i.e. where there does in fact exist an observable market price.

Why is this relevant? In the above example, we assume that banks A and B agree on the contract’s valuation. If instead Bank A believes the contract is worth $65mm but Bank B only believes the contract is worth $30mm and has only posted that much collateral, then Bank A has $35mm of exposure to Bank B, which it will need to hedge accordingly. But the point is that this is a valuation issue; if the two banks actually agreed on the value of the contract, but Bank B simply refused to post collateral, then Bank B would be defaulting outright on its obligations, and would have its positions closed out accordingly, rather than have the counterparty risk just continue to exist.

The above discusses direct counterparty exposure in the sense of “losing money if my counterparty defaults.” There is of course further risk; if Bank B defaults, Bank A is left with that $100mm of risk that it previously didn’t have. But the risk here is actually a function of Bank B’s net exposure, not Bank A’s gross exposure. If, for example, Bank B had an offsetting contract for $90mm notional with Bank C, then after a default by Bank B, you would expect that Bank A and Bank C would offset their newly acquired risk against each other, such that e.g. Bank A only ends up with a $10mm change in risk, and Bank C ends up with no change in risk. This is pretty much what happened after Lehman defaulted. In fact there was a special trading session arranged for just that purpose, though most of the risk rebalancing actually happened in normal trading after the default.

I believe points (2) and (3) in your blog post boil down to concerns regarding net risk. I agree that large concentrations of net exposure would be a cause for concern, more so in illiquid positions but even to some extent in liquid ones. One way to get more comfortable with this in CDS space is just to look at the DTCC net notional numbers. By definition no entity’s net position can exceed the total net position. This ends up giving you a cap on how bad things can be; of course not ideal, but maybe less bad than you would initially think.


* *
One more thing—and you can share this too as long as it’s not attributed.

The “margin call contagion” scenario you propose is not representative of how banks operate. Just about everything in a bank’s portfolio will already be contributing to its funding. Bonds will be repoed out (i.e. for cash equal to the bond’s value, less a haircut), stock will be lent out, and collateral posted on derivative contracts will be rehypothecated.

It’s possible that e.g. repo haircuts will exceed the bid-offer on some instruments and selling a security might give me slightly more cash than repoing it, but the extra amount is small. In general the notion of “liquidating a valuable position for cash” doesn’t make sense for a bank. Of course this may be different for a buy-side firm, but it doesn’t make sense for a bank to sell a security for liquidity purposes when it’s already used to secure some cash. This is also less true for illiquid things that can’t be financed; it is however true for any collateralized derivative position due to rehypothecation.

The link also refers back to this post: http://epicureandealmaker.blogspot.com/2011/11/methinks-thou-dost-protest-too-much.html
Title: Re: BAC-WT - Bank of America Warrants
Post by: racemize on December 05, 2011, 06:53:23 AM
Thanks Junto, that was great.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on December 05, 2011, 09:14:11 AM
The situation that scares me is the counterparty default.

Same scare I had with Fairfax in 2008.

Large reinsurance recoverable hedged with CDS.

AIG goes down and no bailout.  Barclays, Citigroup, DeutcheBank, BofA go down.  The Fairfax CDS portfolio is kaput.

AIG's reinsurance is worthless ->  most reinsurers go down in daisy chain style.

Fun isn't it?

Junto's post does help me feel better.
Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on December 05, 2011, 11:11:22 AM
weird the entire financial system nearly went down in 2008/2009 yet the derivative book of JPM, the bank with the most derivative exposure per the bears who monitor such things, did not have any problems with it's derivative book. That is it did not blow up. It also looks like it will "survive" this crisis.----------
I SUSPECT that it was because problems were mostly related to credit derivatives (20% of total if I remember correctly). As per previous poster, interest/currency derivatives are the ones to watch, because it makes up the bulk of the total book.
Also, I have been unable to establish how much has been netted off outside the US banking system, so there is an important and potentially big piece of the puzzle missing. The BIS data I've looked at only shows that the US picture resembles the global one; the other very big player is Barclays; a very leverage entity to start off with.

Uccmal--If you invert the issue by asking, where will I be safe if any of the big banks blow up due to derivatives, then it gets interesting. What seems conclusive is that if one of those big 5 blow up the rest are all in trouble and all the resources that can be mustered will be brought to bear on the situation. So I get comfortable somewhere between the fact that there is really no place to hide, but say for gold under the bed and that the cavalry will be out in force. Many will disagree, but for me it provides enough comfort to invest in things like BAC. However, I will not invest in a non-TBTF

Lastly, a word on the notional. I find a lot of the derivative stuff goes straight over my head. I sometimes will count things on my fingers to make sure I get it right ;-) Point is I think the credit v notional talk is a bit like when companies were valued on revenues back in the Dotcom days. So I took it back to basics. Where does a derivative contract come from? From some farmer that wanted to hedge his harvest. So if his harvest was worth $100,000 then how much did he hedge? Well, $100k and that was the notional of his contract. Today we blew straight past that and many now maintain notional can be ignored. I am highly skeptical and think the fact that we have now reached 10x notional/GDP on a US and global basis might prove to be some kind of a barrier. We can only leverage up the global trade so much, right?

It is quite scary to think that as little as two years ago the average paperwork on the trading of derivatives were more than 6 months behind and that Buffett found it almost impossible to run down Gen Re's D-book.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Smazz on December 05, 2011, 03:52:17 PM
The rationale for the rating downgrades seems kind of perverse.  In effect we dont see the government stepping in to support them because they are strong enough to stand on their own now, so we downgraded them.  I just dont understand it.

As an aside, can anyone reflect on this for me:  Am I correct that the ratings agencies can only use publicly available information or are they privy to things that only insiders have access to?

After 2007-2008 no sane, rational human being should take the "ratings agencies" seriously.

Ive been saying this all along as well.

Just curious, with all these great documentaries we've seen over the last few years of how things have blown up - has anyone ever done an investigative of the rating agencies absolute incompetence over that time period?  I'd really love to sit down with some popcorn over that. :P

And I actually did well over that time period, I can just imagine those who got slaughtered.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on December 05, 2011, 08:45:05 PM
Buffett has also stated that he intends to exercise the Goldman Sachs warrants that Berkshire holds.  So the derivatives risk is within his risk tolerance at least. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on December 06, 2011, 05:35:25 AM
On Reuters today. Sorry no Link

 WELLS FARGO & CO CEO SAYS BANK "LOOKS FORWARD" TO RETURNING MORE CAPITAL TO SHAREHOLDERS NEXT YEAR     

Are the warrants adjusted for dividends only or return of capital to?
Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on December 06, 2011, 05:36:14 AM
   BofA Merrill unit in $315 mln mortgage settlement     
          Dec 6 (Reuters) - Bank of America Corp (BAC.N) agreed
to pay $315 million to settle claims by investors who said they
were misled about mortgage securities offerings by its Merrill
Lynch unit, a court filing shows.   
    The settlement requires court approval.   
   
 (Reporting by Jonathan Stempel in New York; Editing by Derek
Caney)   
 ((jon.stempel@thomsonreuters.com +1 646 223 6317; Reuters
Messaging: jon.stempel.reuters.com@reuters.net))
 
Title: Re: BAC-WT - Bank of America Warrants
Post by: mals on December 08, 2011, 09:12:31 PM
Now there is talk of Baupost being short BAC.
That reminded me that I should read again a well researched piece on the option that BAC takes Countrywide to bankruptcy and limit its liabilities.
I remember stumbling on one such researched document in the recent past but could not find it in my searches just now.

In general with
 - the discount to its tangible book value already being placed on BAC, to the tune of $50-60B
 - american economy not doing as badly as per most of the economic indicators
 - BAC having loads of deposits and not having to access the market for funding needs too much
 - and its franchise generating large pre-provision pre-tax surplus
I believe that it is possible that shorts win in the short term and longs win in the long term. BAC will be able to dig itself out of the hole and yet in the short term there may be further panic.

Panics can however ruin financial institutions and therefore I am concerned.

And that is why it is important to understand whether BAC has the option to limit Countrywide related losses.
So if somebody has seen the piece that I remember seeing, please do point me to it.
Title: Re: BAC-WT - Bank of America Warrants
Post by: lessthaniv on December 08, 2011, 09:24:19 PM
http://www.bloomberg.com/news/2011-09-16/bofa-said-to-keep-bankruptcy-as-option-for-countrywide-unit.html

Title: Re: BAC-WT - Bank of America Warrants
Post by: mals on December 08, 2011, 09:26:21 PM
I did not mean this news piece @lessthaniv.

I had seen a report from somebody who had read all the detailed legal documents and had prepared some sort of considered and detailed assessment of the situation. The kinds that news wires do not carry :)
I read the headline of the article and then decided to come back to it. But now I cannot find it...

---

In the meantime, I found these articles. Not the same thing as what I was looking for -
http://blogs.wsj.com/deals/2011/11/08/why-bofa-decided-against-a-countrywide-bankruptcy-for-now/
http://blogs.wsj.com/deals/2010/11/02/could-bofa-push-countrywide-into-bankruptcy/
http://www.subprimeshakeout.com/2011/04/pfaelzer-dismissal-of-bank-of-america-from-countrywide-suit-throws-investors-for-a-loop.html

Substance over form is the argument made here - did Countrywide become one entity (substance wise) or is it a separate entity (form wire - i.e. based on how the corporate entity was structured). Question is whether Countrywide is really separate or one entity with BoA.

Time will tell. On balance, it appears to be a situation where a long time frame investor will do quite well.
But I am no expert on legal wranglings. All I hope is that they have not created new mess since 2008 and it does appear that the franchise is doing ok and can do better and can afford to pay-off reasonably large liabilities.
Title: Re: BAC-WT - Bank of America Warrants
Post by: beerbaron on December 08, 2011, 10:02:29 PM
Now there is talk of Baupost being short BAC.

I think Klarman once said he never shorts unless it's to hedge something else.

Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on December 09, 2011, 02:47:31 AM
Mals,
This might be of some help
See links in first few lines. Challenging to read around the biases, but does make some valid points.
http://www.zerohedge.com/article/pimco-and-new-york-fed-said-seek-bank-america-repurchase-mortgages

The legal side of it. In this case foreclosures, but it gives you a sense of the legal challenges. Main point for me; It will take time. With investment time is your enemy, with debt it is your friend. $50Bn over 5 years is not $50Bn today; discounted at 5% it is $39Bn, plus lawyers fees.
(see page 13 and importantly 2nd para of page 16)
http://digital.library.unt.edu/ark:/67531/metadc29633/m1/1/high_res_d/R41491_2010Nov15.pdf

http://www.scribd.com/fullscreen/39593695
See Exhibit 9 for BAC
Title: Re: BAC-WT - Bank of America Warrants
Post by: racemize on December 09, 2011, 06:17:30 AM
I'm sure most of you have already done this analysis, but here's a pretty good article on BAC's level 3 assets:

http://seekingalpha.com/article/312845-bank-of-america-piercing-its-opaque-balance-sheet
Title: Re: BAC-WT - Bank of America Warrants
Post by: Aberhound on December 10, 2011, 02:11:35 PM
As soon as any bank in Europe fails to pay its depositors because derivatives take priority and the government refuses or is unable to bail out "the rich" depositors why would anyone keep their deposits in BoA instead of WFC or some smaller bank without the opaque derivative exposure? What will BoA's cost of capital be compared to its competitors when the risk becomes more apparent? How will BoA compete with deposit terms with those who have lower cost of capital? How will BoA compete with WFC who is in a far better position to take advantage of the flood of cheap bank owned assets that will be available over the next 5 years?

When you deposit monies at BoA you take a risk that the derivatives take priority. Less than 2% of the population choose to avoid the risk now but what happens when there is a cross-over of awareness? BoA's challenge is to get out from the vicious circle to the virtuous circle before there is a bank problem in Europe. Maybe BoA can make the transition, but their task is much more challenging than for their competitors and the amount of time they have is not in their control. Note the European banks all face the same problem but worse because they cannot expect support from the US and their sovereigns are weaker. This will create the derivative problem because Europe has as many derivatives as the US and European derivative problems will become US derivative problems. There is a lack of good counterparties so all derivative holders are exposed to weak counterparties.

Buffett prefers businesses that can be run by mediocre talent in a business that doesn't face such headwinds. It will be interesting to see if he doubles down if BoA weakens.

Title: Re: BAC-WT - Bank of America Warrants
Post by: alertmeipp on December 10, 2011, 04:14:48 PM
how derivatives become such an evil ... options, equity, forex, interest swaps are used by financials as long as I can remember... the fact that the notion amount is huge or it's not straight forward really bother so many of u...
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on December 10, 2011, 05:44:29 PM
Buffett prefers businesses that can be run by mediocre talent in a business that doesn't face such headwinds.

Imagine Goldman Sachs with mediocre talent though.
Title: Re: BAC-WT - Bank of America Warrants
Post by: mals on December 10, 2011, 07:54:22 PM

Main point for me; It will take time. With investment time is your enemy, with debt it is your friend. $50Bn over 5 years is not $50Bn today; discounted at 5% it is $39Bn, plus lawyers fees.

http://www.scribd.com/fullscreen/39593695
See Exhibit 9 for BAC

Thanks for sharing the links. Going through them now.

A question:: I did not understand your comments about "time is your enemy...". As I view it, it is good for equity holders that BoA will likely need to meet its liability over several years. It would be better if there were no liability, but given that there is liability spreading it out is better for equity holders. Is that what you meant?

On the JP Morgan report, if one assumes that it is directionally right, then BoA put-back claims were only about $11B by around Aug 2010. Perhaps the claims have gone up, but by how much is the question. I am guessing there exist more updated estimate of how much the claims stand at around now?

BoA's valuation appears to be penalized to the tune of $50-60B (if one takes discount to tangible equity as one representative of the level of discount). With BoA's cash flows and the fact that they will need to pay these claims over the years, I believe that BoA will be fine.  It  does not have a liquidity problem - at least not that I can see. I also believe that regulators would also prefer to have it that way - who wants another problem to deal with when there is Europe to deal with at the same time.

I will review the documents some more, but on balance it appears to me that BoA exposure is a risk worth taking. Low but finite risk of wipe-out in return for a decent possibility of a large return over a few years.
Title: Re: BAC-WT - Bank of America Warrants
Post by: berkshiremystery on December 10, 2011, 09:36:41 PM
Now there is talk of Baupost being short BAC.

I think Klarman once said he never shorts unless it's to hedge something else.

<snip>... The hedge-fund blog Zero Hedge speculated Thursday night that Baupost, as Walnut Place, may be fighting the proposed BofA MBS settlement because it has shorted Bank of America stock and taken a long position on MBIA, which is also engaged in do-or-die MBS litigation with BofA. The Baupost client memo -- without naming the Zero Hedge blog -- firmly rejected that assertion as "unfounded and completely false."

"We have on occasion owned a small amount of default protection on Bank of America debt as part of our overall portfolio hedging strategy through which we hold credit default swaps on a diverse group of financial institutions and other corporate issuers," the memo said. "We currently have no long or short position in equity, corporate debt, or credit default swaps of Bank of America or MBIA."
  ... </snip>

Source: http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=34462&terms=%40ReutersTopicCodes+CONTAINS+'ANV' (http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=34462&terms=%40ReutersTopicCodes+CONTAINS+'ANV')
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on December 10, 2011, 10:08:03 PM
I'm surprised that BAC is only paying 0.27% on deposits.  WFC pays 0.25% on deposits.

What's driving the sudden drop in cost of deposits for BAC? 
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on December 11, 2011, 02:12:42 AM
Now there is talk of Baupost being short BAC.

I think Klarman once said he never shorts unless it's to hedge something else.

<snip>... The hedge-fund blog Zero Hedge speculated Thursday night that Baupost, as Walnut Place, may be fighting the proposed BofA MBS settlement because it has shorted Bank of America stock and taken a long position on MBIA, which is also engaged in do-or-die MBS litigation with BofA. The Baupost client memo -- without naming the Zero Hedge blog -- firmly rejected that assertion as "unfounded and completely false."

"We have on occasion owned a small amount of default protection on Bank of America debt as part of our overall portfolio hedging strategy through which we hold credit default swaps on a diverse group of financial institutions and other corporate issuers," the memo said. "We currently have no long or short position in equity, corporate debt, or credit default swaps of Bank of America or MBIA."
  ... </snip>

Source: http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=34462&terms=%40ReutersTopicCodes+CONTAINS+'ANV' (http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=34462&terms=%40ReutersTopicCodes+CONTAINS+'ANV')

Yup.  They're good guys trying to make a buck, not part of the Evil Empire of those despicable short sellers.  :)
Title: Re: BAC-WT - Bank of America Warrants
Post by: onyx1 on December 11, 2011, 05:20:52 AM
On the JP Morgan report, if one assumes that it is directionally right, then BoA put-back claims were only about $11B by around Aug 2010. Perhaps the claims have gone up, but by how much is the question. I am guessing there exist more updated estimate of how much the claims stand at around now?

Yes, the claims have gone up and may go even higher.  Just look at one line of JPMs $11b estimate which included almost no private label MBS liability (33m).  The BOY-Mellon settlement for private label MBS (of which Klarman claims should be "many times" higher) grew that liability from $33m to $8.5bln + another $5bln for range of possible losses. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: Packer16 on December 11, 2011, 05:27:19 AM
The put back liability is what may put Countrywide into BK as it appears that not everyone is one baord with the settlement.

Packer
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on December 11, 2011, 08:29:04 AM
On the JP Morgan report, if one assumes that it is directionally right, then BoA put-back claims were only about $11B by around Aug 2010. Perhaps the claims have gone up, but by how much is the question. I am guessing there exist more updated estimate of how much the claims stand at around now?

Current (Q3 2011) representations and warranties outstanding claims are $11.672b.

See page 31 of BofA's 3rd quarter earnings presentation:

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9MTExMTY3fENoaWxkSUQ9LTF8VHlwZT0z&t=1

Title: Re: BAC-WT - Bank of America Warrants
Post by: BargainValueHunter on December 11, 2011, 08:42:25 AM
Quick question...

The liabilities of Countrywide have been discussed constantly in the press.

But can anyone see a day where Countrywide is a healthy mortgage originator delivering solid, steady earnings to the parent company?

The mortgage market won't stay broken until the end of time, after all. 8)
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on December 11, 2011, 10:59:25 AM
I found this interesting -- old news (from August) to some of you:

L.A. judge puts time limit on BofA MBS fraud claims

http://newsandinsight.thomsonreuters.com/Legal/News/2011/08_-_August/L_A__judge_puts_time_limit_on_BofA_MBS_fraud_claims/

Pfaelzer's findings aren't binding on any other district court judge presiding over a Countrywide MBS fraud case, and there are still unanswered questions about whether the MBS class action tolls the statute. But the Stichting ABP opinion is definitely not good news for anyone who's still contemplating federal fraud claims in an MBS fraud suit against Countrywide. Plaintiffs are going to have come up with a very good explanation for why they waited until now to bring those claims.
Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on December 12, 2011, 11:10:43 AM
-------------A question:: I did not understand your comments about "time is your enemy...". As I view it, it is good for equity holders that BoA will likely need to meet its liability over several years. It would be better if there were no liability, but given that there is liability spreading it out is better for equity holders. Is that what you meant?

On the JP Morgan report, if one assumes that it is directionally right, then BoA put-back claims were only about $11B by around Aug 2010. Perhaps the claims have gone up, but by how much is the question. I am guessing there exist more updated estimate of how much the claims stand at around now?-------------------

Yes. Put another way. If I am receiving $1 then the longer I have to wait the less it is worth...time not my friend/enemy...but when I have to pay $1 then the longer it takes the less I have to pay in "real" terms/present value. Anyway, you understood it right, I obviously just explained it badly.

Putbacks Q3 2011 - $16Bn incurred and management was expecting another $5Bn, so at $21Bn, but has been trending up and is currently a the top end of the original range. There is a lot of noise around the issue and as always it is important to anchor yourself in the facts before reading others' analysis, including views on this Board, starting with mine. See Note 9 (page 198) of the latest Q. It does a good job of laying out the GSE/non-GSE issues, including where the $8.5Bn settlement fits in.

When reading it bear the following in mind.
1. How big is the potential liability?
2. How long will it take to resolve (time value of money).
3. How complex is the issue. Complex is good, because it ties in with 2. above.
4. What are the mitigating issues e.g. can anything be claimed back from the mortgage insurers, correspondents, etc.

Hope it helps.
Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on December 12, 2011, 11:27:08 AM
www.fairholmefunds.com/pdf/amaii2011.pdf

Don't think I have seen the transcript of Berkowitz's presentation at the AAII posted here. He spends quite a bit of time talking about BofA and I think the following does give his comments an interesting angle,
1. Berkowitz started his career at Merrill Lynch in London in 1982
2. He invested in the banks in a big way during the boom/bust cycle of the late 1980's/early 1990's, so he has done this before.

Lastly, for those that bought BofA early...

From page 6 "For me, the period that we’re in right now is very reminiscent of the early 90s. I remember having a gigantic position in Wells Fargo. Everyone thought they were going to go bust, because they had all of these empty commercial buildings in California and all over the place. They didn’t go bust. It was a rough time, and they made seven times money. I don’t think its going to happen that way. But if people who are in the banks during this doom and gloom period made 5 to 10 times their money, history repeats itself. Not exactly the same way but if you understand, critical to the functioning of this country, critical to job growth, critical to the safety and security of our nation, they have to succeed. Even if they succeed in a non-excessive way, with a very reasonable profit, one would do quite well based upon the price. Very reminiscent of the start in the late ‘80s, and it went to the ‘90s, 1992, 1993, it went up, it came down. People didn’t understand. They lost money again, and then boom! Because of this consolidation, there were fewer players; so tremendous uncertainty which should diminish over the next 12 months, big bias. This is how we do it. And usually it means buying something that’s hated. And something where the newspaper everyday is going to tell you, “You’re wrong.” And your friends are going to tell you, “You’re wrong.” There’s going to be something else that is hot and juicy, some new thing which you are going to want to get in on, and you usually feel pretty lousy about it. Because, when you’re early, you look wrong. You make your most money when times are at their toughest. You just don’t know it at the time. "
Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on December 14, 2011, 12:12:07 PM
On sale. 52 wk low at time of writing.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Rabbitisrich on December 14, 2011, 04:16:23 PM
I wonder whether $5 can really represent a technical point despite hovering around that price. Wouldn't the people who have to sell at that price already have sold for risk management purposes?
Title: Re: BAC-WT - Bank of America Warrants
Post by: Rabbitisrich on December 14, 2011, 06:55:09 PM
This will be interesting:http://blogs.desmoinesregister.com/dmr/index.php/2011/12/08/iowa-ag-says-mortgage-settlement-should-be-done-by-christmas/ (http://blogs.desmoinesregister.com/dmr/index.php/2011/12/08/iowa-ag-says-mortgage-settlement-should-be-done-by-christmas/)

Iowa Attorney General Tom Miller said Thursday a settlement between almost all state attorneys general and the five largest mortgage servicers should be finalized before Christmas, with or without California.The deal, which Miller has been trying to negotiate since March, would release the five servicers – Ally Financial, Bank of America, Citigroup, J.P. Morgan Chase, and Wells Fargo – from legal claims on past home loan servicing and foreclosures. The deal would not prohibit individuals from suing the banks, or government prosecutors from suing banks over issues related to the packaging of home loans into mortgage-backed securities.In return the banks will agree to pay for what Miller calls “substantial principal reductions” for homeowners who are underwater, and agree to a set of mortgage servicing standards, interest rate reductions, and cash payments to some homeowners who’ve alrady gone through foreclosure.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on December 14, 2011, 08:10:17 PM
This article cites Keefe, Bruyette, Woods stating that BofA is now at about 6.25% on a fully phased in Basel III basis.  (before counting the effect of Q4 earnings).

http://blogs.wsj.com/marketbeat/2011/11/22/bank-of-america-stock-price-nears-two-year-low-on-story-of-spat-with-regulators/?KEYWORDS=Bank+of+America

I can't find the document, but in one of the presentations or transcripts I saw BofA state that a loan book in runoff will give them another 100bps by 2015.  So that would bring it up to 7.25%

Elsewhere I saw Moynihan state that about $18b is 100bps.

Somewhere between now and 2019 (hopefully sooner) they need to retain ~$36b.  They can probably achieve this over the next 24 months if things continue to bump along in the economy.  They have those tax losses to monetize so I think $36b in two years is reasonable as that is only $18b a year before taxes.

So that's about the next 2 years of earnings down the drain.  Or maybe ~1.5 years of peak earnings power at 1% ROA.

Then there are the legal challenges.  I don't know how that plays out of course, but...
$15b to the FHFA MBS securities lawsuit filed in September (estimate is not from reliable sourse -- it came from TylerDurden so likely too high if anything)
$10b to AIG
$50b to shareholders suing over Merrill Lynch acquisition
that's $75 billion thus far, for another 3 years or so of earnings if paid in full (seems pretty unlikely).  But perhaps it's settled for as much as 1/2 of that, or say 1.5 years of pre-tax earnings.

So anyways, I come to about 3-4 years of earnings to flush down the drain just building capital and paying off lawsuits.

Maybe 4-5 years if they wind up paying another $20-25b to settle with Seth Klarman's gang.  Or perhaps they'll get more than that.  Maybe they get $40b and it's 5-6 years.

Anyhow, if you think it's worth 10x earnings of $2 per share yet will suck up 5 years of earnings then it's only a $12 stock (so you get 10% a year as it rises over 5 years to $20).

Then you take that $12 and discount it yet again to account for the fact that better companies like WFC do not trade at their peak earnings power either.   Then add more of a discount for the CDS counterparty headline risk out of Europe etc... 

So buying it here at roughly $5 could be worth 4x upside in 5 years time if those nightmarish legal bills come in as I described and if they are at 1% ROA by then and trading for 10x earnings.

Sorry if you had to read all of that.  What I'm doing here is trying to compare the discounting going on between BAC to C.  C might be worth $60 or so at 1% ROA, yet trades at $26.  Absent a Europe blowup that could theoretically wipe out common stock value of either bank or both of them,  Citi will be returning earnings sooner.  They can double their book value over the next 5 years given that they are farther along in Basel III progress and can start buying back shares next year (for 1/2 of book no less) and paying dividends which of course can be used to buy more shares (same impact as stock buybacks except for taxes). 

So I don't know.  C may be just as cheap as BAC when you account for the impact of how many years of BAC's earnings may be sequestered.

Then again, maybe BAC strings out the lawsuits and puts Countrywide into bankruptcy 5 years from now.  Or perhaps they settle with shareholders for only $10b and Klarman's gang is stuck with just $8.5b.  Then AIG is tossed out for being "sophisticated" investors or the FHFA settles for only $5b.

The market is seemingly thinking the legal bills will be about the size I mentioned, or at least that's what they might be discounting the stock to account for the risk of it being that large.



Title: Re: BAC-WT - Bank of America Warrants
Post by: onyx1 on December 18, 2011, 11:51:23 AM
Then there are the legal challenges.  I don't know how that plays out of course, but...
$15b to the FHFA MBS securities lawsuit filed in September (estimate is not from reliable sourse -- it came from TylerDurden so likely too high if anything)
$10b to AIG
$50b to shareholders suing over Merrill Lynch acquisition
that's $75 billion thus far, for another 3 years or so of earnings if paid in full (seems pretty unlikely).  But perhaps it's settled for as much as 1/2 of that, or say 1.5 years of pre-tax earnings.

So anyways, I come to about 3-4 years of earnings to flush down the drain just building capital and paying off lawsuits.
Eric,
I agree with your general framework.  My main comment is that the analysis should include litigation reserves.

BAC has already set up an undisclosed amount of litigation reserves that will substantially improve the results of the analysis.  These reserves are designed to cover expected losses on those cases where losses are probable and estimates can be made.
 
For example, it likely includes an estimate of the ML acquisition case liability and at a figure significantly less than the $50bln the plaintiffs are asking for.  The $50bln is based on the market value move after ML posted a $15.3bln loss after the acquisition.  The crux of the case is the timing of the disclosure of losses on ML’s MBS super senior positions prior to BAC’s shareholder vote.  SS valuation was very difficult at the time as nothing was trading.  The mark down grew from about $2bln to $11bln over several months prior to the shareholder vote.  I don’t see BAC being held responsible for Mr. Market’s reaction, but rather some amount in the low end range of the SS write down, say $3-$5bln.  This amount should be covered in current litigation reserves.

$10bln AIG losses should be covered by R&W reserves consistent with the settlement with BNY-Mellon.

FHFA lawsuit.  I agree the TylerDurden $15bln loss estimate appears too high.  The original face amount of the securities in question is $57bln.  These securities are senior to all others and are paying down around 15% of original face per year.  They have a current face of $24bln. The GSE have them marked at 67%.  If these marks are correct, then in a worst case scenario of a rescission of all trades, BAC loses $33% of $24bln = $8bln less whatever interest the GSEs have collected to date, say $1bln, or $7bln.  The losses would drop if BAC is able to collect from correspondent lenders and other guarantors representing 28% of R&W claims.  A settlement of this lawsuit of $2-4bln would not surprise me and once again this amount should be covered in reserves.

If litigation reserves are adequate, the 3-4 years of earnings “down the drain” becomes more like 2 years.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on December 18, 2011, 12:41:41 PM
onyx1,
Do you suppose they held back on setting up a reseve for the MBS securities reps&warranties until they had a form of "price discovery" via the $8.5b settlement with the BNY Mellon trusts? 

Then once they had that settlement inked they were obligated to put up a reserve for 100% of their estimated MBS securities liabilities with the assumption that their entire liability could be settled on similar terms?

Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on December 18, 2011, 01:17:15 PM
Then there are the legal challenges.  I don't know how that plays out of course, but...
$15b to the FHFA MBS securities lawsuit filed in September (estimate is not from reliable sourse -- it came from TylerDurden so likely too high if anything)
$10b to AIG
$50b to shareholders suing over Merrill Lynch acquisition
that's $75 billion thus far, for another 3 years or so of earnings if paid in full (seems pretty unlikely).  But perhaps it's settled for as much as 1/2 of that, or say 1.5 years of pre-tax earnings.

So anyways, I come to about 3-4 years of earnings to flush down the drain just building capital and paying off lawsuits.
Eric,
I agree with your general framework.  My main comment is that the analysis should include litigation reserves.

BAC has already set up an undisclosed amount of litigation reserves that will substantially improve the results of the analysis.  These reserves are designed to cover expected losses on those cases where losses are probably and estimates can be made.
 
For example, it likely includes an estimate of the ML acquisition case liability and at a figure significantly less than the $50bln the plaintiffs are asking for.  The $50bln is based on the market value move after ML posted a $15.3bln loss after the acquisition.  The crux of the case is the timing of the disclosure of losses on ML’s MBS super senior positions prior to BAC’s shareholder vote.  SS valuation was very difficult at the time as nothing was trading.  The mark down grew from about $2bln to $11bln over several months prior to the shareholder vote.  I don’t see BAC being held responsible for Mr. Market’s reaction, but rather some amount in the low end range of the SS write down, say $3-$5bln.  This amount should be covered in current litigation reserves.

$10bln AIG losses should be covered by R&W reserves consistent with the settlement with BNY-Mellon.

FHFA lawsuit.  I agree the TylerDurden $15bln loss estimate appears too high.  The original face amount of the securities in question is $57bln.  These securities are senior to all others and are paying down around 15% of original face per year.  They have a current face of $24bln. The GSE have them marked at 67%.  If these marks are correct, then in a worst case scenario of a rescission of all trades, BAC loses $33% of $24bln = $8bln less whatever interest the GSEs have collected to date, say $1bln, or $7bln.  The losses would drop if BAC is able to collect from correspondent lenders and other guarantors representing 28% of R&W claims.  A settlement of this lawsuit of $2-4bln would not surprise me and once again this amount should be covered in reserves.

If litigation reserves are adequate, the 3-4 years of earnings “down the drain” becomes more like 2 years.

We went to the CFA conference in NYC a few weeks ago and heard from two astute analysts who were not enthusiastic about the big banks.  The EURO banks are mostly zombies.  The big money center US banks have a lot of issues that are going to take a lot of time to work through.

Richard Bernstein hinted in passing that most of the big money center banks are trading for about twice what they are worth, but they are starting to see value in a handful of regional banks.

Aswath Damodaran says CITI and Morgan Stanley will require five years of projected earnings to get their Tier I capital up to the levels needed to support the payment of substantial dividends.

Onyx,  how does BAC compare to CITI and MS in their capital ratios?
Title: Re: BAC-WT - Bank of America Warrants
Post by: onyx1 on December 18, 2011, 01:49:10 PM
onyx1,
Do you suppose they held back on setting up a reseve for the MBS securities reps&warranties until they had a form of "price discovery" via the $8.5b settlement with the BNY Mellon trusts? 

Then once they had that settlement inked they were obligated to put up a reserve for 100% of their estimated MBS securities liabilities with the assumption that their entire liability could be settled on similar terms?

Yes, but only for the non-GSE/non-monline exposures as they have different contractual standards.  Page 60 of Q3 10-Q, under "Representations and Warranties Liability":

"In the case of private- label securitizations, our estimate considers implied repurchase experience based on the BNY Mellon Settlement, adjusted to reflect differences between the Covered Trusts and the remainder of the population of private- label securitizations, and assumes that the conditions to the BNY Mellon Settlement will be met.

Page 35, Q2 presentation shows the breakdown: $8.6bln BNY-Mellon, plus $5.4bln implied exposure for remaining non-GSE.

Of course if Klarman is successful, estimates and reserves will go up across the board.  But as I posted in a previous thread it would likely be 5+ years of litigation.

http://www.cornerofberkshireandfairfax.ca/forum/index.php?topic=5829.msg63959#msg63959
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on December 18, 2011, 03:17:14 PM
Aswath Damodaran says CITI and Morgan Stanley will require five years of projected earnings to get their Tier I capital up to the levels needed to support the payment of substantial dividends.

Onyx,  how does BAC compare to CITI and MS in their capital ratios?

Aswath is UCLA educated, so he must be correct.  How do I start a shareholder lawsuit against Citigroup?   :D

Here is what Citi says:

Continue to expect to begin returning capital to shareholders in 2012 and operate in a Tier 1 Common ratio range of 8-9% under Basel III by end of 2012

See page 23

http://www.citigroup.com/citi/fin/data/p111020a.pdf
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on December 18, 2011, 05:14:51 PM
Aswath Damodaran says CITI and Morgan Stanley will require five years of projected earnings to get their Tier I capital up to the levels needed to support the payment of substantial dividends.

Onyx,  how does BAC compare to CITI and MS in their capital ratios?

Aswath is UCLA educated, so he must be correct.  How do I start a shareholder lawsuit against Citigroup?   :D

Here is what Citi says:

Continue to expect to begin returning capital to shareholders in 2012 and operate in a Tier 1 Common ratio range of 8-9% under Basel III by end of 2012

See page 23

http://www.citigroup.com/citi/fin/data/p111020a.pdf

Mike Mayo said that the most expensive writing ever, $183,000.00 per word was the rate for what the auditor's report cost for a bank that shall remain unnamed.  In his opinion, the reason it was so expensive is that it cost that much to gloss over and obscure their real condition that even their managers and auditors don't understand.  If they had wanted transparency, they would have given important details instead of an occult presentation, according to Mike.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on December 18, 2011, 05:31:53 PM
Aswath Damodaran says CITI and Morgan Stanley will require five years of projected earnings to get their Tier I capital up to the levels needed to support the payment of substantial dividends.

Onyx,  how does BAC compare to CITI and MS in their capital ratios?

Aswath is UCLA educated, so he must be correct.  How do I start a shareholder lawsuit against Citigroup?   :D

Here is what Citi says:

Continue to expect to begin returning capital to shareholders in 2012 and operate in a Tier 1 Common ratio range of 8-9% under Basel III by end of 2012

See page 23

http://www.citigroup.com/citi/fin/data/p111020a.pdf

Mike Mayo said that the most expensive writing ever, $183,000.00 per word was the rate for what the auditor's report for a bank that shall remain unnamed cost.  In his opinion, the reason it was so expensive is that it cost that much to gloss over and obscure their real condition that even their managers and auditors don't understand.

I'm interested in hearing about the value of Mike Mayo.  Apparently he was a bull on Lehman in 2007.   Is that accurate?

From what I can find, he accuses Citigroup of overstating their DTA by $10b.
Title: Re: BAC-WT - Bank of America Warrants
Post by: onyx1 on December 18, 2011, 05:43:56 PM
We went to the CFA conference in NYC a few weeks ago and heard from two astute analysts who were not enthusiastic about the big banks.  The EURO banks are mostly zombies.  The big money center US banks have a lot of issues that are going to take a lot of time to work through.

Richard Bernstein hinted in passing that most of the big money center banks are trading for about twice what they are worth, but they are starting to see value in a handful of regional banks.

Aswath Damodaran says CITI and Morgan Stanley will require five years of projected earnings to get their Tier I capital up to the levels needed to support the payment of substantial dividends.

Onyx,  how does BAC compare to CITI and MS in their capital ratios?

Did they offer any research to support their claims?  If so, I'd love to understand their reasoning.  So many of these analysts live to see their name in print or on TV that they shoot from the hip.  Reading some well thought out research would be refreshing.
Title: Re: BAC-WT - Bank of America Warrants
Post by: vinod1 on December 18, 2011, 05:54:30 PM
This article cites Keefe, Bruyette, Woods stating that BofA is now at about 6.25% on a fully phased in Basel III basis.  (before counting the effect of Q4 earnings).

http://blogs.wsj.com/marketbeat/2011/11/22/bank-of-america-stock-price-nears-two-year-low-on-story-of-spat-with-regulators/?KEYWORDS=Bank+of+America

I can't find the document, but in one of the presentations or transcripts I saw BofA state that a loan book in runoff will give them another 100bps by 2015.  So that would bring it up to 7.25%

Elsewhere I saw Moynihan state that about $18b is 100bps.

Somewhere between now and 2019 (hopefully sooner) they need to retain ~$36b.  They can probably achieve this over the next 24 months if things continue to bump along in the economy.  They have those tax losses to monetize so I think $36b in two years is reasonable as that is only $18b a year before taxes.

So that's about the next 2 years of earnings down the drain.  Or maybe ~1.5 years of peak earnings power at 1% ROA.

Then there are the legal challenges.  I don't know how that plays out of course, but...
$15b to the FHFA MBS securities lawsuit filed in September (estimate is not from reliable sourse -- it came from TylerDurden so likely too high if anything)
$10b to AIG
$50b to shareholders suing over Merrill Lynch acquisition
that's $75 billion thus far, for another 3 years or so of earnings if paid in full (seems pretty unlikely).  But perhaps it's settled for as much as 1/2 of that, or say 1.5 years of pre-tax earnings.

So anyways, I come to about 3-4 years of earnings to flush down the drain just building capital and paying off lawsuits.

Maybe 4-5 years if they wind up paying another $20-25b to settle with Seth Klarman's gang.  Or perhaps they'll get more than that.  Maybe they get $40b and it's 5-6 years.

Anyhow, if you think it's worth 10x earnings of $2 per share yet will suck up 5 years of earnings then it's only a $12 stock (so you get 10% a year as it rises over 5 years to $20).

Then you take that $12 and discount it yet again to account for the fact that better companies like WFC do not trade at their peak earnings power either.   Then add more of a discount for the CDS counterparty headline risk out of Europe etc... 

So buying it here at roughly $5 could be worth 4x upside in 5 years time if those nightmarish legal bills come in as I described and if they are at 1% ROA by then and trading for 10x earnings.

Sorry if you had to read all of that.  What I'm doing here is trying to compare the discounting going on between BAC to C.  C might be worth $60 or so at 1% ROA, yet trades at $26.  Absent a Europe blowup that could theoretically wipe out common stock value of either bank or both of them,  Citi will be returning earnings sooner.  They can double their book value over the next 5 years given that they are farther along in Basel III progress and can start buying back shares next year (for 1/2 of book no less) and paying dividends which of course can be used to buy more shares (same impact as stock buybacks except for taxes). 

So I don't know.  C may be just as cheap as BAC when you account for the impact of how many years of BAC's earnings may be sequestered.

Then again, maybe BAC strings out the lawsuits and puts Countrywide into bankruptcy 5 years from now.  Or perhaps they settle with shareholders for only $10b and Klarman's gang is stuck with just $8.5b.  Then AIG is tossed out for being "sophisticated" investors or the FHFA settles for only $5b.

The market is seemingly thinking the legal bills will be about the size I mentioned, or at least that's what they might be discounting the stock to account for the risk of it being that large.

I think you might be omitting some of the litigation. The way I see it I break down the litigation as follows

1. Warranties and Representations Liability
  a) GSE - My estimate is a maximum of about $5 billion further beyond what has been recognized.

  b) Monolines - My max estimate is $8 billion.

  c) Private Label - My max estimate is about $27 billion. Seth Klarman's litigation would fall under this.

2. Robo Signing and Claim to Title: This is being charged by the state AG's. The numbers I keep seeing is $20 billion for the industry. Let us assume $30 billion is the final agreed amount and that BAC is responsible for 25% this gives a max exposure of about $8 billion.

3. Charges of fraud by investors in mortgage backed securities. This is basically alleging violation of securities law in the offering documents. AIG $10 billion suit falls under this. FHFA lawsuit also falls under this although there is a lot of overlap with what would be covered under 1(a).

I would guess this exposure as a max of around $5 billion.

4. Merrill Lynch acquisition related litigation for $50 billion. I do not think the case has much merit and would be settled at a fraction of the amount. I cannot even think of a rational way to assess the likely maximum number, but I think something like $10 billion is a very reasonable maximum. I think if this dollar amount is offered by BAC, the opposing team would happily take this amount.

The grand total is about $63 billion as the maximum and this assumes that this number is over on top of the $14 billion or so that has already been reserved.

Thanks

Vinod
 

Title: Re: BAC-WT - Bank of America Warrants
Post by: vinod1 on December 18, 2011, 05:56:43 PM
My estimates above are based on the notes I have made for myself:


Warranties Liability
•   Three different groups (1) GSE (2) Monolines (3) Whole loan sales & Private label securitizations.
•   Primarily concentrated around loans sold during 2004-2008 period.
•   GSE: BAC and legacy Countrywide sold $1.1 trillion to GSE during 2004-2008 period out of $2 T in 2001-2010. Of this $540 billion principal has been paid back and about $110 billion (or about 10% of loans in this period) are in default or 180 days past due.
   Through YE 2010, $21.6 B in repurchase claims made on 2004-2008 vintages or about 2% of loans. Resolved $18.2 B with a net loss experience of 27%. Collateral loss severity rate on approved repurchases has averaged 45-55%.
   Agreement with GSE completely settles all issues arising out of Countrywide sales to GSE but do not cover original BAC. Management estimates that BAC is through 70-75% of repurchase claims expected in total from GSE’s as a result of these agreements.
•   Non-GSE or Private-Label Securitization (PLS): Pools of First lien mortgage loans and Home equity loans have been sold as Private-Label Securitization or in the form of Whole Loans. Many of the whole loans were subsequently pooled with other mortgages into private-label securitizations issued or sponsored by the third party buyer of the whole loans. In some of the private label securitizations, monolines have insured all or some of the issued bonds.
•   Loans sold to other than GSE’s totaled $963 billion in 2004-2008 period of which $478 billion in princiipal has been paid. So only the remaining $485 billion in play (but BAC states that only $372 billion in principal is outstanding as of YE 2010. Why?) and of which $216 billion have defaulted or severely delinquent.
   Since significant payments would have been made on loans that have not defaulted or delinquent, the majority of the risk is concentrated in the $216 billion defaulted/delinquent loans and this amount is called Princiapal at Risk.
   Even in this $216 B defaulted loans, $68 B loans had borrowers who paid for over 36 months, which might indicate that there might no mis-represenation and that the borrower had intent and ability to pay at the time of the loan.
   Only $32 B out of $216 B had borrowers pay less than 13 payments. This is high probability of BAC being at fault.
   As of YE 2010, a total of $13.7 B in repurchase requests were made on these 2004-2008 loans. $6 billion has been paid and $4 billion denied. Rest in progress.
   Assume that only defaulted loans in Pay Option, Subprime or Home Equity or where borrower made less than 36 months payment are at risk to BAC (BAC thinks 25 months is enough). This gives about $150 B in loans that have defaulted (out of $216B) and where BAC is at a putback risk. Assuming that 50% of the loans have misrepresentations (or about 16% of total originated loans compared to roughly 2-3% of loans to GSE that we know so far) and assuming a 60% loss severity rate (compared to 45-55% in GSE). This suggests a maximum loss of about $45 billion to BAC from representations and warrenties to non-GSE. If we use just the loans which have less than 25 months as BAC believes, and the same estimates of losses, we get about $27B maximum loss. BAC estimate is $7-$10 B.
   PLS must generally aggregate 25% of voting interests to instruct securitization trustee to investigate repurchase claims.
   Some investors in PLS may not pursue repurchase requests as their loss is mitigated by cash flows from tranches below AAA.
   Out of $216B, monlolines have insured $48B ($33B in first lien and $15B in 2nd lien) defaulted loans. Most losses in 2nd lien loans.  At least 25 payments have been made on 52% of the loans so only about $23B is the likely exposure.
•   Loans sold to other than GSE’s have less rigorous representations and warranties. Borrower fraud representations and warranties were generally not given to private-label securitizations. Few transactions contain a representation tthat there has been no fraud or material misrepresentation by a borrower or third party. Due to these factors only a portion of the Principal at Risk with respect to private label securitizations will ultimately result in a repurchase.
•   In Q1, 2011 BAC reached agreement with AGO on $36 billion in loans consisting of $10.9 billion Principal at Risk (some of which already resolved) for a payment of $1.6 billion. AGO represents about a third of home equity exposure and 2nd lien home equity exposure is some of the most riskiest stuff.
Title: Re: BAC-WT - Bank of America Warrants
Post by: onyx1 on December 18, 2011, 06:10:11 PM
The grand total is about $63 billion as the maximum and this assumes that this number is over on top of the $14 billion or so that has already been reserved.

Thanks for these posts vinod1.   What did you assume about undisclosed Litigation reserves?
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on December 18, 2011, 06:10:40 PM
Aswath Damodaran says CITI and Morgan Stanley will require five years of projected earnings to get their Tier I capital up to the levels needed to support the payment of substantial dividends.

Onyx,  how does BAC compare to CITI and MS in their capital ratios?

Aswath is UCLA educated, so he must be correct.  How do I start a shareholder lawsuit against Citigroup?   :D

Here is what Citi says:

Continue to expect to begin returning capital to shareholders in 2012 and operate in a Tier 1 Common ratio range of 8-9% under Basel III by end of 2012

See page 23

http://www.citigroup.com/citi/fin/data/p111020a.pdf

Mike Mayo said that the most expensive writing ever, $183,000.00 per word was the rate for what the auditor's report for a bank that shall remain unnamed cost.  In his opinion, the reason it was so expensive is that it cost that much to gloss over and obscure their real condition that even their managers and auditors don't understand.

I'm interested in hearing about the value of Mike Mayo.  Apparently he was a bull on Lehman in 2007.   Is that accurate?

From what I can find, he accuses Citigroup of overstating their DTA by $10b.

Yeah, he talked about his being slow to downgrade Lehman as the worst mistake of his career.  He continued to believe the BS they were feeding him, until he finally caught them in a lie.  Then, he quickly put out a sell on them as they were near the brink, and that may have been the straw that broke the camel's back and pushed them over into their death slide.
Title: Re: BAC-WT - Bank of America Warrants
Post by: vinod1 on December 18, 2011, 06:16:16 PM
The grand total is about $63 billion as the maximum and this assumes that this number is over on top of the $14 billion or so that has already been reserved.

Thanks for these posts vinod1.   What did you assume about undisclosed Litigation reserves?

I did not assume any number for the undisclosed litigation reserves. I remember seeing $14 billion number somewhere as what has been reserved for Warranties & Reps.

Vinod
Title: Re: BAC-WT - Bank of America Warrants
Post by: vinod1 on December 18, 2011, 06:22:13 PM
Personally, the biggest risk I see is any potential irrational reaction by regulators asking BAC to raise capital. Giving banks enough time for their earnings to cover any capital shortfalls has been a very consistent historical pattern.

I have read a lot of what Bernanke has written, including his book Essays on the Great Depression and if has a free hand I am very comfortable with this risk. However, we have the onsite examiners and who knows what is going through their minds especially in terms of their career risk.

Vinod
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on December 18, 2011, 06:24:21 PM
We went to the CFA conference in NYC a few weeks ago and heard from two astute analysts who were not enthusiastic about the big banks.  The EURO banks are mostly zombies.  The big money center US banks have a lot of issues that are going to take a lot of time to work through.

Richard Bernstein hinted in passing that most of the big money center banks are trading for about twice what they are worth, but they are starting to see value in a handful of regional banks.

Aswath Damodaran says CITI and Morgan Stanley will require five years of projected earnings to get their Tier I capital up to the levels needed to support the payment of substantial dividends.

Onyx,  how does BAC compare to CITI and MS in their capital ratios?

Did they offer any research to support their claims?  If so, I'd love to understand their reasoning.  So many of these analysts live to see their name in print or on TV that they shoot from the hip.  Reading some well thought out research would be refreshing.

Aswath posts on his website.  If you can't find the details there, shoot him an email.  He's a professor, and I think he'll share with you.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on December 18, 2011, 06:29:02 PM
Aswath Damodaran says CITI and Morgan Stanley will require five years of projected earnings to get their Tier I capital up to the levels needed to support the payment of substantial dividends.

Onyx,  how does BAC compare to CITI and MS in their capital ratios?

Aswath is UCLA educated, so he must be correct.  How do I start a shareholder lawsuit against Citigroup?   :D

Here is what Citi says:

Continue to expect to begin returning capital to shareholders in 2012 and operate in a Tier 1 Common ratio range of 8-9% under Basel III by end of 2012

See page 23

http://www.citigroup.com/citi/fin/data/p111020a.pdf

Mike Mayo said that the most expensive writing ever, $183,000.00 per word was the rate for what the auditor's report for a bank that shall remain unnamed cost.  In his opinion, the reason it was so expensive is that it cost that much to gloss over and obscure their real condition that even their managers and auditors don't understand.

I'm interested in hearing about the value of Mike Mayo.  Apparently he was a bull on Lehman in 2007.   Is that accurate?

From what I can find, he accuses Citigroup of overstating their DTA by $10b.

Yeah, he talked about his being slow to downgrade Lehman as the worst mistake of his career.  He continued to believe the BS they were feeding him, until he finally caught them in a lie.  Then, he quickly put out a sell on them as they were near the brink, and that may have been the straw that broke the camel's back and pushed them over into their death slide.

“If you tell a lie big enough and keep repeating it, people will eventually come to believe it."

- Joseph Goebbels

Is Citigroup telling a huge whopper of a lie? 

According to Mayo Citigroup is overstating the DTA by $10b.  In doing so, they report Tier 1 ratio at 11.7% under Basel I. 

Mike Mayo thinks this is fraud.

What is the motive in this fraud?  What if they only reported 10% under Basel I?  The horrors, the horrors.  Look, they are reporting a number higher than most of their rivals even if you DISALLOW that $10b in DTA.

I didn't mean to discredit him for Lehman -- everybody makes a mistake.  Citigroup no longer lets him participate on conference calls.  I've read those old transcripts with Mayo asking questions and they indeed seemed disruptive in tone -- some sort of axe to grind.   I understand that he's been against Citigroup since 2001 or so, and that's fine given how Citigroup ended up -- however the new management probably doesn't appreciate being painted with the same brush given the changes they instituted.  Mayo is biting at their ankles, or so it sounds to me.

$10b of DTAs means sh*t to Citigroup.  They are reporting Basel I Tier 1 ratio of 11.7%.  Why make a lie that you don't need to make?

Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on December 18, 2011, 06:32:53 PM
Personally, the biggest risk I see is any potential irrational reaction by regulators asking BAC to raise capital. Giving banks enough time for their earnings to cover any capital shortfalls has been a very consistent historical pattern.

I have read a lot of what Bernanke has written, including his book Essays on the Great Depression and if has a free hand I am very comfortable with this risk. However, we have the onsite examiners and who knows what is going through their minds especially in terms of their career risk.

Vinod

+1

Regarding Vinod's 65B estimate, my own estimate was lower (40B, one year PTPP). For example, I remember subtracting an estimate of the litigation reserves. Vinod's framework looks comprehensive though with detailed notes so it might be time to review those estimates.

What others think of Vinod's analysis?
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on December 18, 2011, 06:40:22 PM
Might be interesting to run a poll on the litigation cost for BAC.

With an diverse and independent group that includes some informed people but also some skeptics, we might get some "wisdom of the crowds" instead of the variations of Mr Market.
Title: Re: BAC-WT - Bank of America Warrants
Post by: onyx1 on December 18, 2011, 06:45:14 PM
The grand total is about $63 billion as the maximum and this assumes that this number is over on top of the $14 billion or so that has already been reserved.

Thanks for these posts vinod1.   What did you assume about undisclosed Litigation reserves?

I did not assume any number for the undisclosed litigation reserves. I remember seeing $14 billion number somewhere as what has been reserved for Warranties & Reps.

Vinod

BAC has litigation reserves and I think you have to incorporate them.   

Special call, BM: "In addition to our credit reserves, we have approximately $18 billion [Note: $16bln now at end of Q3] in reserves in our mortgage business for rep-and-warrants, and we have additional reserves for litigation matters.

They don't disclose the number to avoid tipping their hand.   But if we here can make reasoned estimates certainly BAC can too with much better information.  And if they can make estimates, it is a safe assumption that they have set up a reserve to match their expected losses.  This would apply to the FHFA, AIG and ML acquisition lawsuits.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on December 18, 2011, 06:49:18 PM
But if we here can make reasoned estimates certainly BAC can too with much better information.  And if they can make estimates, why should we assuming that they have not set up a reserve to match their expected losses?  This would apply to the FHFA, AIG and ML acquisition lawsuits.

Now I'll say something skeptical:

One year ago we could make reasoned estimates that they would have R&W exposure in excess of their reserves at the time.  Then all of a sudden they increase the reserve by $14b in one quarter.

The same could happen with their litigation reserve -- it could be some relatively small percentage only to grow by several multiples in a single (future) quarter.



Title: Re: BAC-WT - Bank of America Warrants
Post by: onyx1 on December 18, 2011, 07:07:41 PM
The same could happen with their litigation reserve -- it could be some relatively small percentage only to grow by several multiples in a single (future) quarter.

Agreed.  BAC has made it clear they review inputs and refine and adjust these reserves as more information is known each quarter.  In some cases,  they have made no estimate at all as they deem the losses improbable or impossible to estimate.  If that changes, the litigation reserve would grow.
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on December 18, 2011, 07:08:30 PM
Aswath Damodaran says CITI and Morgan Stanley will require five years of projected earnings to get their Tier I capital up to the levels needed to support the payment of substantial dividends.

Onyx,  how does BAC compare to CITI and MS in their capital ratios?

Aswath is UCLA educated, so he must be correct.  How do I start a shareholder lawsuit against Citigroup?   :D

Here is what Citi says:

Continue to expect to begin returning capital to shareholders in 2012 and operate in a Tier 1 Common ratio range of 8-9% under Basel III by end of 2012

See page 23

http://www.citigroup.com/citi/fin/data/p111020a.pdf

Mike Mayo said that the most expensive writing ever, $183,000.00 per word was the rate for what the auditor's report for a bank that shall remain unnamed cost.  In his opinion, the reason it was so expensive is that it cost that much to gloss over and obscure their real condition that even their managers and auditors don't understand.

I'm interested in hearing about the value of Mike Mayo.  Apparently he was a bull on Lehman in 2007.   Is that accurate?

From what I can find, he accuses Citigroup of overstating their DTA by $10b.

Yeah, he talked about his being slow to downgrade Lehman as the worst mistake of his career.  He continued to believe the BS they were feeding him, until he finally caught them in a lie.  Then, he quickly put out a sell on them as they were near the brink, and that may have been the straw that broke the camel's back and pushed them over into their death slide.

“If you tell a lie big enough and keep repeating it, people will eventually come to believe it."

- Joseph Goebbels

Is Citigroup telling a huge whopper of a lie? 

According to Mayo Citigroup is overstating the DTA by $10b.  In doing so, they report Tier 1 ratio at 11.7% under Basel I. 

Mike Mayo thinks this is fraud.

What is the motive in this fraud?  What if they only reported 10% under Basel I?  The horrors, the horrors.  Look, they are reporting a number higher than most of their rivals even if you DISALLOW that $10b in DTA.

I didn't mean to discredit him for Lehman -- everybody makes a mistake.  Citigroup no longer lets him participate on conference calls.  I've read those old transcripts with Mayo asking questions and they indeed seemed disruptive in tone -- some sort of axe to grind.   I understand that he's been against Citigroup since 2001 or so, and that's fine given how Citigroup ended up -- however the new management probably doesn't appreciate being painted with the same brush given the changes they instituted.  Mayo is biting at their ankles, or so it sounds to me.

$10b of DTAs means sh*t to Citigroup.  They are reporting Basel I Tier 1 ratio of 11.7%.  Why make a lie that you don't need to make?

Why indeed?  Getting shut out of conference calls was the least of what happened to him.  He and his family were put under nearly constant surveillance. Nothing in any way threatening, of course.  Just intense staring from a proper distance.  If you want more details on CITI, see my reply to ONYX.
Title: Re: BAC-WT - Bank of America Warrants
Post by: vinod1 on December 18, 2011, 07:33:49 PM
The same could happen with their litigation reserve -- it could be some relatively small percentage only to grow by several multiples in a single (future) quarter.

Agreed.  BAC has made it clear they review inputs and refine and adjust these reserves as more information is known each quarter.  In some cases,  they have made no estimate at all as they deem the losses improbable or impossible to estimate.  If that changes, the litigation reserve would grow.

With BAC, I would not worry too much about +/- $10 billion in estimates especially if they add more to MOS.  :)

You have to remember that this is at this stage a self graded exam, where the penalty for being too strict with yourself is instant death (or its close parallel - severe dilution). BAC has good cover in GAAP rules for estimating contingent liabilities. It is very difficult to find fault with whatever their estimate was for this. So they refine the number gradually to catch up with the PTPP flow and without unduly hurting their capital ratios. This is what I would do and this is what I expect BAC to do as well.

Vinod

 
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on December 18, 2011, 07:39:18 PM
The same could happen with their litigation reserve -- it could be some relatively small percentage only to grow by several multiples in a single (future) quarter.

Agreed.  BAC has made it clear they review inputs and refine and adjust these reserves as more information is known each quarter.  In some cases,  they have made no estimate at all as they deem the losses improbable or impossible to estimate.  If that changes, the litigation reserve would grow.

With BAC, I would not worry too much about +/- $10 billion in estimates especially if they add more to MOS.  :)

You have to remember that this is at this stage a self graded exam, where the penalty for being too strict with yourself is instant death (or its close parallel - severe dilution). BAC has good cover in GAAP rules for estimating contingent liabilities. It is very difficult to find fault with whatever their estimate was for this. So they refine the number gradually to catch up with the PTPP flow and without unduly hurting their capital ratios. This is what I would do and this is what I expect BAC to do as well.

Vinod

 

That sounds GAAPishly correct.  The truth would be to say: we don't have a clue.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on December 18, 2011, 08:11:34 PM
Aswath Damodaran says CITI and Morgan Stanley will require five years of projected earnings to get their Tier I capital up to the levels needed to support the payment of substantial dividends.

Onyx,  how does BAC compare to CITI and MS in their capital ratios?

Aswath is UCLA educated, so he must be correct.  How do I start a shareholder lawsuit against Citigroup?   :D

Here is what Citi says:

Continue to expect to begin returning capital to shareholders in 2012 and operate in a Tier 1 Common ratio range of 8-9% under Basel III by end of 2012

See page 23

http://www.citigroup.com/citi/fin/data/p111020a.pdf

Mike Mayo said that the most expensive writing ever, $183,000.00 per word was the rate for what the auditor's report for a bank that shall remain unnamed cost.  In his opinion, the reason it was so expensive is that it cost that much to gloss over and obscure their real condition that even their managers and auditors don't understand.

I'm interested in hearing about the value of Mike Mayo.  Apparently he was a bull on Lehman in 2007.   Is that accurate?

From what I can find, he accuses Citigroup of overstating their DTA by $10b.

Yeah, he talked about his being slow to downgrade Lehman as the worst mistake of his career.  He continued to believe the BS they were feeding him, until he finally caught them in a lie.  Then, he quickly put out a sell on them as they were near the brink, and that may have been the straw that broke the camel's back and pushed them over into their death slide.

“If you tell a lie big enough and keep repeating it, people will eventually come to believe it."

- Joseph Goebbels

Is Citigroup telling a huge whopper of a lie? 

According to Mayo Citigroup is overstating the DTA by $10b.  In doing so, they report Tier 1 ratio at 11.7% under Basel I. 

Mike Mayo thinks this is fraud.

What is the motive in this fraud?  What if they only reported 10% under Basel I?  The horrors, the horrors.  Look, they are reporting a number higher than most of their rivals even if you DISALLOW that $10b in DTA.

I didn't mean to discredit him for Lehman -- everybody makes a mistake.  Citigroup no longer lets him participate on conference calls.  I've read those old transcripts with Mayo asking questions and they indeed seemed disruptive in tone -- some sort of axe to grind.   I understand that he's been against Citigroup since 2001 or so, and that's fine given how Citigroup ended up -- however the new management probably doesn't appreciate being painted with the same brush given the changes they instituted.  Mayo is biting at their ankles, or so it sounds to me.

$10b of DTAs means sh*t to Citigroup.  They are reporting Basel I Tier 1 ratio of 11.7%.  Why make a lie that you don't need to make?

Why indeed?  Getting shut out of conference calls was the least of what happened to him.  He and his family were put under nearly constant surveillance. Nothing in any way threatening, of course.  Just intense staring from a proper distance.  If you want more details on CITI, see my reply to ONYX.

How far back did that happen?

What do you make of the following report that Mayo is not as negative on Citi and in fact expects them to earn 1% ROA?  He was given a private meeting with Pandit and Gerspach after being shut out for two years.

http://www.cnbc.com/id/39501351/Halftime_Can_Mike_Mayo_s_Big_Citi_Meeting_Lift_Bank_Stocks
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on December 19, 2011, 12:17:42 AM
Aswath Damodaran says CITI and Morgan Stanley will require five years of projected earnings to get their Tier I capital up to the levels needed to support the payment of substantial dividends.

Onyx,  how does BAC compare to CITI and MS in their capital ratios?

Aswath is UCLA educated, so he must be correct.  How do I start a shareholder lawsuit against Citigroup?   :D

Here is what Citi says:

Continue to expect to begin returning capital to shareholders in 2012 and operate in a Tier 1 Common ratio range of 8-9% under Basel III by end of 2012

See page 23

http://www.citigroup.com/citi/fin/data/p111020a.pdf

Mike Mayo said that the most expensive writing ever, $183,000.00 per word was the rate for what the auditor's report for a bank that shall remain unnamed cost.  In his opinion, the reason it was so expensive is that it cost that much to gloss over and obscure their real condition that even their managers and auditors don't understand.

I'm interested in hearing about the value of Mike Mayo.  Apparently he was a bull on Lehman in 2007.   Is that accurate?

From what I can find, he accuses Citigroup of overstating their DTA by $10b.

Yeah, he talked about his being slow to downgrade Lehman as the worst mistake of his career.  He continued to believe the BS they were feeding him, until he finally caught them in a lie.  Then, he quickly put out a sell on them as they were near the brink, and that may have been the straw that broke the camel's back and pushed them over into their death slide.

“If you tell a lie big enough and keep repeating it, people will eventually come to believe it."

- Joseph Goebbels

Is Citigroup telling a huge whopper of a lie? 

According to Mayo Citigroup is overstating the DTA by $10b.  In doing so, they report Tier 1 ratio at 11.7% under Basel I. 

Mike Mayo thinks this is fraud.

What is the motive in this fraud?  What if they only reported 10% under Basel I?  The horrors, the horrors.  Look, they are reporting a number higher than most of their rivals even if you DISALLOW that $10b in DTA.

I didn't mean to discredit him for Lehman -- everybody makes a mistake.  Citigroup no longer lets him participate on conference calls.  I've read those old transcripts with Mayo asking questions and they indeed seemed disruptive in tone -- some sort of axe to grind.   I understand that he's been against Citigroup since 2001 or so, and that's fine given how Citigroup ended up -- however the new management probably doesn't appreciate being painted with the same brush given the changes they instituted.  Mayo is biting at their ankles, or so it sounds to me.

$10b of DTAs means sh*t to Citigroup.  They are reporting Basel I Tier 1 ratio of 11.7%.  Why make a lie that you don't need to make?

Why indeed?  Getting shut out of conference calls was the least of what happened to him.  He and his family were put under nearly constant surveillance. Nothing in any way threatening, of course.  Just intense staring from a proper distance.  If you want more details on CITI, see my reply to ONYX.

How far back did that happen?

What do you make of the following report that Mayo is not as negative on Citi and in fact expects them to earn 1% ROA?  He was given a private meeting with Pandit and Gerspach after being shut out for two years.

http://www.cnbc.com/id/39501351/Halftime_Can_Mike_Mayo_s_Big_Citi_Meeting_Lift_Bank_Stocks



Did I miss something?  That report's from 2010, and it doesn't say anything about what he expected them to earn then.  It says he thought at that time that their targeted ROA, 125BP was too high and that he thought it should be lower, 100BP.  What's more important is what it didn't say: nothing about the mystery meat on their balance sheet.
Title: Re: BAC-WT - Bank of America Warrants
Post by: onyx1 on December 19, 2011, 06:10:54 AM
The same could happen with their litigation reserve -- it could be some relatively small percentage only to grow by several multiples in a single (future) quarter.

Agreed.  BAC has made it clear they review inputs and refine and adjust these reserves as more information is known each quarter.  In some cases,  they have made no estimate at all as they deem the losses improbable or impossible to estimate.  If that changes, the litigation reserve would grow.

With BAC, I would not worry too much about +/- $10 billion in estimates especially if they add more to MOS.  :)

You have to remember that this is at this stage a self graded exam, where the penalty for being too strict with yourself is instant death (or its close parallel - severe dilution). BAC has good cover in GAAP rules for estimating contingent liabilities. It is very difficult to find fault with whatever their estimate was for this. So they refine the number gradually to catch up with the PTPP flow and without unduly hurting their capital ratios. This is what I would do and this is what I expect BAC to do as well.

Vinod

 

See this document for some context of securities class action settlements:

http://www.cornerstone.com/files/News/029b31a7-ff84-4000-b1ff-d177014ced27/Presentation/NewsAttachment/fd13e1e4-5564-4d46-86a3-882f232147a9/Cornerstone_Research_Settlements_2010_Analysis.pdf

Page 12 shows that Credit-Crisis-Related settlements in 2010 were around 2%-3% of estimated damages.

Title: Re: BAC-WT - Bank of America Warrants
Post by: value-is-what-you-get on December 19, 2011, 06:27:16 AM
Very interesting onyx1 - thanks for posting.  Looks like there's a case to be made for proper legal counsel selection!  1.2% low end to 3.4% high end.  Quite the range.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on December 19, 2011, 07:21:44 AM
Did I miss something?  That report's from 2010, and it doesn't say anything about what he expected them to earn then.  It says he thought at that time that their targeted ROA, 125BP was too high and that he thought it should be lower, 100BP.  What's more important is what it didn't say: nothing about the mystery meat on their balance sheet.

He thinks it should be 100bps but you reckon even still he doesn't expect them to earn that?  Or are you taking exception to the choice of words "expects" instead of what I might have used instead "can earn"?

Which cut of mystery meat are you thinking is going to sink the ship?  Here is the CitiHolding mystery meat locker as it stands today:

see page 7

http://www.citigroup.com/citi/fin/data/p111020a.pdf?ieNocache=737

Are you talking about the Special Asset Pool which houses $45 billion in assets?  This number has fallen 53% over the past year, where are the huge losses?  Isn't this the place where they have been hiding all of their losses according to the skeptics?

Here are the numbers for Special Asset Pool size over the past 3 years:
2008 Q3:  $239b
2009 Q3:  $163b
2010 Q3:    $95b
2011 Q3:    $45b







Title: Re: BAC-WT - Bank of America Warrants
Post by: onyx1 on December 19, 2011, 07:46:42 AM
Getting back to BAC, and focusing on the bigger picture.  It may take 2 years, 3 years, or even 5 years of (mostly pre-tax) earnings to build up to Basel III capital requirements and pay legal settlements over and above that which is current reserved.  Even if it takes 5 years, you end up with very well capitalized mega bank with $1.8 trl in assets earning 1%.  Even at modest 10X thats $180bln or over 3X todays market value.   Who wouldn't be satisfied with a triple in 5 years?
Title: Re: BAC-WT - Bank of America Warrants
Post by: benchmark on December 19, 2011, 12:18:28 PM
Getting back to BAC, and focusing on the bigger picture.  It may take 2 years, 3 years, or even 5 years of (mostly pre-tax) earnings to build up to Basel III capital requirements and pay legal settlements over and above that which is current reserved.  Even if it takes 5 years, you end up with very well capitalized mega bank with $1.8 trl in assets earning 1%.  Even at modest 10X thats $180bln or over 3X todays market value.   Who wouldn't be satisfied with a triple in 5 years?

Agreed. I'm also looking at common and 2014 10 leap. Now that common has dropped below 5, i think it will probably go lower
Title: Re: BAC-WT - Bank of America Warrants
Post by: alertmeipp on December 19, 2011, 01:45:09 PM
The market is not doing any valuation right now.

I think ppl are getting pissed and just sell and move on.

As usual, I am fully invested and all I can do is suck it up at the moment.
Title: Re: BAC-WT - Bank of America Warrants
Post by: racemize on December 19, 2011, 01:51:59 PM
The market is not doing any valuation right now.

I think ppl are getting pissed and just sell and move on.

As usual, I am fully invested and all I can do is suck it up at the moment.

I'm pretty much with you there--I'm thinking of gathering up some cash reserves as the paychecks come in, but I keep finding things I like!
Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on December 19, 2011, 02:36:00 PM
The market is not doing any valuation right now.

I think ppl are getting pissed and just sell and move on.

As usual, I am fully invested and all I can do is suck it up at the moment.

I agree. The fear caused by the recency effect and uncertainty is enormous. Take BAC. How long was the stock priced under $5 in 08-09? Not even a month! Now the bank is in much better shape, dealing with the issues and getting more focused, .. How exactly is it going to get killed from major contagion from Europe? How is going to happen for C? Somehow Mr. Market thinks these banks deserve equally low or even lower valuations than their European peers that are often undercapitalized and have real threat of contagion.


And not buying BAC now because the $5 support is "broken"? I'd rather not gamble on wether an insanely cheap stock will sell off or not because of certain policies or because my technical chart says so, and just buy the damn thing. Maybe one can wait until he is certain the $3.xx bottom from 2009 will hold. After all, you were right from $15/10/8/6 to $5...
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on December 19, 2011, 02:36:00 PM
The market is not doing any valuation right now.

I think ppl are getting pissed and just sell and move on.

As usual, I am fully invested and all I can do is suck it up at the moment.

I'm pretty much with you there--I'm thinking of gathering up some cash reserves as the paychecks come in, but I keep finding things I like!


FWIW,  I think were in the midst of a robust tax loss selling season this year.  All of my large caps that are significantly lower this year are getting hammered some more.  Wfc, jpm, bac, and bby, which were already down alot have been shit kicked again.  Ge which has stayed in a range all year is still in that range.  There are no fundamental changes in the macro since January, April, or August.  In the meantime everyone of these companies is better off than a year ago.




Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on December 19, 2011, 02:39:55 PM
The market is not doing any valuation right now.

I think ppl are getting pissed and just sell and move on.

As usual, I am fully invested and all I can do is suck it up at the moment.

I agree. The fear caused by the recency effect and uncertainty is enormous. Take BAC. How long was the stock priced under $5 in 08-09? Not even a month! Now the bank is in much better shape, dealing with the issues and getting more focused, .. How exactly is it going to get killed from major
contagion from Europe? How is going to happen for C? Somehow these banks Mr. Market thinks
these banks deserve equally low or even lower valuations than their European peers that are often undercapitalized and have real threat of contagion.


And not buying BAC now because the $5 support is "broken"? I'd rather not gamble on wether an insanely cheap stock will sell off or not because of certain policies or because my technical chart says so, and just buy the damn thing. Maybe one can wait until he is certain the $3.xx bottom from 2009 will hold. After all, you were right from $15/10/8/6 to $5...

Amen Brother
Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on December 19, 2011, 02:44:32 PM
The market is not doing any valuation right now.

I think ppl are getting pissed and just sell and move on.

As usual, I am fully invested and all I can do is suck it up at the moment.

I'm pretty much with you there--I'm thinking of gathering up some cash reserves as the paychecks come in, but I keep finding things I like!


FWIW,  I think were in the midst of a robust tax loss selling season this year.  All of my large caps that are significantly lower this year are getting hammered some more.  Wfc, jpm, bac, and bby, which were already down alot have been shit kicked again.  Ge which has stayed in a range all year is still in that range.  There are no fundamental changes in the macro since January, April, or August.  In the meantime everyone of these companies is better off than a year ago.

I was wondering about that too. I've read somewhere that the impact from tax loss selling is actually a lot lower in a down market because there aren't much profits to offset. Makes sense. On the other hand this could just give people a good excuse to sell their biggest losers 'for free' so to speak. Making it easier to do something that can be emotionally difficult (selling big losers). They might also know they are acting irrational but are supported by rational tax decisions which makes it easier to cave in to the fear, maybe thinking they can get back in at better prices in January/February.

Just thinking out loud here. Zero experience with it as I live in Europe. Insight would be appreciated, not that it matters for the valuation of BAC or any other company.
Title: Re: BAC-WT - Bank of America Warrants
Post by: rranjan on December 19, 2011, 03:37:02 PM
actually the way this year played out enhanced tax loss selling. remember the first half was strong and lots of things went up. Also, high quality non financial stocks have done reasonably well this year, as have high quality bonds. looking at the tape today all the losers were down today. rimm fslr aig c bac glw gnw. don't know how long this will go on.

I think it is mainly tax loss issue when we are talking about already beaten up stocks going further down during the end of year. I don't make any investment decision based on these guesses though. I simply buy when I think they are cheap and sell when they reach near full value. I am finding plenty of cheap stuff right now so almost fully invested. I have been selling some in rally and then again buying back to reduce average cost of some holdings but more or less fully invested.

Title: Re: BAC-WT - Bank of America Warrants
Post by: vinod1 on December 19, 2011, 06:03:44 PM
The same could happen with their litigation reserve -- it could be some relatively small percentage only to grow by several multiples in a single (future) quarter.

Agreed.  BAC has made it clear they review inputs and refine and adjust these reserves as more information is known each quarter.  In some cases,  they have made no estimate at all as they deem the losses improbable or impossible to estimate.  If that changes, the litigation reserve would grow.

With BAC, I would not worry too much about +/- $10 billion in estimates especially if they add more to MOS.  :)

You have to remember that this is at this stage a self graded exam, where the penalty for being too strict with yourself is instant death (or its close parallel - severe dilution). BAC has good cover in GAAP rules for estimating contingent liabilities. It is very difficult to find fault with whatever their estimate was for this. So they refine the number gradually to catch up with the PTPP flow and without unduly hurting their capital ratios. This is what I would do and this is what I expect BAC to do as well.

Vinod

 

See this document for some context of securities class action settlements:

http://www.cornerstone.com/files/News/029b31a7-ff84-4000-b1ff-d177014ced27/Presentation/NewsAttachment/fd13e1e4-5564-4d46-86a3-882f232147a9/Cornerstone_Research_Settlements_2010_Analysis.pdf

Page 12 shows that Credit-Crisis-Related settlements in 2010 were around 2%-3% of estimated damages.

Thanks! It is good to know that the settlement % are rather low.
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on December 19, 2011, 06:04:49 PM
Getting back to BAC, and focusing on the bigger picture.  It may take 2 years, 3 years, or even 5 years of (mostly pre-tax) earnings to build up to Basel III capital requirements and pay legal settlements over and above that which is current reserved.  Even if it takes 5 years, you end up with very well capitalized mega bank with $1.8 trl in assets earning 1%.  Even at modest 10X thats $180bln or over 3X todays market value.   Who wouldn't be satisfied with a triple in 5 years?


Don't disagree.  But let's not pretend to analyze a maze with hidden chambers that the very best bank analysts can't navigate.

Let's just say: these are big banks, probably too big to fail.  They've been in the dumps before and come back.  I know there's a pony in there somewhere.  I'm willing to wait patiently until the pony comes out so I can take a ride.   8)
Title: Re: BAC-WT - Bank of America Warrants
Post by: txlaw on December 19, 2011, 06:23:38 PM
Wow, quite amazing to see BAC trading at below $5 today.

Just read a blog post about WEB's investment in BofA: http://blogs.wsj.com/deals/2011/12/19/warren-buffett-is-1-5-billion-underwater-on-his-bank-of-america-stock/

I argued when the preferred deal was done that it was at a below market rate because WEB believed that the common was worth at least $7.14 per share and probably substantially more than that.  If that is correct, then WEB ought to be buying at these levels, unless he thinks things have changed materially such that the IV of BAC is now substantially below the $7.14 figure.

Or I could have just been dead wrong.  It's possible that WEB really was interested only in an asymmetric bet that would be covered no matter what but that would have a lottery ticket-like optionality. 

I've been adding to my BAC-WT stake over the last few months, but it's been pretty painful to watch.
Title: Re: BAC-WT - Bank of America Warrants
Post by: value-is-what-you-get on December 19, 2011, 06:43:38 PM
Yeah I read that too - guy doesn't even have his facts straight.  Says BAC has to buy out WEB at a 5% premium "at any time" which sounds like WEB can call his money back tomorrow when in fact the preferreds he bought are locked in for 5 years and the premium is only triggered if and when BAC wants to by back "at any time".  I guess I'm just spoiled by the high quality of fact-based information I get from this board as opposed to the opinion shaping stuff the WSJ et al sees fit to hang their names on from time to time.  I like this kind of shoddy reporting whispering sweet nothings in Mr. Market's ear though!
Title: Re: BAC-WT - Bank of America Warrants
Post by: alertmeipp on December 19, 2011, 06:46:04 PM
The market is not doing any valuation right now.

I think ppl are getting pissed and just sell and move on.

As usual, I am fully invested and all I can do is suck it up at the moment.

I'm pretty much with you there--I'm thinking of gathering up some cash reserves as the paychecks come in, but I keep finding things I like!

I am in my mid 30 so one or two paycheck no longer has big impact to my book...
Title: Re: BAC-WT - Bank of America Warrants
Post by: alertmeipp on December 19, 2011, 06:57:11 PM

I've been adding to my BAC-WT stake over the last few months, but it's been pretty painful to watch.

Putting money to work in a down market is like that. The econ isn't that bad, if it doesn't not blow up - some of these purchases will turn be golden. If it blows up, it would still be but will definitely be longer time frame.

I am getting more woriedy about the ppl at the top of our governments, they seems clueless sometimes.
Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on December 20, 2011, 08:30:43 AM

And not buying BAC now because the $5 support is "broken"? I'd rather not gamble on wether an insanely cheap stock will sell off or not because of certain policies or because my technical chart says so, and just buy the damn thing. Maybe one can wait until he is certain the $3.xx bottom from 2009 will hold. After all, you were right from $15/10/8/6 to $5...


http://www.zerohedge.com/news/bank-america-drops-501-lowest-march-2009

Quote
As of minutes ago, BAC stock hit the nearly 3 year low value of $5.01 which immediately set off algorithmic defense programs, because as has been explained previously, should the stock trade under $5.00 during regular hours, instead of the After Hours session, when it hit $4.90 a few weeks ago, it will most likely set off numerous selling programs from plain vanilla funds which despite what pundits claims, have a hard floor of $5.00 (these are the same "pundits" who believe a downgrade of the EuropeAAAn club will have no impact on asset vallue) for held stocks.The result would be unpredictable so it is better to eat losses on algo all bid programs than to find out what would happen when the stock has  $4 handle.

Hm. Quite the impact...
I actually wished they were right once. Maybe we'll get lucky later on!


Btw, BAC warrants actually seem a lot cheaper now than they were before. The A warrants are at $2.03.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on December 20, 2011, 09:15:37 AM
Btw, BAC warrants actually seem a lot cheaper now than they were before. The A warrants are at $2.03.

Last summer when the stock was $8 the warrants were $3.62. 

Stock is down 38% since then and warrants would be $2.25 if they had declined by an equal percentage.

These warrants are weird.  They are supposed to be leverage but they have been trading in almost in equal percentage gains/losses as the common.
Title: Re: BAC-WT - Bank of America Warrants
Post by: txlaw on December 20, 2011, 09:21:54 AM
Wow, quite amazing to see BAC trading at below $5 today.

Just read a blog post about WEB's investment in BofA: http://blogs.wsj.com/deals/2011/12/19/warren-buffett-is-1-5-billion-underwater-on-his-bank-of-america-stock/

I argued when the preferred deal was done that it was at a below market rate because WEB believed that the common was worth at least $7.14 per share and probably substantially more than that.  If that is correct, then WEB ought to be buying at these levels, unless he thinks things have changed materially such that the IV of BAC is now substantially below the $7.14 figure.

Or I could have just been dead wrong.  It's possible that WEB really was interested only in an asymmetric bet that would be covered no matter what but that would have a lottery ticket-like optionality. 

I've been adding to my BAC-WT stake over the last few months, but it's been pretty painful to watch.

I would be surprised if he is buying bac common. he got the slug he wanted and the structure he wanted.

You might be right. 

I'm surprised there are no other deep pockets buying up the common.  I would've expected some of these sovereign wealth funds to put their dollars into BAC.  Maybe they're not because of the way they've been burned in the last couple of years.
Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on December 20, 2011, 09:31:52 AM
Btw, BAC warrants actually seem a lot cheaper now than they were before. The A warrants are at $2.03.

Last summer when the stock was $8 the warrants were $3.62. 

Stock is down 38% since then and warrants would be $2.25 if they had declined by an equal percentage.

These warrants are weird.  They are supposed to be leverage but they have been trading in almost in equal percentage gains/losses as the common.

Yes, leverage is very limited for the A warrants. Like 20-25% extra on normal upside at best I'd guess.

How about the B warrants? A lot more risk but at least there is real leverage. If the stock recovered to $15 in the next two years or something, those warrants are a 7/9-bagger based on discounted historical prices. Strike price is high (I bet Berkowitz would consider it doable) but the company has 7 years to recover and grow. Options probably provide the same upside tho, no view on that.

http://www.investorpoint.com/stock/BAC%252EWS%252EB-BANK%20OF%20AMERICA%20Corp.%20WARRANTS/chart/
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on December 20, 2011, 11:28:23 AM
Wow, quite amazing to see BAC trading at below $5 today.

Just read a blog post about WEB's investment in BofA: http://blogs.wsj.com/deals/2011/12/19/warren-buffett-is-1-5-billion-underwater-on-his-bank-of-america-stock/

I argued when the preferred deal was done that it was at a below market rate because WEB believed that the common was worth at least $7.14 per share and probably substantially more than that.  If that is correct, then WEB ought to be buying at these levels, unless he thinks things have changed materially such that the IV of BAC is now substantially below the $7.14 figure.

Or I could have just been dead wrong.  It's possible that WEB really was interested only in an asymmetric bet that would be covered no matter what but that would have a lottery ticket-like optionality. 

I've been adding to my BAC-WT stake over the last few months, but it's been pretty painful to watch.

I would be surprised if he is buying bac common. he got the slug he wanted and the structure he wanted.

You might be right. 

I'm surprised there are no other deep pockets buying up the common.  I would've expected some of these sovereign wealth funds to put their dollars into BAC.  Maybe they're not because of the way they've been burned in the last couple of years.

I think Korea has been buying BAC.
Title: Re: BAC-WT - Bank of America Warrants
Post by: hyten1 on December 20, 2011, 01:04:01 PM
eric what makes you think korea has been buying? just curious?
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on December 20, 2011, 01:07:44 PM
Korea Investment Corp has a new position as of 9/30/11

http://www.foxbusiness.com/industries/2011/09/22/korea-investment-corp-to-buy-more-bank-america-shares-reports/
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on December 21, 2011, 04:10:25 AM
I get gmail alerts for BAC;

There is a slew of articles about BAC breaking the "all important" $5 resistance barrier.  Now, I realize some funds may have to sell below $5 per share but this all seems sort of ludicrous.  The investor is truly an irrational beast. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on December 21, 2011, 02:00:45 PM
I get gmail alerts for BAC;

There is a slew of articles about BAC breaking the "all important" $5 resistance barrier.  Now, I realize some funds may have to sell below $5 per share but this all seems sort of ludicrous.  The investor is truly an irrational beast.

Look at BAC's chart for the last two days.  The spiky up action and the lack of similar spiky down action means that a major buyer has been supporting the stock above the $5.00 level.  We've started to nibble at the beast on the idea that there may be a pony in there somewhere.  :)
Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on December 21, 2011, 02:44:04 PM
I have no idea how you can determine that from a chart. I only see some spiky up action in the last half hour today, for the rest it seems normal. There are probably a lot of days you can find this pattern when a stock is going up?

The pony is almost a sure thing if you ask me. But if things turn out better than most expect, we'll get a full-scale petting zoo instead.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ubuy2wron on December 21, 2011, 03:26:52 PM
bac is it's own little island. it's decoupled from up moves in in the financials. it goes up less and down more. it's the most hated stock on the planet. yes even more than rimm.
peter  I find myself seldom agreeing with you but you are exactly on target with this comment. The hatred for BAC on zerohedge is palpable, they want it destroyed but then the zero hedge blog is largely constituted by investors who are the exact opposit of the regulars here.
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on December 22, 2011, 08:55:15 AM
I get gmail alerts for BAC;

There is a slew of articles about BAC breaking the "all important" $5 resistance barrier.  Now, I realize some funds may have to sell below $5 per share but this all seems sort of ludicrous.  The investor is truly an irrational beast.

Look at BAC's chart for the last two days.  The spiky up action and the lack of similar spiky down action means that a major buyer has been supporting the stock above the $5.00 level.  We've started to nibble at the beast on the idea that there may be a pony in there somewhere.  :)

What I mean by spiky price action is that frequently the stock price will plateau at a certain price, although not exactly.  When it does this, the fluctuations off the plateau are almost entirely up, rarely down.  I interpret this as meaning that one or more major buyers are taking most of the shares offered at each plateau.  Please note several of these plateaus with spiky up price action recently, as BAC continues to rise off these plateaus. 

Today's price action shows less of this pattern, meaning that that buyer(s) support appears less necessary to provide liquidity as the selling pressure near the $5.00 price that is necessary for institutional purchases may have abated.  :)
Title: Re: BAC-WT - Bank of America Warrants
Post by: leftcoast on December 22, 2011, 09:10:12 AM
Btw, BAC warrants actually seem a lot cheaper now than they were before. The A warrants are at $2.03.

Last summer when the stock was $8 the warrants were $3.62. 

Stock is down 38% since then and warrants would be $2.25 if they had declined by an equal percentage.

These warrants are weird.  They are supposed to be leverage but they have been trading in almost in equal percentage gains/losses as the common.

Strange divergence over the past few days:
(http://bigcharts.marketwatch.com/kaavio.Webhost/charts/big.chart?nosettings=1&symb=bacwsa&uf=0&type=2&size=2&sid=4553783&style=320&freq=1&startdate=9/19/2011&enddate=12/22/2011&rand=927506182&compidx=aaaaa%3a0&comp=bac&ma=0&maval=9&lf=1&lf2=0&lf3=0&height=335&width=579&mocktick=1)
Title: Re: BAC-WT - Bank of America Warrants
Post by: meiroy on December 23, 2011, 12:20:27 AM
Btw, BAC warrants actually seem a lot cheaper now than they were before. The A warrants are at $2.03.

Last summer when the stock was $8 the warrants were $3.62. 

Stock is down 38% since then and warrants would be $2.25 if they had declined by an equal percentage.

These warrants are weird.  They are supposed to be leverage but they have been trading in almost in equal percentage gains/losses as the common.

Strange divergence over the past few days:
(http://bigcharts.marketwatch.com/kaavio.Webhost/charts/big.chart?nosettings=1&symb=bacwsa&uf=0&type=2&size=2&sid=4553783&style=320&freq=1&startdate=9/19/2011&enddate=12/22/2011&rand=927506182&compidx=aaaaa%3a0&comp=bac&ma=0&maval=9&lf=1&lf2=0&lf3=0&height=335&width=579&mocktick=1)

also with the wfc warrants.
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on December 23, 2011, 05:40:37 PM
Btw, BAC warrants actually seem a lot cheaper now than they were before. The A warrants are at $2.03.

Last summer when the stock was $8 the warrants were $3.62. 

Stock is down 38% since then and warrants would be $2.25 if they had declined by an equal percentage.

These warrants are weird.  They are supposed to be leverage but they have been trading in almost in equal percentage gains/losses as the common.

Strange divergence over the past few days:
(http://bigcharts.marketwatch.com/kaavio.Webhost/charts/big.chart?nosettings=1&symb=bacwsa&uf=0&type=2&size=2&sid=4553783&style=320&freq=1&startdate=9/19/2011&enddate=12/22/2011&rand=927506182&compidx=aaaaa%3a0&comp=bac&ma=0&maval=9&lf=1&lf2=0&lf3=0&height=335&width=579&mocktick=1)

also with the wfc warrants.


It's a common phenomenon. When, a stock tanks the historical volatility and the implied volatility typically increase a lot.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on December 23, 2011, 06:58:50 PM
The AIG warrants don't suffer from the same thing.  They usually move about 2x the stock movement.
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on December 23, 2011, 08:23:41 PM
there was a big seller in the bac As on Thursday.

despite difference of opinions we are both buying!
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on December 24, 2011, 05:42:26 PM
there was a big seller in the bac As on Thursday.

Likely delta hedging.  They are too pricey in relation to the common.  :)
Title: Re: BAC-WT - Bank of America Warrants
Post by: meiroy on December 25, 2011, 09:26:40 PM
there was a big seller in the bac As on Thursday.

Likely delta hedging.  They are too pricey in relation to the common.  :)

Can you set a tax loss by switching from the warrants to the common?
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on December 26, 2011, 07:46:14 AM
there was a big seller in the bac As on Thursday.

Likely delta hedging.  They are too pricey in relation to the common.  :)

Can you set a tax loss by switching from the warrants to the common?

That would likely be a wash sale because warrants are considered to be a substantially similar security.
Title: Re: BAC-WT - Bank of America Warrants
Post by: meiroy on December 26, 2011, 05:57:29 PM
there was a big seller in the bac As on Thursday.

Likely delta hedging.  They are too pricey in relation to the common.  :)

Can you set a tax loss by switching from the warrants to the common?

the irs says you can if they are not substantially identical. and ask yourself this. is the warrant terms substantially identical to the common terms?


Following twacowfca's definition I got to this:

"Section 1091.-Loss from Wash Sales of Stock or Securities

 

26 CFR 1.1091-1: Losses from wash sales of stock or securities.

 

If an individual taxpayer, who is not a dealer in stocks or securities, sells common stock of a corporation at a loss and simultaneously purchases warrants for common stock of the same corporation, the loss is not allowable by reason of section 1091(a) of the Internal Revenue Code of 1954. If the taxpayer sells stock warrants of a corporation at a loss and simultaneously purchases common stock of the same corporation, the loss is allowable unless the relative values and price changes are so similar as to make the warrants fully convertible securities and therefore substantially identical with the shares of common stock.
....
(a) DISALLOWANCE OF LOSS DEDUCTION.
...
Where stock or securities substantially identical to stock or securities sold at a loss are acquired within a specified period, the words "substantially identical" indicate that something less than precise correspondence will suffice to make the transaction a wash sale. See Marie Hanlin et al., Executors v. Commissioner, 108 Fed. (2d) 429. Whether a stock warrant is substantially identical with the stock of the issuing corporation is dependent upon the facts of the particular case. If the warrant may be exercised only upon the payment of a substantial consideration, it may be true that a stock purchase warrant is not substantially identical with the stock of the issuing corporation. But it does not follow that in every instance a warrant could not be substantially identical with the underlying security to which it relates. A warrant may be traded at a price substantially equal to the current value of the underlying common stock and have all the earmarks of a fully convertible security and thus be considered substantially similar to the stock.
..."

So the answer is, it depends?

Key sentence: "If the warrant may be exercised only upon the payment of a substantial consideration, it may be true that a stock purchase warrant is not substantially identical with the stock of the issuing corporation."

The warrants indeed require substantial consideration to be exercised, therefore one might assume from this that the tax loss deduction is allowed.  What is your opinion?


Title: Re: BAC-WT - Bank of America Warrants
Post by: Kiltacular on December 27, 2011, 10:18:42 PM
meiroy,

I had looked into this issue previously but hadn't found the language you discuss.

After reading this, I would say that a very easy case could be made in this instance that give the current prices of the warrants, the common, and, importantly, the conversion price of the warrants, the securities are currently NOT substantially similar and a tax loss could be taken.

An alternative scenario that would probably prevent me from feeling this way would be, say, if the common was currently trading at 20 while the strike on the warrants was around 12.  Then, you'd be deep in the money.  Even then, you still quote the key section which might make the argument that they're still different pass muster.

Finally, even if you do this -- and it clearly isn't clear you can't -- you'd have to first be auditied before you'd even have to explain your position.  Based on the current prices / strikes, I feel the explanation would be simple.

Title: Re: BAC-WT - Bank of America Warrants
Post by: Arden on December 31, 2011, 05:01:06 AM
Do you by chance know what happens with the WFC or BAC warrants when the company gives out a dividend?

Does the dividend hurt the option holder? do they lower the strike price?
Title: Re: BAC-WT - Bank of America Warrants
Post by: Arden on December 31, 2011, 06:55:52 AM
Ok I found the prospectus, there is protection for WFC WT only for dividends more than 0.34 per quarter. I just hope they don't keep the dividend below it for too long on purpose.
Title: Re: BAC-WT - Bank of America Warrants
Post by: colinwalt on December 31, 2011, 09:11:14 AM
I didn't go and look for the prospectus, but I did find this:

http://seekingalpha.com/article/257763-tarp-warrants-hidden-value-among-the-mega-banks

BAC
BAC-WTA
Expiration: January 16, 2019
Strike: $13.30

Quarterly dividend threshold for strike readjustment: $0.01 Additionally, the exercise price of, and the number of shares of our common stock underlying, the warrants will not be adjusted for any regular quarterly cash dividends that are in the aggregate less than or equal to $0.01 per share of common stock, which is the amount of the last dividend per share declared prior to the date on which the warrants were originally issued to Treasury on January 16, 2009.

BAC-WTB
Expiration: Oct 28, 2018
Strike: $30.79

Additionally, the exercise price of, and the number of shares of our common stock underlying, the warrants will not be adjusted for any regular quarterly cash dividends that are in the aggregate less than or equal to $0.32 per share of common stock, which is the amount of the last dividend per share declared prior to the date on which the warrants were originally issued to Treasury on October 28, 2008.

More interesting stuff here:

http://caps.fool.com/blogs/tarp-warrantsdeal-or-no/441352
Title: Re: BAC-WT - Bank of America Warrants
Post by: Arden on January 01, 2012, 01:23:44 AM
It's really nice to see how well protected the warrants are -. The government really is no sucker.

It also says the warrant is protected from buybacks-  does anyone know what this means? Buybacks help the warrant, so why would it need protection from it?
Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on January 05, 2012, 08:22:57 AM
So... did Munger post something?  8)
Title: Re: BAC-WT - Bank of America Warrants
Post by: merkhet on January 05, 2012, 08:28:21 AM
BAC is above $6 a share for the first time in a while... -- is this allowed?   :D
Title: Re: BAC-WT - Bank of America Warrants
Post by: alertmeipp on January 05, 2012, 06:57:20 PM
remember when it's below 5, all funds must sell. they are buying back once it's above 5.01  ;)


just jokes.
Title: Re: BAC-WT - Bank of America Warrants
Post by: BargainValueHunter on January 11, 2012, 12:55:01 PM
"B" warrants exploded to the upside today (36%)

http://www.investorpoint.com/stock/BAC.WS.B-BANK%20OF%20AMERICA%20Corp.%20WARRANTS/

???
Title: Re: BAC-WT - Bank of America Warrants
Post by: leftcoast on January 11, 2012, 01:44:49 PM
"B" warrants exploded to the upside today (36%)

http://www.investorpoint.com/stock/BAC.WS.B-BANK%20OF%20AMERICA%20Corp.%20WARRANTS/

???

They're making up some lost ground:
(http://bigcharts.marketwatch.com/kaavio.Webhost/charts/big.chart?nosettings=1&symb=bacwsb&uf=0&type=2&size=2&sid=4553784&style=320&freq=1&startdate=9/1/2011&enddate=1/12/2012&rand=1666108629&compidx=aaaaa%3a0&comp=bacwsa%2c+bac&ma=0&maval=9&lf=1&lf2=0&lf3=0&height=335&width=579&mocktick=1)

As Ericopoloy said:
Quote
There's nothing quite like recovering lost ground and feeling like it's a gain.
Title: Re: BAC-WT - Bank of America Warrants
Post by: berkshiremystery on January 11, 2012, 01:52:36 PM
also neat to have a look at the credit default swaps for the major banks and brokers

cds rates are coming down a little in recent days, after the sharp run-up in the second half of 2011

U.S. Bank And Broker Default Risk
http://seekingalpha.com/article/319009-u-s-bank-and-broker-default-risk?source=yahoo (http://seekingalpha.com/article/319009-u-s-bank-and-broker-default-risk?source=yahoo)
Title: Re: BAC-WT - Bank of America Warrants
Post by: BargainValueHunter on January 11, 2012, 04:20:28 PM
"B" warrants exploded to the upside today (36%)

http://www.investorpoint.com/stock/BAC.WS.B-BANK%20OF%20AMERICA%20Corp.%20WARRANTS/

???

They're making up some lost ground:
(http://bigcharts.marketwatch.com/kaavio.Webhost/charts/big.chart?nosettings=1&symb=bacwsb&uf=0&type=2&size=2&sid=4553784&style=320&freq=1&startdate=9/1/2011&enddate=1/12/2012&rand=1666108629&compidx=aaaaa%3a0&comp=bacwsa%2c+bac&ma=0&maval=9&lf=1&lf2=0&lf3=0&height=335&width=579&mocktick=1)

As Ericopoloy said:
Quote
There's nothing quite like recovering lost ground and feeling like it's a gain.

So your saying that since a one day move hasn't completely made up a year of losses it is nothing to investigate?

Anyone who bought the B warrants recently couldn't care less about what happened last year. For them they are popping the champagne (o.k., maybe not but 30% up in a day ain't bad).
Title: Re: BAC-WT - Bank of America Warrants
Post by: leftcoast on January 11, 2012, 05:33:05 PM
So your saying that since a one day move hasn't completely made up a year of losses it is nothing to investigate?

Anyone who bought the B warrants recently couldn't care less about what happened last year. For them they are popping the champagne (o.k., maybe not but 30% up in a day ain't bad).

Just noting that the B warrants fell much farther than the A's and common, especially during the last 2 months of 2011 (they were down 90% by Dec). Now that BAC is recovering, I'm not surprised to see the B's rising faster. That, and the volatility premium is probably going up too, if you're pricing these like regular options.

I have no insight on why the B's bounced back so much today vs yesterday or next week, if that's what you're investigating. If there's a reason for that, I'm sure it would be interesting to hear about.
Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on February 01, 2012, 08:32:50 AM
sorry no link..From Reuters article with title "BofA selling three buildings in New York,Charlotte"

spokeswoman Kelli Raulerson, "Real estate ownership is not a core business for Bank of America," Raulerson said. "Therefore, we are currently reviewing our portfolio and making the decision to sell our ownership interest in certain properties."    
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on February 01, 2012, 08:39:13 AM
I like Moynihan. He continues to do what he has to do. Years of acquisition and merger without real integration must have left substantial underutilized or unnecessary resources.

sorry no link..From Reuters article with title "BofA selling three buildings in New York,Charlotte"

spokeswoman Kelli Raulerson, "Real estate ownership is not a core business for Bank of America," Raulerson said. "Therefore, we are currently reviewing our portfolio and making the decision to sell our ownership interest in certain properties."
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on February 01, 2012, 09:27:43 AM
Question:
What's a fair approximation of price per square foot.  Their total real estate holdings are worth $12.5 billion at $100 per square foot.


BofA’s 2010 annual report says the bank owned or leased 118.7 million square feet domestically and 6.9 million square feet in foreign countries.

http://www.bizjournals.com/charlotte/blog/bank_notes/2012/02/bank-of-america-to-sell-hearst-tower.html?ana=yfcpc&page=2
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on February 01, 2012, 09:34:23 AM
I take it this real estate has a low cost basis on BofA's balance sheet.  By selling it, they can monetize the DTA to build capital ratio for Basel III.
Title: Re: BAC-WT - Bank of America Warrants
Post by: OracleofCarolina on February 01, 2012, 09:51:12 AM
Here's the link
http://www.bizjournals.com/charlotte/blog/bank_notes/2012/02/bank-of-america-to-sell-hearst-tower.html?ana=yfcpc&page=all
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on February 01, 2012, 10:28:37 AM
Question:
What's a fair approximation of price per square foot.  Their total real estate holdings are worth $12.5 billion at $100 per square foot.


BofA’s 2010 annual report says the bank owned or leased 118.7 million square feet domestically and 6.9 million square feet in foreign countries.

http://www.bizjournals.com/charlotte/blog/bank_notes/2012/02/bank-of-america-to-sell-hearst-tower.html?ana=yfcpc&page=2

Do not count victory, a large part of those properties are leased.

A company that I own, Gramercy Capital (GKK), was a large leaser to Bank of America (Dana properties) and BAC paid very little because of a rent adjustment provisions that will shoot up in 2019. Those properties (downtown office buildings) are now owned by KBS.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on February 02, 2012, 08:06:57 AM
Well, it was roughly mid-February last year when Berkshire released their Dec 31st holdings.  I really think he topped up to a 15% (including warrants) BAC ownership.  Every now and then I need to make a prediction.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on February 03, 2012, 10:20:20 AM
Only another 92% gain to go from here to get back to the 52 week high.
Title: Re: BAC-WT - Bank of America Warrants
Post by: txlaw on February 03, 2012, 06:28:54 PM
Not a bad run so far. 

It will be interesting to see whether these sale-leaseback transactions and that Allstate ruling will cause more flip flops on BAC by market participants. 

My exposure to BAC is through the warrants and the 2014 LEAPS.  I was tempted to add more recently, but it's already a huge position for me.  Instead, I've started to establish a substantial position in the AIG warrants. 

Incidentally, people should check out the new Fairholme presentation on BAC that was posted on another thread.
Title: Re: BAC-WT - Bank of America Warrants
Post by: prunes on February 03, 2012, 08:26:16 PM
Sadly, I overweighted in BAC way too early, so when it fell to $5 I felt too overextended to buy more. I am still below my cost basis. Live and learn.
Title: Re: BAC-WT - Bank of America Warrants
Post by: sswan11 on February 03, 2012, 09:46:56 PM
What about quarterly earnings?  Article in WSJ about bank earnings at risk as reserve releases diminish.

http://online.wsj.com/article/SB10001424052970204662204577199252526660144.html?KEYWORDS=bank+reserves

http://seekingalpha.com/article/340081-the-bank-reserves-cookie-jar-is-close-to-empty
Title: Re: BAC-WT - Bank of America Warrants
Post by: treasurehunt on February 04, 2012, 03:18:07 PM
What about quarterly earnings?  Article in WSJ about bank earnings at risk as reserve releases diminish.

http://online.wsj.com/article/SB10001424052970204662204577199252526660144.html?KEYWORDS=bank+reserves

http://seekingalpha.com/article/340081-the-bank-reserves-cookie-jar-is-close-to-empty

I am not concerned. I value banks using my estimate of normalized earnings, and the assumption is that normalized provisions equal normalized charge-offs. Reserve releases are irrelevant to this valuation. Now there might be fluctuations in bank stock prices because reserve releases during some short time frame are much less than expected or something, but why should that be a big deal?

The thing to note is that current loan loss provisions are probably close to normalized losses for the big banks, in my opinion (losses are higher than normal, but provisions are less than losses). I don't think any big bank is provisioning much less than normalized losses. Reserve releases will go down over time, but so will losses. I think the net effect will be close to a wash, although there might be quarters where the lack of reserve releases has a negative effect on earnings. I don't see anything to worry about though.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on February 08, 2012, 12:41:58 PM
He rides a 15% Oakmark Select fund allocation in Washington Mutual completely into the ground.

Then in Q3 2011 he sells the fund out of BAC at prices that in his own words reflect only 1/3 to 1/4 of long term value.

http://blogs.barrons.com/focusonfunds/2012/02/08/oakmarks-nygren-bac-on-right-course-favors-mrk-bmy-vs-jnj/?mod=yahoobarrons

Title: Re: BAC-WT - Bank of America Warrants
Post by: Grenville on February 08, 2012, 12:54:28 PM
He rides a 15% Oakmark Select fund allocation in Washington Mutual completely into the ground.

Then in Q3 2011 he sells the fund out of BAC at prices that in his own words reflect only 1/3 to 1/4 of long term value.

http://blogs.barrons.com/focusonfunds/2012/02/08/oakmarks-nygren-bac-on-right-course-favors-mrk-bmy-vs-jnj/?mod=yahoobarrons

unfortunately once upon a time I was an investor with Nygren in Oakmark Select, and I watched what happened with Wamu and got out before it was too late.
Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on February 22, 2012, 01:44:39 AM
From Oct 2011 FT Lex

Goldman Sachs v BofA: and the winner is ... 
Quick as a flash: if you had to choose between owning Goldman Sachs or Bank of America shares for the next five years, which would you pick? Over the past half a decade the former would have been the right answer by a considerable margin (minus 45 per cent versus minus 90 per cent), although nobody would have enjoyed winning the bet. Most snap decisions would probably fall the same way today. Goldman is still considered the premier Wall Street institution, while BofA lurches between nasty rumours and panic sell-offs....


http://www.ft.com/intl/cms/s/3/f8db4eba-f9a0-11e0-a805-00144feab49a.html#axzz1n07jOlTZ
Title: Re: BAC-WT - Bank of America Warrants
Post by: onyx1 on February 23, 2012, 03:03:04 PM
The 10-K is out.  It's long and will take a while to get through it all, but the first page I turn to is regulatory capital.  I look for changes in wording to get a clue as to how management expects capital to evolve.  Here is a key paragraph and how it has changed over the last three quarters.

June 30, 2011:
“We have made the implementation and migration of the new capital rules our primary capital related priority. We intend to continue to build capital through retaining earnings, actively reducing legacy asset portfolios and implementing other non- dilutive capital related initiatives including focusing on the reduction of higher risk- weighted assets. As the new rules come into effect, we currently anticipate that we will be in excess of the minimum required ratios without needing to raise new equity capital.

September 30, 2011:
“Preparing for the implementation of the new capital rules is a top priority. We intend to continue to build capital through retaining earnings, actively reducing legacy asset portfolios and implementing other capital related initiatives, including focusing on reducing both higher risk- weighted assets and assets currently deducted, or expected to be deducted under Basel III, from capital.”

Note new capital raising exclusion is missing, and I believe this contributed to the weakness in BAC shares last fall.

December 31, 2011:
“Preparing for the implementation of the new capital rules is a top strategic priority, and we expect to comply with the final rules when issued and effective. We intend to continue to build capital through retaining earnings, actively reducing legacy asset portfolios and implementing other capital related initiatives, including focusing on reducing both higher risk- weighted assets and assets currently deducted, or expected to be deducted under Basel III, from capital.  We expect non- core asset sales to play a less prominent role in our capital strategy in future periods.”


If BAC expected the need to raise capital it would be a disclosure item and would likely show up here.  Except for the addition of the last sentence, nothing new is disclosed and that is a positive.  But  they have hedged themselves and appear to hinge the outcome of raising capital the Fed's acceptance of their analytical models, as disclosed by the by addition of these two new paragraphs:

"On January 5, 2012, we submitted a capital plan to the Federal Reserve consistent with the proposed rules. The capital plan includes the ICAAP and related results, analysis and support for the capital guidelines, and planned capital actions. The ICAAP incorporates capital forecasts, stress test results, economic capital, qualitative risk assessments and assessment of regulatory changes, all of which influence the capital adequacy assessment.
   
Given that the U.S. regulatory agencies have issued neither proposed rulemaking nor supervisory guidance on Basel III, significant uncertainty exists regarding the eventual impacts of Basel III on U.S. financial institutions, including us.  These regulatory changes also require approval by the U.S. regulatory agencies of analytical models used as part of our capital measurement and assessment, especially in the case of more complex models. If these more complex models are not approved, it could require financial institutions to hold additional capital, which in some cases could be significant."

All eyes now turn to the fed.

Sorry for the long post.



Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on February 23, 2012, 03:23:09 PM
BofA Halts Routing New Mortgages to Fannie Mae

http://www.bloomberg.com/news/2012-02-23/bofa-halts-routing-new-mortgages-to-fannie-mae.html

PS: good analysis onyx, thanks
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on February 23, 2012, 05:08:46 PM
Nice analysis Onyx - I learned something of real value.
Title: Re: BAC-WT - Bank of America Warrants
Post by: enoch01 on February 23, 2012, 06:09:54 PM
BofA Halts Routing New Mortgages to Fannie Mae

http://www.bloomberg.com/news/2012-02-23/bofa-halts-routing-new-mortgages-to-fannie-mae.html


I'm not sure what to make of this.  I assumed it had been more profitable to lay these off on the GSE's rather than keep them on balance sheet.  Unless they sell these all to Freddie Mac, won't they be making less on this business now?
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on February 23, 2012, 06:48:26 PM
Nice analysis Onyx - I learned something of real value.

Yes.  Good sleuthing.  :)
Title: Re: BAC-WT - Bank of America Warrants
Post by: rranjan on February 23, 2012, 06:53:57 PM
BofA Halts Routing New Mortgages to Fannie Mae

http://www.bloomberg.com/news/2012-02-23/bofa-halts-routing-new-mortgages-to-fannie-mae.html


I'm not sure what to make of this.  I assumed it had been more profitable to lay these off on the GSE's rather than keep them on balance sheet.  Unless they sell these all to Freddie Mac, won't they be making less on this business now?

I was thinking about the same so I will try...

Historically the average difference between Key interest rate on mortgage-backed securities and 30 years mortgage loan has been around 0.50%. Now days, it is running close to 1%. If spread returns to their historical average then 30 years loan rate might drop to 3.40%. I doubt that it will happen though.

60% of loans are originated by 5 big banks and they claim that the cost of originating  loans have gone up due to regulations. Fannie and Freddie have gotten tougher over the documentations which pushes the cost up. Fees charged to lenders by Fredie and Fannie are going to increase this year as well.

So If I am BAC then I might be tempted to keep 1% spread to myself as long as tight underwriting is practiced. Yes, it will tie up the capital and BAC can write less business but major portion of spread will drop to their bottom-line.

Just my thoughts. I don't have any special insight on this.
Title: Re: BAC-WT - Bank of America Warrants
Post by: thomcapital on February 23, 2012, 07:36:01 PM
Hello all,

I've been trying to wrap my head around the risk/reward of the warrants vs. the common. How do you assess future expected volatility and its impact on the warrants? While doing some big picture sensitivity analysis (comparing warrant values using B-S at WolframAlpha, assuming 72 months to expiration, BAC @ $14); owning the stock outright will outperform the warrant if you assume volatility drops to 45%, but the warrant outperforms if volatility is maintained at 60%...

Thanks in advance!
Title: Re: BAC-WT - Bank of America Warrants
Post by: sswan11 on February 23, 2012, 10:20:26 PM
Credit Suisse analysis of 28% (proposed) vs 35% corporate tax rate on deferred tax asset:


■  GAAP Implications.  A lower U.S. corporate tax rate would cause Bank of
America to take a write-down on a  portion of its DTA’s of $32Bn. We
estimate DTA’s of $15-19Bn that may be subject to a potential impairment
from the lower corporate rate (although likely to be less by the time the new
rate is enacted in 2013). This base excludes estimated foreign tax DTAs,
state taxes and credit carryforwards ($0-4.5bn) which would not face DTA
impairment (because not based on the U.S. corporate tax rate). We estimate
that a corporate tax rate to 28% would imply a write-down of about $3.0-
3.9Bn or a negative 2-3% to tangible book value...The shares would trade at 0.4x book value and 0.7x tangible book value (vs. 0.4x BV and 0.6x TBV currently).
Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on February 24, 2012, 01:38:22 AM
Credit Suisse analysis of 28% (proposed) vs 35% corporate tax rate on deferred tax asset:


■  GAAP Implications.  A lower U.S. corporate tax rate would cause Bank of
America to take a write-down on a  portion of its DTA’s of $32Bn. We
estimate DTA’s of $15-19Bn that may be subject to a potential impairment
from the lower corporate rate (although likely to be less by the time the new
rate is enacted in 2013). This base excludes estimated foreign tax DTAs,
state taxes and credit carryforwards ($0-4.5bn) which would not face DTA
impairment (because not based on the U.S. corporate tax rate). We estimate
that a corporate tax rate to 28% would imply a write-down of about $3.0-
3.9Bn or a negative 2-3% to tangible book value...The shares would trade at 0.4x book value and 0.7x tangible book value (vs. 0.4x BV and 0.6x TBV currently).

Page 17 of 10K...
Changes in U.S. and non-U.S. tax and other laws and regulations could adversely affect our financial condition and results of operations.
The U.S. Congress and the Administration have signaled growing interest in reforming the U.S. corporate income tax. While the timing of such reform is unclear, possible approaches include lowering the 35 percent corporate tax rate, modifying the taxation of income earned outside of the U.S. and limiting or eliminating various other deductions, tax credits and/or other tax preferences. It is not possible at this time to quantify either the one-time impact from remeasuring deferred tax assets and liabilities that might result upon enactment of tax reform or the ongoing impact reform might have on income tax expense, but either of these impacts could adversely affect our financial condition and results of operations.
In addition, the income from certain non--U.S. subsidiaries has not been subject to U.S. income tax as a result of long-standing deferral provisions applicable to income that is derived in the active conduct of a banking and financing business (active finance income). The U.S. Congress has extended the application of these deferral provisions several times, most recently in 2010. These provisions now are set to expire for taxable years beginning on or after January 1, 2012. Absent an extension of these provisions, active financing income earned by certain non-U.S. subsidiaries will generally be subject to a tax provision that considers incremental U.S. income tax. The impact of the expiration of these provisions would depend upon the amount, composition and geographic mix of our future earnings.
Other countries have also proposed and, in some cases, adopted certain regulatory changes targeted at financial institutions or that otherwise affect us. The EU has adopted increased capital requirements and the U.K. has (i) increased liquidity requirements for local financial institutions, including regulated U.K. subsidiaries of non-U.K. bank holding companies and other financial institutions as well as branches of non-U.K. banks located in the U.K; (ii) adopted a Bank Tax Levy which will apply to the aggregate balance sheet of branches and subsidiaries of non-U.K. banks and banking groups operating in the U.K.; and (iii) proposed the creation and production of recovery and resolution plans by U.K.-regulated entities.
On July 19, 2011, the U.K. 2011 Finance Bill was enacted which reduced the corporate income tax rate one percent to 26 percent beginning on April 1, 2011, and then to 25 percent effective April 1, 2012. These rate reductions will favorably affect income tax expense on future U.K. earnings but also required us to remeasure our U.K. net deferred tax assets using the lower tax rates. The income tax benefit for 2011 included a $782 million charge for the remeasurement, substantially all of which was recorded in GBAM. If corporate income tax rates were to be reduced to 23 percent by 2014 as suggested in U.K. Treasury announcements and assuming no change in the deferred tax asset balance, a charge to income tax expense of approximately $400 million for each one percent reduction in the rate would result in each period of enactment (for a total of approximately $800 million). We are also monitoring other international legislative proposals that could materially impact us, such as changes to corporate income tax laws. Currently, in the U.K., net operating loss carryforwards (NOLs) have an indefinite life. Were the U.K.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on February 24, 2012, 03:26:03 AM
rranjan, that seems reasonable.  There is no reason that BAC has to keep everything on its books.  They can lay it off to other third parties.  If the GSEs are making it too onerous 3rd parties are likely to pop up to buy.  Or alternatively, keeping prime and near prime mortgages will give them a very healthy earnings stream going forward.  They do have alot of workers to redeploy as the runoff of bad loans winds down.  This is what banks used to do and they were quite successful at it.
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on February 24, 2012, 10:35:34 AM
http://www.bloomberg.com/news/2012-02-23/bofa-halts-routing-new-mortgages-to-fannie-mae.html


The bank is cutting off Fannie Mae from loans starting this month, except for modifications and some refinancings, because of the U.S.-controlled company’s stance on repurchases, Bank of America said yesterday in a filing. The firms are in talks to end the disagreement, the bank said.

Chief Executive Officer Brian T. Moynihan is seeking to limit additional costs from faulty loans after the 2008 takeover of Countrywide Financial Corp. helped saddle the Charlotte, North Carolina-based bank with about $42 billion in expenses. In November, the lender said it refused to cooperate with what it deemed a new Fannie Mae policy that required loan repurchases if an insurer drops coverage.
“Bank of America may be saying, ‘It’s too risky to do business with Fannie’ because of what it considers to be a stricter loan-recourse policy,” said David Felt, a former deputy general counsel at the Federal Housing Finance Agency, Fannie Mae’s regulator. “I don’t know if Fannie really cares; it’s the largest mortgage purchaser in the world, and if Bank of America turns to Freddie Mac instead, that’s like a different subsidiary of the same company.”

Bank of America will sell new loans to Freddie Mac, the other U.S.-controlled mortgage-finance firm, and Ginnie Mae, a company that packages loans backed by the Federal Housing Administration, said a person with direct knowledge of the lender’s plans. The lender also may keep some loans on the balance sheet, said the person, who spoke on condition of anonymity because the plans aren’t public.

Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on February 27, 2012, 09:01:57 AM
On Bank of America Buffett says the bank's deposit base is a "huge asset" and CEO Brian Moynihan has done exactly what he would do.

Nothing on the video or transcript but Moynihan starting to get the recognition he deserves. Plus some other Buffet stuff,
http://www.cnbc.com/id/46538421
Title: Re: BAC-WT - Bank of America Warrants
Post by: onyx1 on February 27, 2012, 12:27:01 PM
BofA $8.5 bln deal returned to NY state court


    Feb 27 (Reuters) - Bank of America Corp's proposed
$8.5 billion settlement with investors in mortgage-backed
securities should be returned to New York state court for
review, a U.S. appeals court ruled Monday.   
    The decision by the 2nd U.S. Circuit Court of Appeals is a
win for Bank of America, which is seeking approval to settle
claims by investors in 530 mortgage securitization trusts with
$174 billion of unpaid principal. 
     The ruling reverses an October decision by U.S. District
Judge William Pauley taking the case from state court. 


Ontime ruling promised by the court, and a big win for BAC.  This should make it easier to finalize the BNY-Mellon settlement, which will in turn justify much (if not all) of BAC's remaining non-GSE R&W reserves. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: Grenville on February 27, 2012, 12:46:37 PM
BofA $8.5 bln deal returned to NY state court


    Feb 27 (Reuters) - Bank of America Corp's proposed
$8.5 billion settlement with investors in mortgage-backed
securities should be returned to New York state court for
review, a U.S. appeals court ruled Monday.   
    The decision by the 2nd U.S. Circuit Court of Appeals is a
win for Bank of America, which is seeking approval to settle
claims by investors in 530 mortgage securitization trusts with
$174 billion of unpaid principal. 
     The ruling reverses an October decision by U.S. District
Judge William Pauley taking the case from state court. 


Ontime ruling promised by the court, and a big win for BAC.  This should make it easier to finalize the BNY-Mellon settlement, which will in turn justify much (if not all) of BAC's remaining non-GSE R&W reserves.

Thanks for posting. Here is the link on Bloomberg
http://www.bloomberg.com/news/2012-02-27/bofa-mortgage-bond-settlement-returned-to-n-y-state-court.html (http://www.bloomberg.com/news/2012-02-27/bofa-mortgage-bond-settlement-returned-to-n-y-state-court.html)
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on February 27, 2012, 04:50:48 PM
Alison Frankel from Reuters is doing a great job following the legal proceedings.

http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=40610&terms=@ReutersTopicCodes+CONTAINS+'ANV' (http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=40610&terms=@ReutersTopicCodes+CONTAINS+'ANV')

Walnut counsel Owen Cyrulnik of Grais & Ellworth declined my request for comment. A BNY Mellon spokesman declined Reuters' request. (The bank is represented in the BofA case by Mayer Brown and DLA Piper.) BofA's spokesman offered a statement: "Bank of America's chief interest has been that the proposed settlement be considered and eventually approved by a court of unquestionable jurisdiction," he said. "We are gratified that the matter has been resolved on appeal. We believe the trustee acted reasonably in entering into the settlement agreement and we look forward to completing judicial proceedings to approve the decision." BofA counsel Mirvis of Wachtell sent an email statement: "Yippee."
Title: Re: BAC-WT - Bank of America Warrants
Post by: Grenville on February 27, 2012, 05:27:13 PM
Alison Frankel from Reuters is doing a great job following the legal proceedings.

http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=40610&terms=@ReutersTopicCodes+CONTAINS+'ANV' (http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=40610&terms=@ReutersTopicCodes+CONTAINS+'ANV')

Walnut counsel Owen Cyrulnik of Grais & Ellworth declined my request for comment. A BNY Mellon spokesman declined Reuters' request. (The bank is represented in the BofA case by Mayer Brown and DLA Piper.) BofA's spokesman offered a statement: "Bank of America's chief interest has been that the proposed settlement be considered and eventually approved by a court of unquestionable jurisdiction," he said. "We are gratified that the matter has been resolved on appeal. We believe the trustee acted reasonably in entering into the settlement agreement and we look forward to completing judicial proceedings to approve the decision." BofA counsel Mirvis of Wachtell sent an email statement: "Yippee."

Thanks! I've enjoyed her posts. If any of you want to follow her twitter account, I just figured out how to do so in google reader. Here are the instructions:

"For what it’s worth, Google Reader users can add Twitter feeds by clicking “Browse for stuff > Search > Stay connected to friends and family”, filling in the feed name and selecting Twitter in the combo box."
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on February 28, 2012, 09:16:02 AM
Another good  legal blog, that has been a BAC skeptic, but still declares the recent news a victory.


http://www.subprimeshakeout.com/2012/02/breaking-bony-bofa-settlement-to-return-to-state-court-after-second-circuit-reverses-pauley.html

Regardless of the propriety of this decision, and barring a Hail Mary appeal to the Supreme Court by Walnut Place, it’s clear that this decision is a big win for Bank of America and other institutions with large exposure to legacy private label mortgage issuance.  State court provides a much more favorable forum to the banks, as previously discussed, as it ensures that Article 77′s shortened procedures and deferential standard of review will be applied.  New York Supreme Court Judge Barbara Kapnick will still have her hands full determining how to deal with the impressive slate of intervenors opposed to the settlement, including the New York Attorney General Schneiderman, when ruling on the scope and timing of discovery.  But BoNY and BofA can rest assured that any decision approving the settlement will ultimately bind all bondholders in the affected trusts.
Title: Re: BAC-WT - Bank of America Warrants
Post by: sswan11 on February 29, 2012, 11:56:29 AM
Merrill Lynch comments on AG settlement:

we do not view the settlement as a game-changer for the
housing market or the economy. In our view, the healing of the housing market
will continue to be slow and bumpy

Speeding up foreclosures
The AG settlement does three things, in our view. First, it resolves the outstanding
legal liability for servicer processing errors, otherwise known as “robo-signing.”
Second, it also allocates money to principal reduction. Third, it puts in place
guidelines for servicing delinquent loans. For example, it clarifies how a servicer
must communicate with a borrower before foreclosing.
In our home price model, created with Chris Flanagan MBS/ABS Strategist and
the securitized products research team, we assumed the settlement would be
reached early this year. This is a key reason we have expected foreclosure
speeds to pick up this year and next. In our baseline forecast, we assume 1.8
million distressed mortgages will be liquidated this year and 2.1 million next year.
This is up from 1.5 million in 2011 (Chart 1). This is the crucial factor for our
forecast for home prices to fall through this year before bottoming in early 2013 as
liquidations peak. We are on track with our forecast and look for prices to fall 7%
from 3Q11. We forecast the real recovery will start in 2014, and the bounce, when
it comes, could be strong.

The “transfer” to borrowers
A lot of the press reports have taken a very narrow view of the impact on GDP
from the agreement. They note that the total of about $40bn (assuming the
smaller bank agreement is also completed) could be as much as a 0.25%
stimulus to the economy. We disagree. It is important to recognize that the
payments are a transfer from banks to state governments and households.
Therefore we think it likely that bank profitability could be affected and that banks
would be encouraged to seek other sources of revenue, such as raising fees and
interest overall spending to the extent that the receivers of the transfer have a higher
“marginal propensity to consume (MPC)” the monies than the payers. In our view,
the net effect of this transfer will be a stimulus to GDP of less than 0.1% spread
over three years.

Neither a lender nor a borrower be
It is also important to recognize that credit to the household sector will likely
remain tight for the foreseeable future. The AG settlement only helps reduce one
kind of risk for banks. Lending to the household sector has become risky for
banks. If a loan goes bad, the bank could face considerable legal and reputational
risk. As a result, lending standards for mortgage loans have remained
exceptionally tight

Mortgage lending is particularly risky. In some states it now takes more than three
years to repossess the loan and during that period many homeowners do not pay
their mortgage. This “squatters rent” amounts to a transfer payment from the
mortgage holders to the delinquent homeowner of about $50bn per year. The
harder and more expensive it is to repossess homes, the less willing lenders will
likely be to extend credit. Confidence in the home as collateral has been reduced,
in our view. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on March 01, 2012, 09:13:52 AM
Pricing power. As a shareholder, one of the few times that I've liked the banks finding ways to raise fees or price out marginal customers. Banking is not a bad business if you don't do stupid things.

http://online.wsj.com/article/SB10001424052970204571404577253742237347180.html

Bank of America Corp. is working on sweeping changes that would require many users of basic checking accounts to pay a monthly fee unless they agree to bank online, buy more products or maintain certain balances.

The plan by the nation's second-largest bank by assets is the latest sign of stresses in the banking industry at a time of low interest rates, slow economic growth and new rules limiting many types of service charges. Many other big banks, including J.P. Morgan Chase & Co.—the nation's largest—and Wells Fargo & Co., have rolled out plans that aim to raise fee revenue or push customers to do more business with the bank.

Those efforts are tricky, because they risk upsetting the banks' best customers or drawing fire from politicians. Bank of America retreated last fall from a new $5 debit-card charge following a customer revolt and a wave of criticism.

Title: Re: BAC-WT - Bank of America Warrants
Post by: misterstockwell on March 01, 2012, 09:48:23 AM
There is no pricing power in banking. Raise my fees and I have 8,000 other choices
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on March 01, 2012, 10:01:30 AM
There is no pricing power in banking. Raise my fees and I have 8,000 other choices

Not that easy, there are switching costs and, where it matters, banking is a regulated oligopoly with barriers to entry. And when your raw material (interest rate) is under pressure, the ability to find other sources of income and transfer pricing to customers is a good indication of pricing power. Banks worldwide have had very stable and growing pre-provision earnings in all types of environments (with the exception of deflation).

For example, American credit unions beat large banks on pricing on several products, but do they really matter (ref: additional factors to consider) ?

http://stock.ly/16rdtj
 (http://stock.ly/16rdtj)
I am not saying this is See's Candy but talk to an auto parts company what happens when steel prices go up. THAT is a commodity business with zero pricing power.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 01, 2012, 10:14:56 AM
The kind of people who complain about these $5 a month fees probably spend $200+ per month on their Comcast bill and regularly pay $5 for a pay per view movie.

Why not instead bitch about how the bailout of the banks actually netted you a profit?
Title: Re: BAC-WT - Bank of America Warrants
Post by: Dazel on March 01, 2012, 10:25:15 AM
Bac wants their unprofitable customers to leave....those that are profitable will not likely pay the fee...they want to cross sell...ie mortagage, investment account...no fee...
Bring your investment account in and we will waive the fee...etc...everyone said the durbin law was short sighted and they are right...no banks want the customers that do not want to pay it and the debit fee covered off this fee...millions will go with out checking accounts because of stupid law makers...it is not just bac...
Unintended consequences...bac and the other banks have an excuse...the new law..

Dazel.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 01, 2012, 10:26:59 AM
Bac wants their unprofitable customers to leave....those that are profitable will not likely pay the fee...they want to cross sell...ie mortagage, investment account...no fee...
Bring your investment account in and we will waive the fee...etc...everyone said the durbin law was short sighted and they are right...no banks want the customers that do not want to pay it and the debit fee covered off this fee...millions will go with out checking accounts because of stupid law makers...it is not just bac...
Unintended consequences...bac and the other banks have an excuse...the new law..

Dazel.

In summary:

You need to make a purchase if you come in to use the restroom.
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on March 01, 2012, 10:47:12 AM
In summary:

You need to make a purchase if you come in to use the restroom.

Man, they just charged me extra in McDonalds for switching to water instead of Coke in my combo.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 01, 2012, 10:55:11 AM
In summary:

You need to make a purchase if you come in to use the restroom.

Man, they just charged me extra in McDonalds for switching to water instead of Coke in my combo.

What!  You mean you have to pay money for food???  That's exploitation, I mean you are going to DIE if you don't get that basic service.  What's next, are we going to have to pay for checking accounts too? 
Title: Re: BAC-WT - Bank of America Warrants
Post by: onyx1 on March 01, 2012, 11:06:11 AM
In summary:

You need to make a purchase if you come in to use the restroom.

Man, they just charged me extra in McDonalds for switching to water instead of Coke in my combo.

What!  You mean you have to pay money for food???  That's exploitation, I mean you are going to DIE if you don't get that basic service.  What's next, are we going to have to pay for checking accounts too?

Haha, very Funny! 
Sadly, America is becoming a country of entitlement.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 01, 2012, 11:09:07 AM
Where did this guy come from?

Time to unload Bank of America:
http://www.marketwatch.com/story/time-to-unload-bank-of-america-2012-02-29

He writes:
eco­nomic earn­ings fell $10 bil­lion to -$46.6 bil­lion in 2011 from -$36.6 bil­lion in 2010

At $8.12/share, the cur­rent val­u­a­tion of BAC implies 20% com­pounded annual rev­enue growth for 18 years
Wow, really?

Then today he reiterates that the bank is desperate (uses the fee hike as an excuse to put out the second bearish report in two days):
http://www.marketwatch.com/story/raising-fees-at-bofa-is-a-desperate-move-2012-03-01?siteid=yhoof2

Title: Re: BAC-WT - Bank of America Warrants
Post by: misterstockwell on March 01, 2012, 11:10:30 AM
I could get in my car right now and find 50 different banks in a half hour. No problem. A great many of them would PAY me to move my deposits to their bank. I get those offers all the time in the mail. There is no cost involved in switching banks. You can profit on the switch. I don't see the stickiness, and I do see my clients leaving their bank all the time when they pimp them with fees. There is no reason to pay for banking.
Title: Re: BAC-WT - Bank of America Warrants
Post by: rmitz on March 01, 2012, 11:21:35 AM
What!  You mean you have to pay money for food???  That's exploitation, I mean you are going to DIE if you don't get that basic service.  What's next, are we going to have to pay for checking accounts too?

Actually, that's pretty accurate, since coca-cola doesn't really qualify very well as food.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Hester on March 01, 2012, 11:32:43 AM
http://www.youtube.com/watch?v=Hjqy2lJ5yoU
Title: Re: BAC-WT - Bank of America Warrants
Post by: Santayana on March 01, 2012, 11:45:26 AM
I could get in my car right now and find 50 different banks in a half hour. No problem. A great many of them would PAY me to move my deposits to their bank. I get those offers all the time in the mail. There is no cost involved in switching banks. You can profit on the switch. I don't see the stickiness, and I do see my clients leaving their bank all the time when they pimp them with fees. There is no reason to pay for banking.

I'm guessing that you have a lot more leverage in switching banks than many people do, specifically those that can't keep a balance above a couple of hundred dollars.     And really, 50 banks in 30 minutes?  Where do you live?   It seems like anyplace that dense, traffic would keep you from getting around so fast.

I completely understand why they would want to raise fees, and don't have a problem with it.  But we should recognize that it is a legitimate hardship for many people out there given the near necessity of having a bank account these days.
Title: Re: BAC-WT - Bank of America Warrants
Post by: misterstockwell on March 01, 2012, 12:09:07 PM
I should up my number. Bing maps with my zip code and the word "bank" got me 25 different companies within 15 minute drive before I stopped counting. That doesn't include thrifts or credit unions. That is in typical suburbia.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Junto on March 01, 2012, 12:09:12 PM
I could get in my car right now and find 50 different banks in a half hour. No problem. A great many of them would PAY me to move my deposits to their bank. I get those offers all the time in the mail. There is no cost involved in switching banks. You can profit on the switch. I don't see the stickiness, and I do see my clients leaving their bank all the time when they pimp them with fees. There is no reason to pay for banking.

I'm guessing that you have a lot more leverage in switching banks than many people do, specifically those that can't keep a balance above a couple of hundred dollars.     And really, 50 banks in 30 minutes?  Where do you live?   It seems like anyplace that dense, traffic would keep you from getting around so fast.

I completely understand why they would want to raise fees, and don't have a problem with it.  But we should recognize that it is a legitimate hardship for many people out there given the near necessity of having a bank account these days.

It is driving the growth in prepaid cards for the people who don't qualify for bank accounts. Effectively, prepaids can do everything a checking account can do these days (direct deposit, atm access, online viewing); they just are more expensive and don't allow overdrafts. If bank's are hampered on their ability to limit risk with overdrafts among other things, lower dollar accounts should be pushed out like any other non-performing/higher risk customer at a non-financial institution.

I think misterstockwell is embellishing a little bit there. The facts remain that most people do not change banks regularly and the people that do are not the ideal customer of the bank. There is always some risk but with margins on the low dollar deposit accounts decreasing with low interest rates, low debit card fees, etc... these accounts may be attractive to other banks or credit unions.

BAC is trying to focus on its core customer base and not being all things to all people.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 01, 2012, 12:34:50 PM
I should up my number. Bing maps with my zip code and the word "bank" got me 25 different companies within 15 minute drive before I stopped counting. That doesn't include thrifts or credit unions. That is in typical suburbia.

How many of them pay more on deposits than BofA?

If you tell me "most of them", then it undermines your argument that there is no pricing power in banking.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Santayana on March 01, 2012, 12:52:54 PM
I should up my number. Bing maps with my zip code and the word "bank" got me 25 different companies within 15 minute drive before I stopped counting. That doesn't include thrifts or credit unions. That is in typical suburbia.

Are you sure you're not counting multiple branches of the same bank?   Or that your suburbia is really typical?
Title: Re: BAC-WT - Bank of America Warrants
Post by: misterstockwell on March 01, 2012, 01:38:41 PM
I have no idea what they pay on deposits.

I was counting unique bank companies, not branches. I am not sure about other suburbs, but it is typical for this area  ;D
Title: Re: BAC-WT - Bank of America Warrants
Post by: onyx1 on March 01, 2012, 02:46:50 PM
Sen. Richard Durbin (D. IL) sounds none too pleased to pick up this morning’s Wall Street Journal and read that Bank of America is nearing the end of tests that might implement new fee structures for many checking-account customers.

Durbin, an important senator for the banking world and critic of the biggest banks, took issues with the bank’s efforts to restructure the basic checking account relationship.

“Here we go again,” Durbin said in a statement. “Four months to the day after Bank of America rolled back plans to squeeze their customers instead of serving them, they are at it again. This brazen return to new monthly fees is a challenge that cannot go unanswered.”

http://blogs.wsj.com/deals/2012/03/01/bofas-fee-plan-durbin-will-have-none-of-it/

Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on March 01, 2012, 03:02:24 PM
Jeez, If you hold any account in Canada that does transactions you need to keep a minimum amount or pay a fee beyond a certain number of transactions.  It has always been thus for checking type accounts. 

There are switching costs to changing banks that are somewhat intangible:
1) Adjusting automatic withdrawal plans.
2) Stress
3) Ending up with different accounts for different things (confusion).
4) convenience - as in what you are used to.  I know I can go to that ATM because it is near where I buy my groceries, and smokes. People like routine.
5) Convenience - bundling
6) convenience - people want stuff they hate dealing with to be easy to do - how else can you explain the Trillions in mutual funds that cant beat any index fund.

People are creatures of habit.  This is what Buffett knows. 

Mrstockwell, when did you last take one of these competitors up on their offers? 
Title: Re: BAC-WT - Bank of America Warrants
Post by: hyten1 on March 01, 2012, 03:26:16 PM
strange i actually think switching for banks  is not very high but not trivial either

i guess it depends on what type of accounts and how many accounts you have.

i would tend to change my behavior first before i decide to switch bank

i live in manhattan there are many choice

but the hassle or switching is pretty high.

maybe its just me, i am lazy
Title: Re: BAC-WT - Bank of America Warrants
Post by: hyten1 on March 01, 2012, 03:29:19 PM
for me the bank i use raise their minimum etc and started charging recently if you don't

i simplely raise the amount to meet the minimum etc.

unless bank did something extremely diff i won't be switching, or some other bank that is offering something considerably better
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on March 01, 2012, 04:07:39 PM
strange i actually think switching for banks  is not very high but not trivial either

i guess it depends on what type of accounts and how many accounts you have.

i would tend to change my behavior first before i decide to switch bank

i live in manhattan there are many choice

but the hassle or switching is pretty high.

maybe its just me, i am lazy


I just changed my behaviour and keep my accounts above the 1500 threshold most of the time. 

I dont equate hassle avoidance with laziness.  In this day and age all of us need to run some of our lives on autopilot.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 01, 2012, 04:48:30 PM
I have only ever had one account -- opened in 1984 with Wells Fargo.  I've since lived in six different cities in three different states.  I've never had trouble finding a branch near where I live.

And they don't charge me any fees to have my account.  Why would I ever leave for a local bank that won't exist in my next city?

Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 01, 2012, 04:55:35 PM
Sen. Richard Durbin (D. IL) sounds none too pleased to pick up this morning’s Wall Street Journal and read that Bank of America is nearing the end of tests that might implement new fee structures for many checking-account customers.

Durbin, an important senator for the banking world and critic of the biggest banks, took issues with the bank’s efforts to restructure the basic checking account relationship.

“Here we go again,” Durbin said in a statement. “Four months to the day after Bank of America rolled back plans to squeeze their customers instead of serving them, they are at it again. This brazen return to new monthly fees is a challenge that cannot go unanswered.”

http://blogs.wsj.com/deals/2012/03/01/bofas-fee-plan-durbin-will-have-none-of-it/


The strange thing about this is we're talking about accounts that actually cost the bank money.  It's like they (Durbin and others) are trying to argue that banking is an essential utility, yet if you don't pay your water bill the municipality shuts it off.  If you don't pay your electric bill you are shut off.  So is it a utility or isn't it, and why can't BofA behave like one and ask people to pay for their service?
Title: Re: BAC-WT - Bank of America Warrants
Post by: alertmeipp on March 01, 2012, 05:04:10 PM
because wallstreet = evil & bank = wallstreet.
Title: Re: BAC-WT - Bank of America Warrants
Post by: JSArbitrage on March 01, 2012, 06:19:22 PM
Sen. Richard Durbin (D. IL) sounds none too pleased to pick up this morning’s Wall Street Journal and read that Bank of America is nearing the end of tests that might implement new fee structures for many checking-account customers.

Durbin, an important senator for the banking world and critic of the biggest banks, took issues with the bank’s efforts to restructure the basic checking account relationship.

“Here we go again,” Durbin said in a statement. “Four months to the day after Bank of America rolled back plans to squeeze their customers instead of serving them, they are at it again. This brazen return to new monthly fees is a challenge that cannot go unanswered.”

http://blogs.wsj.com/deals/2012/03/01/bofas-fee-plan-durbin-will-have-none-of-it/


The strange thing about this is we're talking about accounts that actually cost the bank money.  It's like they (Durbin and others) are trying to argue that banking is an essential utility, yet if you don't pay your water bill the municipality shuts it off.  If you don't pay your electric bill you are shut off.  So is it a utility or isn't it, and why can't BofA behave like one and ask people to pay for their service?

Bank of America customers are doing BoA a favor.  They are technically creditors; they have loaned the bank money.  Are you suggesting we should actually PAY for the "privilege" of loaning a bank money? The first bank to charge people fees just to have an account will lose big time. 

It's so dumb.  Just like the $5 fee was dumb. If a bank can't make money borrowing for free then they don't belong in business. 

And the idea that small accounts should be charged because they are just too small to be profitable is short-term thinking.  I have a Wells Fargo account because my parents banked there and I opened my first account with my birthday money.  I probably had sub $750  in my account for a decade.

If they had charged me money, I would have gone elsewhere.  And they wouldn't have my much larger account today including credit cards and CDs.  They wouldn't have my fiance's account. 

I double dare the first bank to make that move. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 01, 2012, 06:37:08 PM
Sen. Richard Durbin (D. IL) sounds none too pleased to pick up this morning’s Wall Street Journal and read that Bank of America is nearing the end of tests that might implement new fee structures for many checking-account customers.

Durbin, an important senator for the banking world and critic of the biggest banks, took issues with the bank’s efforts to restructure the basic checking account relationship.

“Here we go again,” Durbin said in a statement. “Four months to the day after Bank of America rolled back plans to squeeze their customers instead of serving them, they are at it again. This brazen return to new monthly fees is a challenge that cannot go unanswered.”

http://blogs.wsj.com/deals/2012/03/01/bofas-fee-plan-durbin-will-have-none-of-it/


The strange thing about this is we're talking about accounts that actually cost the bank money.  It's like they (Durbin and others) are trying to argue that banking is an essential utility, yet if you don't pay your water bill the municipality shuts it off.  If you don't pay your electric bill you are shut off.  So is it a utility or isn't it, and why can't BofA behave like one and ask people to pay for their service?

Bank of America customers are doing BoA a favor.  They are technically creditors; they have loaned the bank money.  Are you suggesting we should actually PAY for the "privilege" of loaning a bank money? The first bank to charge people fees just to have an account will lose big time. 

It's so dumb.  Just like the $5 fee was dumb. If a bank can't make money borrowing for free then they don't belong in business. 

And the idea that small accounts should be charged because they are just too small to be profitable is short-term thinking.  I have a Wells Fargo account because my parents banked there and I opened my first account with my birthday money.  I probably had sub $750  in my account for a decade.

If they had charged me money, I would have gone elsewhere.  And they wouldn't have my much larger account today including credit cards and CDs.  They wouldn't have my fiance's account. 

I double dare the first bank to make that move.

Might I ask if you are in your 20s?  The term "free checking" is used because there was a time when it wasn't free.

You really think they are going to make money on an account balance of $100 when you use their ATM for free, take up time at the teller window, and get all those statements mailed to you?

First there were upfront fees, then "hidden fees" replaced them (the dawn of free checking), and now hidden fees are being reigned in by government.  So a new era of upfront fees is born.

My account with Wells Fargo initially had a fee for my checking account -- then it was eliminated when I added more services, like direct deposit, or perhaps it was a larger account balance.  I don't remember when.  But yes there was a time in the 1980s/1990s when my monthly fee was eliminated for my checking account.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 01, 2012, 06:45:44 PM
Bank of America customers are doing BoA a favor.  They are technically creditors; they have loaned the bank money.  Are you suggesting we should actually PAY for the "privilege" of loaning a bank money? The first bank to charge people fees just to have an account will lose big time. 

Actually the customers who make money for the bank for the reason you describe are not going to be charged anything.  The deposit has to be of a large enough size before it becomes a profitable "loan" to the bank -- they have overhead costs. 

I could loan you $50 for free interest rate and it would be a "favor" to you, but then what if I asked you to mail me a monthly statement and used up so much of your time on the phone and knocking on your door every day that you just figured it wasn't really a "free" loan anymore.

Title: Re: BAC-WT - Bank of America Warrants
Post by: rranjan on March 01, 2012, 07:17:18 PM
One form or another, the banks are going to collect fee. Earlier it was hidden but due to regulations now it will be more visible. Banks don't want to have too many small accounts even though some of the smaller accounts might become profitable in future. I don't know if it's true but JPM said any account less than 100K is not profitable,

http://www.bloomberg.com/news/2012-02-28/jpmorgan-views-clients-with-less-than-100-000-to-invest-as-unprofitable.html

Now, any bank will have tons of accounts less than 100K? It's true that some of them might use other services and some of them might have more than 100K in future. But majority of them will remain less than 100K in size and not use any other services as well. Banks are better off by letting go these customers. Yes, they might lose some future profitable accounts but over all they are still better off by not keeping these unprofitable accounts.

I don't know if 100K is right figure here. We can use 30K or 50K figure but the argument is still same. Personally, I am never going to keep 100K in bank account. I will always be unprofitable customer if this figure is correct.
Title: Re: BAC-WT - Bank of America Warrants
Post by: bargainman on March 01, 2012, 08:13:50 PM
I tend to agree with Eric.  Banks have overhead and they do provide a service which costs money.  How much does a customer get?  ATM access anywhere in the country and probably a lot of the world,  monthly statements, secure web access, teller service at actual brick and mortar bank locations throughout the country, safety of storage of the cash, among other things I'm sure.  Try to get those things storing the case under your mattress.  Of course there is a delicate balance here between having enough of a deposit base and making sure every single one of those customers is profitable. 

In an odd way it reminds me of the internet age 'freemium' 'model.  Most web services have probably 100+ free users for every paid user.  That can work if the cost of each incremental user is minimal.  Then they work at conversion of those free users into paid users.  Similar to the Wellsfargo cross sell model I think.  Get an unprofitable small time checking account user, sell them a credit card..  get them to open a brokerage account, get them to do a home mortgage loan, home line of equity etc.  You need the 'free user' base to sell into, up to a point.  The question with the banks is, what are their big fixed costs?  Probably the branches for one.  What is the incremental cost of each 'free' customer?  And how many 'free' customers do you need to drive enough traffic to the 'paid/higher value' services?

I'm sure they model this all the time..
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 01, 2012, 08:36:40 PM
I might be more inclined to bank with BofA if their lines are empty at the tellers.  Getting rid of unprofitable customers might add to my convenience and increase the experience of the paying customers.  But I'm happy with Wells right now.

Anyhow cutting staff of 30,000 (New-BAC initiative) might mean that the mix of customers needs to shift as well.

There might also exist a class of customers that keeps an account open at a few different banks just to avoid ATM fees -- he can have a Wells, BofA, and Chase account with $500 in each.  This way he can always find an ATM without getting charged.

I also wonder if they had to issue those 400m shares in December as a result of the $5 debit fee falling through -- the fee might have been a way of filling in a hole before submitting to the new stress test. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: misterstockwell on March 01, 2012, 08:47:32 PM
I've been with the same local bank for 8 years and have never paid a single fee. Before that, I went through 6 banks that got gobbled up, with the new(bigger) owners contacting me to introduce me to their new fees, and me moving my deposits. Two of the six I owned stock in. One was a mutual company that IPO'd. Totally painless to move banks. They are not doing anyone a favor by taking your money. They take it in, pay you little to none, loan it out 10X with a net interest margin. Fees are icing on the cake for them. If higher fees are the only way they can grow profits, then they suck. If they don't want small accounts, then get rid of them. Set a limit on account size vs. attacking them with fees until they leave. How could BAC possibly think this is a good move? Is there anyone there with any common sense?
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 01, 2012, 08:48:30 PM
And the idea that small accounts should be charged because they are just too small to be profitable is short-term thinking.  I have a Wells Fargo account because my parents banked there and I opened my first account with my birthday money.  I probably had sub $750  in my account for a decade.

If they had charged me money, I would have gone elsewhere.  And they wouldn't have my much larger account today including credit cards and CDs.  They wouldn't have my fiance's account. 

I double dare the first bank to make that move.


— Since November, Wells Fargo has charged $15 a month for some checking accounts unless customers have three accounts with the bank, maintain a minimum balance of $7,500 or have a Wells Fargo mortgage.


http://finance.yahoo.com/news/even-backlash-banks-quietly-pursuing-225535347.html
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 01, 2012, 09:22:48 PM
I've been with the same local bank for 8 years and have never paid a single fee.

Alright, now is there a Wells Fargo in your area with customers walking in and out the door? 

If there is, then we are settled that there is in fact pricing power in banking.  You have a zero-fee bank in your area, yet Wells Fargo's customers would rather keep paying fees than move their relationship.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on March 02, 2012, 03:25:34 AM
No offense to anyone, but this argument is sort of meaningless.

I only need BAC stock to return to value.  Say, about $20 by January 2014 to be my biggest all time hit.   It will easily make it into the mid teens soon enough.  For the long term I can only exercise a small number of the calls I have.
Title: Re: BAC-WT - Bank of America Warrants
Post by: misterstockwell on March 02, 2012, 06:09:01 AM
I've been with the same local bank for 8 years and have never paid a single fee.

Alright, now is there a Wells Fargo in your area with customers walking in and out the door? 

If there is, then we are settled that there is in fact pricing power in banking.  You have a zero-fee bank in your area, yet Wells Fargo's customers would rather keep paying fees than move their relationship.

Nope. Nearest Wells Fargo is an hour away. They must not be able to compete.
Title: Re: BAC-WT - Bank of America Warrants
Post by: JSArbitrage on March 02, 2012, 07:09:17 AM
Sen. Richard Durbin (D. IL) sounds none too pleased to pick up this morning’s Wall Street Journal and read that Bank of America is nearing the end of tests that might implement new fee structures for many checking-account customers.

Durbin, an important senator for the banking world and critic of the biggest banks, took issues with the bank’s efforts to restructure the basic checking account relationship.

“Here we go again,” Durbin said in a statement. “Four months to the day after Bank of America rolled back plans to squeeze their customers instead of serving them, they are at it again. This brazen return to new monthly fees is a challenge that cannot go unanswered.”

http://blogs.wsj.com/deals/2012/03/01/bofas-fee-plan-durbin-will-have-none-of-it/


The strange thing about this is we're talking about accounts that actually cost the bank money.  It's like they (Durbin and others) are trying to argue that banking is an essential utility, yet if you don't pay your water bill the municipality shuts it off.  If you don't pay your electric bill you are shut off.  So is it a utility or isn't it, and why can't BofA behave like one and ask people to pay for their service?

Bank of America customers are doing BoA a favor.  They are technically creditors; they have loaned the bank money.  Are you suggesting we should actually PAY for the "privilege" of loaning a bank money? The first bank to charge people fees just to have an account will lose big time. 

It's so dumb.  Just like the $5 fee was dumb. If a bank can't make money borrowing for free then they don't belong in business. 

And the idea that small accounts should be charged because they are just too small to be profitable is short-term thinking.  I have a Wells Fargo account because my parents banked there and I opened my first account with my birthday money.  I probably had sub $750  in my account for a decade.

If they had charged me money, I would have gone elsewhere.  And they wouldn't have my much larger account today including credit cards and CDs.  They wouldn't have my fiance's account. 

I double dare the first bank to make that move.

Might I ask if you are in your 20s?  The term "free checking" is used because there was a time when it wasn't free.

You really think they are going to make money on an account balance of $100 when you use their ATM for free, take up time at the teller window, and get all those statements mailed to you?

First there were upfront fees, then "hidden fees" replaced them (the dawn of free checking), and now hidden fees are being reigned in by government.  So a new era of upfront fees is born.

My account with Wells Fargo initially had a fee for my checking account -- then it was eliminated when I added more services, like direct deposit, or perhaps it was a larger account balance.  I don't remember when.  But yes there was a time in the 1980s/1990s when my monthly fee was eliminated for my checking account.

Yes, I am 29.  May I ask how old you are? Because I think like most young people, I haven't been to my bank's ATM, teller window or had a statement mailed to me in easily over a year.  I do cash bank at the grocery store so I don't have to pay fees.

Firm down analysis is bad anaylsis IMO.  You simply say, "well, they used to charge fees, so they can do it again."  You think the music industry can go back to putting one good single on an album and then charging $20 for it? They wish they could.

Banks do not have pricing power because there are too many substitutes.  I have a broker account with Fidelity and they are FDIC-insured, have debit cards, credit cards (with 2% cash bank too), I can deposit checks by taking a picture on my phone, etc.  Tell me again why I should pay for Wells Fargo?

It doesn't matter if they used to charge fees in the 1980's.  That's irrelevant.  It doesn't matter if they have overhead or have to pay for a physical location every 2 blocks.  That's irrelevant too and, quite frankly, that's not my problem.  It's theirs.

Between FDIC-insured brokerage accounts, internet banks, and credit unions, I'll never have to pay a fee.  But these banks aren't dumb; they'll test fees here and there but they won't roll out anything significant.  They have the ability to do so unless they want to go the way of Borders v. Amazon.

Consumers of my age group of vicious.  I was looking for a computer monitor recently and I was able to read reviews, mind my model number I wanted and get it for the lowest possible price.  I have no loyalty other than to the lowest possible price.

Banks wants to try to impose fees on my generation? Good luck with that. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 02, 2012, 07:33:11 AM
Tell me again why I should pay for Wells Fargo?

Wells Fargo is already charging for checking if you have no meaningful relationship with them.  Just like they did before when I was watching movies on VHS.

I'm 39 in a bit over a month.


Title: Re: BAC-WT - Bank of America Warrants
Post by: misterstockwell on March 02, 2012, 07:53:03 AM
 
Yes, I am 29.  May I ask how old you are? Because I think like most young people, I haven't been to my bank's ATM, teller window or had a statement mailed to me in easily over a year.  I do cash bank at the grocery store so I don't have to pay fees.

Firm down analysis is bad anaylsis IMO.  You simply say, "well, they used to charge fees, so they can do it again."  You think the music industry can go back to putting one good single on an album and then charging $20 for it? They wish they could.

Banks do not have pricing power because there are too many substitutes.  I have a broker account with Fidelity and they are FDIC-insured, have debit cards, credit cards (with 2% cash bank too), I can deposit checks by taking a picture on my phone, etc.  Tell me again why I should pay for Wells Fargo?

It doesn't matter if they used to charge fees in the 1980's.  That's irrelevant.  It doesn't matter if they have overhead or have to pay for a physical location every 2 blocks.  That's irrelevant too and, quite frankly, that's not my problem.  It's theirs.

Between FDIC-insured brokerage accounts, internet banks, and credit unions, I'll never have to pay a fee.  But these banks aren't dumb; they'll test fees here and there but they won't roll out anything significant.  They have the ability to do so unless they want to go the way of Borders v. Amazon.

Consumers of my age group of vicious.  I was looking for a computer monitor recently and I was able to read reviews, mind my model number I wanted and get it for the lowest possible price.  I have no loyalty other than to the lowest possible price.

Banks wants to try to impose fees on my generation? Good luck with that.

I'm 48 JS, and my story is the same as yours.  It's not just your generation that has all these options, and utilizes them!
Title: Re: BAC-WT - Bank of America Warrants
Post by: moore_capital54 on March 02, 2012, 08:11:07 AM
Sen. Richard Durbin (D. IL) sounds none too pleased to pick up this morning’s Wall Street Journal and read that Bank of America is nearing the end of tests that might implement new fee structures for many checking-account customers.

Durbin, an important senator for the banking world and critic of the biggest banks, took issues with the bank’s efforts to restructure the basic checking account relationship.

“Here we go again,” Durbin said in a statement. “Four months to the day after Bank of America rolled back plans to squeeze their customers instead of serving them, they are at it again. This brazen return to new monthly fees is a challenge that cannot go unanswered.”

http://blogs.wsj.com/deals/2012/03/01/bofas-fee-plan-durbin-will-have-none-of-it/


The strange thing about this is we're talking about accounts that actually cost the bank money.  It's like they (Durbin and others) are trying to argue that banking is an essential utility, yet if you don't pay your water bill the municipality shuts it off.  If you don't pay your electric bill you are shut off.  So is it a utility or isn't it, and why can't BofA behave like one and ask people to pay for their service?

Bank of America customers are doing BoA a favor.  They are technically creditors; they have loaned the bank money.  Are you suggesting we should actually PAY for the "privilege" of loaning a bank money? The first bank to charge people fees just to have an account will lose big time. 

It's so dumb.  Just like the $5 fee was dumb. If a bank can't make money borrowing for free then they don't belong in business. 

And the idea that small accounts should be charged because they are just too small to be profitable is short-term thinking.  I have a Wells Fargo account because my parents banked there and I opened my first account with my birthday money.  I probably had sub $750  in my account for a decade.

If they had charged me money, I would have gone elsewhere.  And they wouldn't have my much larger account today including credit cards and CDs.  They wouldn't have my fiance's account. 

I double dare the first bank to make that move.

Might I ask if you are in your 20s?  The term "free checking" is used because there was a time when it wasn't free.

You really think they are going to make money on an account balance of $100 when you use their ATM for free, take up time at the teller window, and get all those statements mailed to you?

First there were upfront fees, then "hidden fees" replaced them (the dawn of free checking), and now hidden fees are being reigned in by government.  So a new era of upfront fees is born.

My account with Wells Fargo initially had a fee for my checking account -- then it was eliminated when I added more services, like direct deposit, or perhaps it was a larger account balance.  I don't remember when.  But yes there was a time in the 1980s/1990s when my monthly fee was eliminated for my checking account.

Yes, I am 29.  May I ask how old you are? Because I think like most young people, I haven't been to my bank's ATM, teller window or had a statement mailed to me in easily over a year.  I do cash bank at the grocery store so I don't have to pay fees.

Firm down analysis is bad anaylsis IMO.  You simply say, "well, they used to charge fees, so they can do it again."  You think the music industry can go back to putting one good single on an album and then charging $20 for it? They wish they could.

Banks do not have pricing power because there are too many substitutes.  I have a broker account with Fidelity and they are FDIC-insured, have debit cards, credit cards (with 2% cash bank too), I can deposit checks by taking a picture on my phone, etc.  Tell me again why I should pay for Wells Fargo?

It doesn't matter if they used to charge fees in the 1980's.  That's irrelevant.  It doesn't matter if they have overhead or have to pay for a physical location every 2 blocks.  That's irrelevant too and, quite frankly, that's not my problem.  It's theirs.

Between FDIC-insured brokerage accounts, internet banks, and credit unions, I'll never have to pay a fee.  But these banks aren't dumb; they'll test fees here and there but they won't roll out anything significant.  They have the ability to do so unless they want to go the way of Borders v. Amazon.

Consumers of my age group of vicious.  I was looking for a computer monitor recently and I was able to read reviews, mind my model number I wanted and get it for the lowest possible price.  I have no loyalty other than to the lowest possible price.

Banks wants to try to impose fees on my generation? Good luck with that.

JS, One thing you may be overlooking with your viewpoint is that everyone in your generation has a service-industry based job. You are obviously well educated and have a career where you most likely provide a service from an office environment and then get paid electronically. As you mentioned, you in fact have no need for a physical bank but you represent the minority in the economy and it has nothing to do with your age group.

The reason banks like Wells and BAC have branches every few blocks is that they were borne out of necessity and they provide invaluable services to their customers who have non-service jobs. Most of the economy that is. And even the youngest generation will require a way to physically deposit their checks, cash, withdraw funds, and speak to their local banker about refinancing their home, or business.

The banking model works and is very profitable, these branches have dual mandates as marketing centres in addition to the actual services they provide.

Your post indicates some disruptive trend on the cusp of banking. Personally, I don't see it. When it comes to people's pocketbooks they will always act the same. I have yet to meet a wealthy individual who does not own at least 1 Safety deposit box for example....

The only fundamental difference I see in banking moving forward is the amount of regulatory oversight and whether these banks are allowed to become profit machines again, or are simply led towards being utility type businesses. Time will tell...

Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on March 02, 2012, 08:25:45 AM
For those of you that think that there is a disruption on the making in banking. That branches are obsolete. That shadow banks, like mutual funds and discounting brokerages, are anything new (how fast people forget "breaking the buck" and eTrade problems). You might want to watch this excellent presentation by the unique Richard Davis from US Bancorp.

http://variantperceptions.wordpress.com/2010/09/14/charting-banking-xx-short-history-of-the-last-25-years/
 (http://variantperceptions.wordpress.com/2010/09/14/charting-banking-xx-short-history-of-the-last-25-years/)

Title: Re: BAC-WT - Bank of America Warrants
Post by: onyx1 on March 02, 2012, 08:38:46 AM
Banks have overhead and they do provide a service which costs money.  How much does a customer get?  ATM access anywhere in the country and probably a lot of the world,  monthly statements, secure web access, teller service at actual brick and mortar bank locations throughout the country, safety of storage of the cash, among other things I'm sure. 

+1

For me, I would also add:
Notary Service.
Customer parking in a great location in my home town.  (I use it even when I don't go into the branch)
Most critically though is online banking.  I took me hours to load in all my regular payee's and I have no desire to do that again. 

They could raise fees on me and I still wouldn't switch. (Psst...don't tell them!)
Title: Re: BAC-WT - Bank of America Warrants
Post by: JSArbitrage on March 02, 2012, 08:46:55 AM
Sen. Richard Durbin (D. IL) sounds none too pleased to pick up this morning’s Wall Street Journal and read that Bank of America is nearing the end of tests that might implement new fee structures for many checking-account customers.

Durbin, an important senator for the banking world and critic of the biggest banks, took issues with the bank’s efforts to restructure the basic checking account relationship.

“Here we go again,” Durbin said in a statement. “Four months to the day after Bank of America rolled back plans to squeeze their customers instead of serving them, they are at it again. This brazen return to new monthly fees is a challenge that cannot go unanswered.”

http://blogs.wsj.com/deals/2012/03/01/bofas-fee-plan-durbin-will-have-none-of-it/


The strange thing about this is we're talking about accounts that actually cost the bank money.  It's like they (Durbin and others) are trying to argue that banking is an essential utility, yet if you don't pay your water bill the municipality shuts it off.  If you don't pay your electric bill you are shut off.  So is it a utility or isn't it, and why can't BofA behave like one and ask people to pay for their service?

Bank of America customers are doing BoA a favor.  They are technically creditors; they have loaned the bank money.  Are you suggesting we should actually PAY for the "privilege" of loaning a bank money? The first bank to charge people fees just to have an account will lose big time. 

It's so dumb.  Just like the $5 fee was dumb. If a bank can't make money borrowing for free then they don't belong in business. 

And the idea that small accounts should be charged because they are just too small to be profitable is short-term thinking.  I have a Wells Fargo account because my parents banked there and I opened my first account with my birthday money.  I probably had sub $750  in my account for a decade.

If they had charged me money, I would have gone elsewhere.  And they wouldn't have my much larger account today including credit cards and CDs.  They wouldn't have my fiance's account. 

I double dare the first bank to make that move.

Might I ask if you are in your 20s?  The term "free checking" is used because there was a time when it wasn't free.

You really think they are going to make money on an account balance of $100 when you use their ATM for free, take up time at the teller window, and get all those statements mailed to you?

First there were upfront fees, then "hidden fees" replaced them (the dawn of free checking), and now hidden fees are being reigned in by government.  So a new era of upfront fees is born.

My account with Wells Fargo initially had a fee for my checking account -- then it was eliminated when I added more services, like direct deposit, or perhaps it was a larger account balance.  I don't remember when.  But yes there was a time in the 1980s/1990s when my monthly fee was eliminated for my checking account.

Yes, I am 29.  May I ask how old you are? Because I think like most young people, I haven't been to my bank's ATM, teller window or had a statement mailed to me in easily over a year.  I do cash bank at the grocery store so I don't have to pay fees.

Firm down analysis is bad anaylsis IMO.  You simply say, "well, they used to charge fees, so they can do it again."  You think the music industry can go back to putting one good single on an album and then charging $20 for it? They wish they could.

Banks do not have pricing power because there are too many substitutes.  I have a broker account with Fidelity and they are FDIC-insured, have debit cards, credit cards (with 2% cash bank too), I can deposit checks by taking a picture on my phone, etc.  Tell me again why I should pay for Wells Fargo?

It doesn't matter if they used to charge fees in the 1980's.  That's irrelevant.  It doesn't matter if they have overhead or have to pay for a physical location every 2 blocks.  That's irrelevant too and, quite frankly, that's not my problem.  It's theirs.

Between FDIC-insured brokerage accounts, internet banks, and credit unions, I'll never have to pay a fee.  But these banks aren't dumb; they'll test fees here and there but they won't roll out anything significant.  They have the ability to do so unless they want to go the way of Borders v. Amazon.

Consumers of my age group of vicious.  I was looking for a computer monitor recently and I was able to read reviews, mind my model number I wanted and get it for the lowest possible price.  I have no loyalty other than to the lowest possible price.

Banks wants to try to impose fees on my generation? Good luck with that.

JS, One thing you may be overlooking with your viewpoint is that everyone in your generation has a service-industry based job. You are obviously well educated and have a career where you most likely provide a service from an office environment and then get paid electronically. As you mentioned, you in fact have no need for a physical bank but you represent the minority in the economy and it has nothing to do with your age group.

The reason banks like Wells and BAC have branches every few blocks is that they were borne out of necessity and they provide invaluable services to their customers who have non-service jobs. Most of the economy that is. And even the youngest generation will require a way to physically deposit their checks, cash, withdraw funds, and speak to their local banker about refinancing their home, or business.

The banking model works and is very profitable, these branches have dual mandates as marketing centres in addition to the actual services they provide.

Your post indicates some disruptive trend on the cusp of banking. Personally, I don't see it. When it comes to people's pocketbooks they will always act the same. I have yet to meet a wealthy individual who does not own at least 1 Safety deposit box for example....

The only fundamental difference I see in banking moving forward is the amount of regulatory oversight and whether these banks are allowed to become profit machines again, or are simply led towards being utility type businesses. Time will tell...

I think you misunderstand what I am saying.  I think banking will do just fine; I just don't think they'll be imposing fees for using their checking account.  Why would they?  It's dumb.  Banking is a razor/blade model.  Hold and protect their money for free and make your money on fees from people who take out mortgages, student loans, don't pay off their credit card balance every month, etc.

What everyone else seems to be saying is that they will go away from the razor/blade model and start outright charging people just to have an account.  I do not think that will happen in any meaningful way or for any real length of time.  They'll offer all kinds of reasons not to charge people (free checking accounts, student accounts, etc.)  They might charge fees on other items (like using the teller more than 4 times a month or something) but for just having an account? I doubt it.  There are way too many free substitutes out there.

It would be a stupid strategic move.  That's my point.  And Wells, Chase, BofA know that or will figure it out very quickly.  They aren't dumb.
Title: Re: BAC-WT - Bank of America Warrants
Post by: JSArbitrage on March 02, 2012, 08:53:05 AM
Sen. Richard Durbin (D. IL) sounds none too pleased to pick up this morning’s Wall Street Journal and read that Bank of America is nearing the end of tests that might implement new fee structures for many checking-account customers.

Durbin, an important senator for the banking world and critic of the biggest banks, took issues with the bank’s efforts to restructure the basic checking account relationship.

“Here we go again,” Durbin said in a statement. “Four months to the day after Bank of America rolled back plans to squeeze their customers instead of serving them, they are at it again. This brazen return to new monthly fees is a challenge that cannot go unanswered.”

http://blogs.wsj.com/deals/2012/03/01/bofas-fee-plan-durbin-will-have-none-of-it/


The strange thing about this is we're talking about accounts that actually cost the bank money.  It's like they (Durbin and others) are trying to argue that banking is an essential utility, yet if you don't pay your water bill the municipality shuts it off.  If you don't pay your electric bill you are shut off.  So is it a utility or isn't it, and why can't BofA behave like one and ask people to pay for their service?

Bank of America customers are doing BoA a favor.  They are technically creditors; they have loaned the bank money.  Are you suggesting we should actually PAY for the "privilege" of loaning a bank money? The first bank to charge people fees just to have an account will lose big time. 

It's so dumb.  Just like the $5 fee was dumb. If a bank can't make money borrowing for free then they don't belong in business. 

And the idea that small accounts should be charged because they are just too small to be profitable is short-term thinking.  I have a Wells Fargo account because my parents banked there and I opened my first account with my birthday money.  I probably had sub $750  in my account for a decade.

If they had charged me money, I would have gone elsewhere.  And they wouldn't have my much larger account today including credit cards and CDs.  They wouldn't have my fiance's account. 

I double dare the first bank to make that move.

Might I ask if you are in your 20s?  The term "free checking" is used because there was a time when it wasn't free.

You really think they are going to make money on an account balance of $100 when you use their ATM for free, take up time at the teller window, and get all those statements mailed to you?

First there were upfront fees, then "hidden fees" replaced them (the dawn of free checking), and now hidden fees are being reigned in by government.  So a new era of upfront fees is born.

My account with Wells Fargo initially had a fee for my checking account -- then it was eliminated when I added more services, like direct deposit, or perhaps it was a larger account balance.  I don't remember when.  But yes there was a time in the 1980s/1990s when my monthly fee was eliminated for my checking account.

Yes, I am 29.  May I ask how old you are? Because I think like most young people, I haven't been to my bank's ATM, teller window or had a statement mailed to me in easily over a year.  I do cash bank at the grocery store so I don't have to pay fees.

Firm down analysis is bad anaylsis IMO.  You simply say, "well, they used to charge fees, so they can do it again."  You think the music industry can go back to putting one good single on an album and then charging $20 for it? They wish they could.

Banks do not have pricing power because there are too many substitutes.  I have a broker account with Fidelity and they are FDIC-insured, have debit cards, credit cards (with 2% cash bank too), I can deposit checks by taking a picture on my phone, etc.  Tell me again why I should pay for Wells Fargo?

It doesn't matter if they used to charge fees in the 1980's.  That's irrelevant.  It doesn't matter if they have overhead or have to pay for a physical location every 2 blocks.  That's irrelevant too and, quite frankly, that's not my problem.  It's theirs.

Between FDIC-insured brokerage accounts, internet banks, and credit unions, I'll never have to pay a fee.  But these banks aren't dumb; they'll test fees here and there but they won't roll out anything significant.  They have the ability to do so unless they want to go the way of Borders v. Amazon.

Consumers of my age group of vicious.  I was looking for a computer monitor recently and I was able to read reviews, mind my model number I wanted and get it for the lowest possible price.  I have no loyalty other than to the lowest possible price.

Banks wants to try to impose fees on my generation? Good luck with that.

JS, One thing you may be overlooking with your viewpoint is that everyone in your generation has a service-industry based job. You are obviously well educated and have a career where you most likely provide a service from an office environment and then get paid electronically. As you mentioned, you in fact have no need for a physical bank but you represent the minority in the economy and it has nothing to do with your age group.

The reason banks like Wells and BAC have branches every few blocks is that they were borne out of necessity and they provide invaluable services to their customers who have non-service jobs. Most of the economy that is. And even the youngest generation will require a way to physically deposit their checks, cash, withdraw funds, and speak to their local banker about refinancing their home, or business.

The banking model works and is very profitable, these branches have dual mandates as marketing centres in addition to the actual services they provide.

Your post indicates some disruptive trend on the cusp of banking. Personally, I don't see it. When it comes to people's pocketbooks they will always act the same. I have yet to meet a wealthy individual who does not own at least 1 Safety deposit box for example....

The only fundamental difference I see in banking moving forward is the amount of regulatory oversight and whether these banks are allowed to become profit machines again, or are simply led towards being utility type businesses. Time will tell...

This seems contradictory to what the others are saying.  The thesis being put forth is that small accounts aren't profitable and only large accounts are profitable.  Therefore, they will charge fees to make up for the unprofitable activity of holding small accounts for free. 

Then you seem to be saying that there are tons of people that don't get paid electronically, which is true.  But these people tend to use pawn shops and checking cashing institutions (they are referred to as an "underbanked" demographic.)

I'd be willing to wager that easily 90%+ of all the large personal account holders get paid electronically.  Business accounts are different because so many businesses deal with cash.  But for personal accounts, I don't think there are that many wealthy people that get paid in cash (legally at least.)
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 02, 2012, 09:07:24 AM
This seems contradictory to what the others are saying.  The thesis being put forth is that small accounts aren't profitable and only large accounts are profitable.  Therefore, they will charge fees to make up for the unprofitable activity of holding small accounts for free. 

They are merely putting the free bathroom key behind the counter.  You want to use the bathroom for free, then buy some product.

They are not charging profitable customers for the bathroom.

Title: Re: BAC-WT - Bank of America Warrants
Post by: rmitz on March 02, 2012, 09:08:35 AM
This seems contradictory to what the others are saying.  The thesis being put forth is that small accounts aren't profitable and only large accounts are profitable.  Therefore, they will charge fees to make up for the unprofitable activity of holding small accounts for free. 

Then you seem to be saying that there are tons of people that don't get paid electronically, which is true.  But these people tend to use pawn shops and checking cashing institutions (they are referred to as an "underbanked" demographic.)

I'd be willing to wager that easily 90%+ of all the large personal account holders get paid electronically.  Business accounts are different because so many businesses deal with cash.  But for personal accounts, I don't think there are that many wealthy people that get paid in cash (legally at least.)

I would just note that more and more institutions are dropping payment by paper checks altogether.  For members of the community at my company who don't have bank accounts or don't want direct deposit, for example, we have switched to giving out prepaid debit cards which recharge on the pay period.  This is not a small trend--paper checks are expensive to deal with, on both the generating and receiving ends!
Title: Re: BAC-WT - Bank of America Warrants
Post by: SharperDingaan on March 02, 2012, 09:10:31 AM
A good bank looks at the lifetime earnings potential of the client. Give away a few hundred $ on the young & make it back from them as they advance through life’s various stages.

Bricks & Mortar exists to 1)advertise the brand 2)service commercial 3)sell product. If you buy jeans you try them on first at a bricks & mortar store – then you search for the brand/size on-line. And the more sophisticated the product (computer, phone, major appliances, etc) the more you HAVE to do it. They have corner locations so that you can’t ignore the signage – something you CAN do, & easily, in the on-line space.

The number of branches reflects technology & demographics. Before Netflix you needed a store to get your VCR/Blue Ray (Blockbuster), now it is obsolete. Population & life stage business was growing, now it is flat &/or declining. Less brick & mortar because you don’t need as many, & the go forward demographic availability of new entry level staff is rapidly declining.
Title: Re: BAC-WT - Bank of America Warrants
Post by: onyx1 on March 02, 2012, 09:37:49 AM
For those of you that think that there is a disruption on the making in banking. That branches are obsolete. That shadow banks, like mutual funds and discounting brokerages, are anything new (how fast people forget "breaking the buck" and eTrade problems). You might want to watch this excellent presentation by the unique Richard Davis from US Bancorp.

http://variantperceptions.wordpress.com/2010/09/14/charting-banking-xx-short-history-of-the-last-25-years/
 (http://variantperceptions.wordpress.com/2010/09/14/charting-banking-xx-short-history-of-the-last-25-years/)

Thanks Plan, enjoyed that video. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 02, 2012, 09:41:55 AM
They are not doing anyone a favor by taking your money. They take it in, pay you little to none, loan it out 10X with a net interest margin. Fees are icing on the cake for them.

BofA has $1 trillion in deposits.  You are saying they can make $10 trillion in loans with a net interest margin?
Title: Re: BAC-WT - Bank of America Warrants
Post by: misterstockwell on March 02, 2012, 12:04:41 PM
No, BofA is a giant black box. I couldn't say with confidence what they could loan, nor could anyone else.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 02, 2012, 12:43:01 PM
No, BofA is a giant black box. I couldn't say with confidence what they could loan, nor could anyone else.

You said with confidence that a deposit can be loaned 10x.  That would imply $10T of loans.

Let's say you had confidence that their books were clean.  You are willing to stand behind the claim that their capital ratios will be acceptable with $10trillion in loans?

To the best of MY knowledge, a deposit that BAC (or any other bank) takes in can be lent out 1x.  To loan out more money beyond that they have to take on debt, retain earnings or raise more equity, or take in more deposits which in turn can be lent out once. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on March 02, 2012, 12:48:00 PM
No, BofA is a giant black box. I couldn't say with confidence what they could loan, nor could anyone else.

Mr Bayes could be of help for you MisterStockwell. That is a very strange comment you just made considering all the information about BAC's loan portfolio that is publicly available from the regulatory overlords.

http://en.wikipedia.org/wiki/Bayesian_statistics
Title: Re: BAC-WT - Bank of America Warrants
Post by: misterstockwell on March 02, 2012, 01:35:32 PM
No, BofA is a giant black box. I couldn't say with confidence what they could loan, nor could anyone else.

You said with confidence that a deposit can be loaned 10x.  That would imply $10T of loans.

Let's say you had confidence that their books were clean.  You are willing to stand behind the claim that their capital ratios will be acceptable with $10trillion in loans?

To the best of MY knowledge, a deposit that BAC (or any other bank) takes in can be lent out 1x.  To loan out more money beyond that they have to take on debt, retain earnings or raise more equity, or take in more deposits which in turn can be lent out once.

I had to go back and see what the hell you were talking about. Nitpicking on a typo? You're a dick.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on March 02, 2012, 02:57:26 PM
No, BofA is a giant black box. I couldn't say with confidence what they could loan, nor could anyone else.

mrstockwell, Dont take this the wrong way, but this statement drives me nuts.  As an outside passive minority investor ALL your investments are black boxes.  BAC, is no more, or no less, a black box, than any other financial, oil company, miner, manufacturer, etc.  In fact I contend it is easier and safer to analyze than oil companies, tech companies, and miners.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 02, 2012, 02:59:01 PM
There's no use.  He already deleted his account.
Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on March 02, 2012, 03:10:58 PM
They take it in, pay you little to none, loan it out 10X with a net interest margin. Fees are icing on the cake for them.


I had to go back and see what the hell you were talking about. Nitpicking on a typo? You're a dick.

So I guess the 'zero' was a typo and you would have said "loan it out 1X with a NIM". Sounds odd but oke. Or am I confused?

In any case, I don't see why Eric is the dick here for correcting something that he couldn't have known was just a plain typo. Play nice!

No, BofA is a giant black box. I couldn't say with confidence what they could loan, nor could anyone else.

mrstockwell, Dont take this the wrong way, but this statement drives me nuts.  As an outside passive minority investor ALL your investments are black boxes.  BAC, is no more, or no less, a black box, than any other financial, oil company, miner, manufacturer, etc.  In fact I contend it is easier and safer to analyze than oil companies, tech companies, and miners.

I agree and I'm in the same boat regarding the discussion on pricing power. It is totally irrelevant at current valuations and for my investment thesis whether the big players have or haven't got any pricing power. +++
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on March 02, 2012, 03:13:57 PM
tomgrt, Your last comment was what I was alluding to above. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on March 02, 2012, 03:21:53 PM
source: www.bankregdata.com


Net Loans & Leases: $7.29 Trillion (up $140.40 Billion)
Net Loans & Leases jumped $140.40 Billion Q on Q which was the biggest quarterly increase in 15 Quarters (since 2007 Q4) sans the artificial 2010 Q1 lift from Credit Cards mentioned earlier.

Quarterly growth by Loan Portfolio type:
                                                                    2011 Q4 Amount   Q on Q Growth   Perc
Commercial & Industrial                                1,358,306,306,000   65,803,604,000   5.09
Credit Cards                                                    687,753,069,000   21,276,448,000   3.19
Farm Loans                                                       61,336,666,000   1,534,287,000           2.57
1-4 Family 1st Liens                                     1,757,656,255,000   32,882,442,000   1.91
Lease Financing                                               100,799,862,000   1,678,089,000           1.69
Individuals: Auto                                             299,860,490,000   3,360,123,000            1.13
Multifamily Residential                                      218,499,357,000   1,683,201,000    0.78
Farmland Loans                                                 68,655,223,000   367,012,000           0.54
Commercial Real Estate                                 1,062,333,258,000   3,995,775,000           0.38
Individuals: Other                                             320,007,378,000   -1,586,004,000   -0.49
Home Equity Loans                                          603,374,488,000   -4,879,665,000   -0.80
1-4 Family Jr Liens                                            120,310,940,000   -6,921,431,000   -5.44
Construction & Dev                                          240,151,179,000   -14,557,692,000   -5.72
 
Commercial & Industrial lending jumped 5.09% which is the largest increase in 17 quarters and the 2nd highest on record. Credit Cards also saw a nice pop with a 3.19% Q on Q increase - given the amount of solicitations in my mail box the past few months this comes as little surprise.

1-4 Family Junior Liens and Construction & Development lending both saw large declines. Construction lending is now at a 10 year low.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 02, 2012, 03:26:37 PM
In any case, I don't see why Eric is the dick here for correcting something that he couldn't have known was just a plain typo. Play nice!

Personally I think he was just saving face.  Why mention any kind of leverage against deposits?  The "typo" argument just doesn't make sense.

Why would one ever say "loan it out at 1x", instead of just saying "loan out the deposits".  The 1x would be implied.  No, I think he is confused about how deposits get loaned out.  My guess is he intentionally wrote 10x because he mentally got it mixed up with the money multiplier effect about how deposits get loaned out, then deposited again, then loaned out, etc...

Again, wouldn't it be odd to write "loan it out at 1x" when you are just trying to say "loan it out".  That's a very awkward way of saying something. Then he didn't object the first time I questioned him with the $10trillion figure, instead muttering something about a "black box", presumably to avoid the question (saving face).
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on March 02, 2012, 07:14:49 PM
Commercial & Industrial lending jumped 5.09% which is the largest increase in 17 quarters and the 2nd highest on record. Credit Cards also saw a nice pop with a 3.19% Q on Q increase - given the amount of solicitations in my mail box the past few months this comes as little surprise.

1-4 Family Junior Liens and Construction & Development lending both saw large declines. Construction lending is now at a 10 year low.

The following chart complements this positive data. The USA does not look remotely like Japan. It seems the deleveraging has stopped so when banks ease conditions, credit responds.

http://www.businessinsider.com/what-stagnation-looks-like-in-one-chart-2012-3
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 03, 2012, 11:54:32 AM
I was reading something by Gary Shilling where he stated that people who collectively are not making mortgage payments are getting an imputed income of about $50b from not having to pay anything at all to continue living in their homes.

I'm wondering if anyone can take a stab at how much interest income BofA is missing due to their share of that $50b pie?
Title: Re: BAC-WT - Bank of America Warrants
Post by: onyx1 on March 04, 2012, 06:26:06 AM
I was reading something by Gary Shilling where he stated that people who collectively are not making mortgage payments are getting an imputed income of about $50b from not having to pay anything at all to continue living in their homes.

I'm wondering if anyone can take a stab at how much interest income BofA is missing due to their share of that $50b pie?

BAC as of 12/31/11:

Residential mortgage 30+ past due   $28.688 bln  at 4%
Home Equity non-performing              $  2.453 bln  at 4% (mostly floating rate)
Countrywide PCI non performing       $12.700 bln  at 3.8%
Countrywide PCI deliquent                $  3.000 bln   at 3.8%

Total comes to about $1.843 bln/year and this is exaggerated since BAC paid 70% for the PCI loans. 
With BAC as such a major player in the US, $50 billion/year seems high to me.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 04, 2012, 10:11:52 AM
Total comes to about $1.843 bln/year and this is exaggerated since BAC paid 70% for the PCI loans. 
With BAC as such a major player in the US, $50 billion/year seems high to me.

Shilling's number includes principle payments (and insurance) as well I think, but his number is actually $65 billion (I guess by making it only $50b I'm adjusting for the principle portion):

-- Rent-Free Renters: Since 2006, 3.1 million people are essentially living rent-free by not paying their monthly mortgage payments. Assuming a monthly mortgage bill equivalent to the national average of $1,721 per person, these nonpayers have increased their purchasing power for other items by $65 billion at annual rates, or the equivalent of 5.6 percent of after-tax income.

Here is the article:
http://www.bloomberg.com/news/2012-02-22/why-renters-rule-u-s-housing-market-part-1-a-gary-shilling.html
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 04, 2012, 10:28:27 AM
Just a warning on Shilling though -- he is skewed with a negative bias so take his article with a dose of skepticism mixed in.

For example, he writes:
-- Annual Absorption: Household formation in the fourth quarter of 2011 was 659,000 at annual rates. Over the last decade, it has averaged about 900,000, a number that seems reasonable in years ahead. Note, however, that this number may be on the high side if significant doubling up reduces household formation.

I comment:
Gary, it actually might be on the LOW side if there was significant doubling up the past few years given the unemployment rate.  The average formation rate for the ten years immediately pre-ceeding the crisis was much higher.  And using that higher number debunks your thesis.

He also writes:
If historical trends hold, the total homeownership rate will return to its earlier base level of 64 percent by the fourth quarter of 2016.

I comment:
Gary, you only get away with this argument because the boomer generation skews the data.  If you look at any age category under 55, home ownership rates are lower at the end of 2011 than at any point in history going back 50 years (as far as the data goes).  So,  if historical trends per age category hold, then home ownership rates will CLIMB from here.  Honestly, what a rookie mistake to compare today's demographic makeup of the United States where it's so top-heavy with the 80% ownership rates of the over-65 age category.  And ditto for the over 55 category, which (combined with the over 65 category) encapsulates all the boomers.





Title: Re: BAC-WT - Bank of America Warrants
Post by: sswan11 on March 05, 2012, 12:29:38 PM
Stress test predictions:

Bank of America Seen as Vulnerable
The 2012 CCAR results could be a bane for the bank and others.

http://online.barrons.com/article/SB50001424052748704759704577263433911368046.html?mod=BOL_da_is
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on March 08, 2012, 02:17:25 PM
Others have rallied while BAC remains moribund.  I guess everyone is waiting for the stress test results.  It will probably rally once the unknowns become known, regardless of the test outcomes.
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on March 08, 2012, 02:18:52 PM
Others have rallied while BAC remains moribund.  I guess everyone is waiting for the stress test results.  It will probably rally once the unknowns become known, regardless of the test outcomes.

Good presentation today by Moynihan despite the interruptions.
Title: Re: BAC-WT - Bank of America Warrants
Post by: racemize on March 08, 2012, 02:38:32 PM
Others have rallied while BAC remains moribund.  I guess everyone is waiting for the stress test results.  It will probably rally once the unknowns become known, regardless of the test outcomes.

Good presentation today by Moynihan despite the interruptions.

got a link?
Title: Re: BAC-WT - Bank of America Warrants
Post by: newbee on March 08, 2012, 04:33:47 PM
http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-presentations (http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-presentations)
03/08/12 is the presentation date
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on March 08, 2012, 04:56:59 PM
Apparently there was some partial nudity on display.  Warm day on the eastern seaboard I guess.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Grenville on March 09, 2012, 07:36:37 AM
Nice videos of Brian Moynihan on CNBC:

On housing and stress test
http://video.cnbc.com/gallery/?video=3000077687 (http://video.cnbc.com/gallery/?video=3000077687)


Improvement in consumer spending
http://video.cnbc.com/gallery/?video=3000077688 (http://video.cnbc.com/gallery/?video=3000077688)

"consumers are spending about 6% more on the credit and debit cards february 2012 versus february 2011, and that's been pretty consistent."

Title: Re: BAC-WT - Bank of America Warrants
Post by: racemize on March 09, 2012, 09:01:48 AM
Nice videos of Brian Moynihan on CNBC:

On housing and stress test
http://video.cnbc.com/gallery/?video=3000077687 (http://video.cnbc.com/gallery/?video=3000077687)


Improvement in consumer spending
http://video.cnbc.com/gallery/?video=3000077688 (http://video.cnbc.com/gallery/?video=3000077688)

"consumers are spending about 6% more on the credit and debit cards february 2012 versus february 2011, and that's been pretty consistent."

thanks for those--respect for moynihan +1.
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on March 09, 2012, 09:14:18 AM
thanks for those--respect for moynihan +1.

Moynihan growing on the job and quickly becoming a dream CEO. Pandit not so much.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Grenville on March 09, 2012, 10:29:31 AM

Moynihan growing on the job and quickly becoming a dream CEO. Pandit not so much.

Just curious, I haven't followed the Citi story, what is Pandit not doing well?
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on March 09, 2012, 07:56:32 PM
I think the best way to illustrate this is to watch Pandit's latest presentation for the Citigroup Financial Services Conference. What is Citigroup's action plan beyond the grandiose vision talk? Then compare his presentation to Brian Moynihan's.

My impression is that Moynihan is a businessman on a mission. Pandit, having been dealt a much better hand, not so much on both accounts. And this is being reflected on the non-credit numbers of both companies.

I have both. Citi because it does not have the mortgage hangover while still cheap. But I am not sure I will keep it long term.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 10, 2012, 02:39:34 PM
http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-presentations (http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-presentations)
03/08/12 is the presentation date


Page 13 shows that the "cost per dollar deposit" is 2.55%, even though they only pay the depositor 0.23% yield on the deposit.



Title: Re: BAC-WT - Bank of America Warrants
Post by: Grenville on March 10, 2012, 10:26:12 PM
I think the best way to illustrate this is to watch Pandit's latest presentation for the Citigroup Financial Services Conference. What is Citigroup's action plan beyond the grandiose vision talk? Then compare his presentation to Brian Moynihan's.

My impression is that Moynihan is a businessman on a mission. Pandit, having been dealt a much better hand, not so much on both accounts. And this is being reflected on the non-credit numbers of both companies.

I have both. Citi because it does not have the mortgage hangover while still cheap. But I am not sure I will keep it long term.

Thanks for the color!
Title: Re: BAC-WT - Bank of America Warrants
Post by: Grenville on March 10, 2012, 10:26:57 PM
http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-presentations (http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-presentations)
03/08/12 is the presentation date


Page 13 shows that the "cost per dollar deposit" is 2.55%, even though they only pay the depositor 0.23% yield on the deposit.

Thanks for pointing out that metric, I missed it when i was looking through the slides.
Title: Re: BAC-WT - Bank of America Warrants
Post by: gordoffh on March 12, 2012, 01:11:04 PM
noticed more premium added to warrants versus stock last couple of days - sold some and bought the common
Title: Re: BAC-WT - Bank of America Warrants
Post by: hardincap on March 22, 2012, 12:24:41 PM
Anyone have an opinion on why BAC B warrants are vastly underperforming stock and A warrants? I am long all three, and am very bullish BAC long term (5 years), but its frustrating to see B warrants lagging behind so badly right now.
Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on March 22, 2012, 12:35:53 PM
It would not worry me if the intrinsic value is comparable. Is it?
Since you own both, how does the value of the Bs compare with the As?
Title: Re: BAC-WT - Bank of America Warrants
Post by: ECCO on March 22, 2012, 01:14:07 PM
Anyone have an opinion on why BAC B warrants are vastly underperforming stock and A warrants? I am long all three, and am very bullish BAC long term (5 years), but its frustrating to see B warrants lagging behind so badly right now.

Do you know what is the excercise price of the "B"? Will BAC trade over that price before the expiration?
Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on March 24, 2012, 02:55:57 AM
I'm thinking about the margin of safety that is left in the B's at current prices.

Exercise price of 13.30 plus warrant price of 5.00 translates into cost of 18.30 in 2018.
Tangible book today is about 13.50 and implies compounding of 9.7% over 6 years to 18.30, which is close to the 10% ROE most of us seem to hope for.

So what do you think? Is there significant margin of safety left, if any?
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on March 24, 2012, 04:33:47 AM
Hardincap, The Strike on the B warrants is 30.79.  I wouldn't expect them to start moving until the stock price is well in excess of 20.  Purely, a speculative investment.

Mr. B, Have you considered the future dividend increases into your calculation.  Let's suppose that Bac runs a 34 cents per share annual dividend - 4 cent bogey = 30 cents over 5 years.  Your price drops to 3.50 per share at todays quote.  So, your adjustment to stock price is 13.30 + 3.50 = 16.60.  However, this doesn't change the MOS. 

The way I figure is that the margin of safety is still in the common stock at the moment.  There isn't any in the warrants and there never was.  There never is a margin of safety in anything that may expire at zero. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on March 24, 2012, 08:21:42 AM
Mr. B, Have you considered the future dividend increases into your calculation.  Let's suppose that Bac runs a 34 cents per share annual dividend - 4 cent bogey = 30 cents over 5 years.  Your price drops to 3.50 per share at todays quote.  So, your adjustment to stock price is 13.30 + 3.50 = 16.60.  However, this doesn't change the MOS. 

The way I figure is that the margin of safety is still in the common stock at the moment.  There isn't any in the warrants and there never was.  There never is a margin of safety in anything that may expire at zero. 

Yes and the increase in the warrant shares too, but don't you think that for long term investors it is cancelled out by Buffett's dilution in 2021? He get's the anti dilution adjustments too.

Your last point is a very good one.
Title: Re: BAC-WT - Bank of America Warrants
Post by: uncommonprofits on March 24, 2012, 11:43:30 AM
I'm thinking about the margin of safety that is left in the B's at current prices.

Exercise price of 13.30 plus warrant price of 5.00 translates into cost of 18.30 in 2018.
Tangible book today is about 13.50 and implies compounding of 9.7% over 6 years to 18.30, which is close to the 10% ROE most of us seem to hope for.

So what do you think? Is there significant margin of safety left, if any?

Something is wrong with the math.  Tangible book assuming $13.50 and a break even basis of $18.30 over a 6 yr period works out to compounding TBV at only 5.2%.  But the real time value is 7 (not 6) - so the real number should be roughly 4.5%.

So if tangible book today is $13.50 cummulated at 10% annually in 7 yrs works out to $26.30 ($10 higher due to a couple of errors imo).
Title: Re: BAC-WT - Bank of America Warrants
Post by: uncommonprofits on March 24, 2012, 12:22:42 PM
Hardincap, The Strike on the B warrants is 30.79.  I wouldn't expect them to start moving until the stock price is well in excess of 20.  Purely, a speculative investment.

Mr. B, Have you considered the future dividend increases into your calculation.  Let's suppose that Bac runs a 34 cents per share annual dividend - 4 cent bogey = 30 cents over 5 years.  Your price drops to 3.50 per share at todays quote.  So, your adjustment to stock price is 13.30 + 3.50 = 16.60.  However, this doesn't change the MOS. 

The way I figure is that the margin of safety is still in the common stock at the moment.  There isn't any in the warrants and there never was.  There never is a margin of safety in anything that may expire at zero.

I agree that dividends need to be worked into the equation.  However, one needs to assume that tangible book drops in accordance with div payouts..... hence growth in TBV drops also. 

It should be worked out year by year but a simple (not entirely accurate) calc would be to take $26.30 (per 10% accumul tbv over 7 yrs) and reduce it by $1.50 (your assumed div payouts).  That would assume a tbv of $24.80 in 7 yrs.  Strike would of course be $11.80 (13.30-1.50).

So assuming the stock traded at a conservative measure of 1.0x TBV, value of the warrants would be $13.00 ($24.80-11.80) in 7 yrs time .... implying a return on investment of about 14.6% for the warrants (based on a $5 assumed price today).  When it traded down near $2.00 this was around 30%.  Some might argue though that there is high probability BAC trades higher than 1.0x tbv in which case there could still be a decent return vs the risk involved.  One does need to do more accurate yr x yr assumptions on divs though to assess properly (and maybe adjust the time frame exactly - say 6.75 yrs?).  Certainly the margin of safety has dropped significantly ... wouldn't say it's zero though.  I need to update my spreadsheet.

 
Title: Re: BAC-WT - Bank of America Warrants
Post by: redskin on March 24, 2012, 12:52:45 PM
Anyone have an opinion on why BAC B warrants are vastly underperforming stock and A warrants? I am long all three, and am very bullish BAC long term (5 years), but its frustrating to see B warrants lagging behind so badly right now.

I think the B's have been vastly outperforming the A's and the common. 

Returns year-to-date...
 
BAC/WS/B  +240%
BAC/WS/A  +140%
BAC             +77%
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on March 24, 2012, 06:12:53 PM
Anyone have an opinion on why BAC B warrants are vastly underperforming stock and A warrants? I am long all three, and am very bullish BAC long term (5 years), but its frustrating to see B warrants lagging behind so badly right now.

I think the B's have been vastly outperforming the A's and the common. 

Returns year-to-date...
 
BAC/WS/B  +240%
BAC/WS/A  +140%
BAC             +77%

Yep.  We started buying the B's in late Dec at 30 to 32 cents.  They have gone up more than the A's because they were then far out on the tail of the normal distribution, the holy grail of the B/S model.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Green King on March 24, 2012, 11:24:40 PM
Anyone have an opinion on why BAC B warrants are vastly underperforming stock and A warrants? I am long all three, and am very bullish BAC long term (5 years), but its frustrating to see B warrants lagging behind so badly right now.

I think the B's have been vastly outperforming the A's and the common. 

Returns year-to-date...
 
BAC/WS/B  +240%
BAC/WS/A  +140%
BAC             +77%

Yep.  We started buying the B's in late Dec at 30 to 32 cents.  They have gone up more than the A's because they were then far out on the tail of the normal distribution, the holy grail of the B/S model.

Can you give more of explanation ? for us who dosen't understand B/S model and haven't had experience playing around for it. So sites or reading for learn more about is characteristics and short comings ?

Thanks
It will be great help
GK
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on March 25, 2012, 03:46:22 AM
Anyone have an opinion on why BAC B warrants are vastly underperforming stock and A warrants? I am long all three, and am very bullish BAC long term (5 years), but its frustrating to see B warrants lagging behind so badly right now.

I think the B's have been vastly outperforming the A's and the common. 

Returns year-to-date...
 
BAC/WS/B  +240%
BAC/WS/A  +140%
BAC             +77%

Yep.  We started buying the B's in late Dec at 30 to 32 cents.  They have gone up more than the A's because they were then far out on the tail of the normal distribution, the holy grail of the B/S model.

Can you give more of explanation ? for us who dosen't understand B/S model and haven't had experience playing around for it. So sites or reading for learn more about is characteristics and short comings ?

Thanks
It will be great help
GK


You might get a copy of Fisher Black's original scientific paper that became the basis for the Black  Scholes Model or a couple of papers published earlier by Ed Thorp that outlined the basic ideas that Black used. References to Thorp's papers can be found in Black's bibliography.   Sorry, you'll have to find your own links to resources. 

Black's model is exquisite if one assumes that the distribution of stock prices over time is a log normal distribution or bell shaped curve.  In truth, it is not, and one can make a lot of money if one is aware of this truth.   

In this instance, the short term volatility for BAC was very high, and short term options for BAC were relatively expensive as was evident by the high implied volatility shown in Black Scholes calculations for valuing the options as they should have been because of the recent high volatility of the stock.  Thus, those who bought relatively short term calls on BAC were not taking advantage of mispricing of the calls, but merely betting that BAC would rebound in a relatively short time frame.  This wasn't a bad bet, but buying the very long duration warrants was an even better bet, even though they also had high implied volatility under B/S model calculations, because they could live to fight another day if it took a few years for BAC to recover substantial value. 

The BAC B warrants were way out of the money, far out on the tail of a log normal distribution, unlikely to ever increase in value enough to be in the money if the future distribution of BAC's stock price were truly expected to be log normal.  As such, the B/S model priced the warrants as a very long shot to ever have a chance to be in the money.  They were farther out on the long end of the tail than the A warrants.  Thus, when the stock rebounded, the B's moved much more as measured by the change in probability calculated incrementally moving away from the tails in the B/S calculations, than the A warrants that were much more into the higher probability area under the curve for graphing a log normal distribution.  (it's easy to graph any log normal distribution to help visualize how the probabilities change dramatically with movement away from the tails.)

When a stock has potential to advance substantially over years, the B/S model misprices calls because it doesn't capture the reality of fat tails nor the capacity of the market to have an upward trend nor the ability of better businesses to outperform other stocks in the market.  These factors are trivial for short term options, and the B/S model usually works very well in the short term.  However, the generally upward trend in the market and the tendency of better businesses to outperform over time or rebound sharply after taking a dive present amazing opportunities to profit from long dated calls and even more opportunity with longer dated warrants.
                          :)
Title: Re: BAC-WT - Bank of America Warrants
Post by: Green King on March 25, 2012, 09:50:05 PM
Thanks  :D I will read on.!!!

So am current in saving that the current price of the B warrants are prices as so due to the B/S model. And if they BAC shares go further in price the increase the Warrants value was be far higher than B and A. In the same light if BAC goes down the B warrants would go down further than the other two.  Since the the bell curve is backed further and the probability excise goes from something like 1% to 0.01%.
Another questions being
How do you know if its miss prices are all the warrants in this area mispriced or is something that you look for bottom up if you believe a stock is going to do well. So buying these mispriced warrants would give a ground return. How do you know if they are mispriced do you run a B/S model use the number as a mark and find out ?

GK
Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on March 26, 2012, 02:07:58 AM
Something is wrong with the math.  Tangible book assuming $13.50 and a break even basis of $18.30 over a 6 yr period works out to compounding TBV at only 5.2%.  But the real time value is 7 (not 6) - so the real number should be roughly 4.5%.

So if tangible book today is $13.50 cummulated at 10% annually in 7 yrs works out to $26.30 ($10 higher due to a couple of errors imo).

You're right. Used this on the fly http://www.epx.com.br/ctb/hp12c.php , which gives the wrong answer whereas this http://epx.com.br/ctb/hp12c.php gives the correct one. In case anyone else is using it.
Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on March 26, 2012, 02:13:33 AM
Something is wrong with the math.  Tangible book assuming $13.50 and a break even basis of $18.30 over a 6 yr period works out to compounding TBV at only 5.2%.  But the real time value is 7 (not 6) - so the real number should be roughly 4.5%.

So if tangible book today is $13.50 cummulated at 10% annually in 7 yrs works out to $26.30 ($10 higher due to a couple of errors imo).

You're right. Used this on the fly http://www.epx.com.br/ctb/hp12c.php , which gives the wrong answer whereas this http://epx.com.br/ctb/hp12c.php gives the correct one. In case anyone else is using it.

Ok, I actually don't know what is going on here. I just used http://www.epx.com.br/ctb/hp12c.php in a different browser to my regular browser (Chrome) and it gives the correct answer 5.2 and when I run it in Chrome it gives 9.7, so it is either Chrome or the cash that is causing issues.

I realize it is off-topic, but just in case anyone else is using (this) online calculator(s).
Title: Re: BAC-WT - Bank of America Warrants
Post by: ECCO on March 26, 2012, 02:46:08 PM
http://www.sec.gov/Archives/edgar/data/5272/000095012311003847/y89089e424b2.htm#605

Common Stock to be issued, assuming full exercise of all Warrants  74,997,777 shares of Common Stock
 
Net proceeds, assuming full exercise of all Warrants  Approximately $3.372 billion (initial exercise price of $45.00 per share) (calculated net of ).
67,650.196 Warrants retained due to tax withholding

Could someone explain me the twist here. What is the "warrants retained due to tax withholding" refering to?

Does that mean there is 74,997,777 warrants on the market?
Or, (74,997,777-67,650,196) 7,347,581 warrants?


Title: Re: BAC-WT - Bank of America Warrants
Post by: jegenolf on March 26, 2012, 03:10:58 PM
67,650.196 Warrants retained due to tax withholding

You made me look, but it's a decimal not a comma. Makes a big difference!
Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on March 26, 2012, 03:11:34 PM
 67,650 :P 196
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on March 26, 2012, 03:22:33 PM
Thanks  :D I will read on.!!!

So am current in saving that the current price of the B warrants are prices as so due to the B/S model. And if they BAC shares go further in price the increase the Warrants value was be far higher than B and A. In the same light if BAC goes down the B warrants would go down further than the other two.  Since the the bell curve is backed further and the probability excise goes from something like 1% to 0.01%.
Another questions being
How do you know if its miss prices are all the warrants in this area mispriced or is something that you look for bottom up if you believe a stock is going to do well. So buying these mispriced warrants would give a ground return. How do you know if they are mispriced do you run a B/S model use the number as a mark and find out ?

GK

You're getting a fairly good understanding of these important insights.  There is one thing that seems paradoxical about the BAC A warrants compared to the B warrants.  The implied volatility (IV) of the B warrants has been much lower than the IV of the A warrants. This is contrary to what one might expect because options, particularly puts,  on a stock or index that are far out of the money often exhibit a "smile" pattern after going through a period of high volatility.  When the smile pattern appears, the options that are farther out of the money have a higher IV and  are "pricey" compared to options that are closer to being in the money.  However, the A warrants have more protection against payment of dividends than the B warrants.  This may explain some of the difference in the Relative IVs.

In any case the B warrants seemed like the better bargain, so we bought the Bs instead of the As.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Parsad on March 26, 2012, 03:24:27 PM
Something is wrong with the math.  Tangible book assuming $13.50 and a break even basis of $18.30 over a 6 yr period works out to compounding TBV at only 5.2%.  But the real time value is 7 (not 6) - so the real number should be roughly 4.5%.

So if tangible book today is $13.50 cummulated at 10% annually in 7 yrs works out to $26.30 ($10 higher due to a couple of errors imo).

You're right. Used this on the fly http://www.epx.com.br/ctb/hp12c.php , which gives the wrong answer whereas this http://epx.com.br/ctb/hp12c.php gives the correct one. In case anyone else is using it.

Ok, I actually don't know what is going on here. I just used http://www.epx.com.br/ctb/hp12c.php in a different browser to my regular browser (Chrome) and it gives the correct answer 5.2 and when I run it in Chrome it gives 9.7, so it is either Chrome or the cash that is causing issues.

I realize it is off-topic, but just in case anyone else is using (this) online calculator(s).

MrB...I think you can afford to buy a $20 calculator, or use the one on your iPhone!   ;D  See you in a few weeks, by the way.  Cheers!
Title: Re: BAC-WT - Bank of America Warrants
Post by: Rabbitisrich on March 27, 2012, 01:27:17 PM
http://newsandinsight.thomsonreuters.com/Legal/News/2011/07_-_July/Why_BofA_is_%28partly%29_to_blame_for_criticism_of_its_MBS_deals/ (http://newsandinsight.thomsonreuters.com/Legal/News/2011/07_-_July/Why_BofA_is_%28partly%29_to_blame_for_criticism_of_its_MBS_deals/)


Alison Frankel, of Reuters' "On The Case", reports on developments in MBS class action damages.

Deutsche Bank $12.80 per $1000 initial certificate value
Wells Fargo $2.70 per $1000 initial certificate value
Merrill Lynch $19.05 per $1000 initial certificate value
Bank of America $2.00 per $1000 initial certificate value (The $8.5 settlement; not a class action; not settled)


Title: Re: BAC-WT - Bank of America Warrants
Post by: Grenville on March 28, 2012, 01:34:28 PM
Commentary on the BNY Settlement and MBIAvCountrwide

http://www.subprimeshakeout.com/2012/03/mbs-discovery-battles-heating-up-impacting-litigation-timelines-and-leverage.html (http://www.subprimeshakeout.com/2012/03/mbs-discovery-battles-heating-up-impacting-litigation-timelines-and-leverage.html)


The ruling on whether the BNY settlement will proceed under Article 77 on April 24.
Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on March 28, 2012, 01:52:58 PM
SYSTEMIC RISK ANALYSIS (DYNAMIC MES WITH SIMULATION) OF U.S. FINANCIALS
http://vlab.stern.nyu.edu/welcome/risk/
BAC tops the list for the US http://vlab.stern.nyu.edu/analysis/RISK.USFIN-MR.MESSIM
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 28, 2012, 04:00:04 PM
SYSTEMIC RISK ANALYSIS (DYNAMIC MES WITH SIMULATION) OF U.S. FINANCIALS
http://vlab.stern.nyu.edu/welcome/risk/
BAC tops the list for the US http://vlab.stern.nyu.edu/analysis/RISK.USFIN-MR.MESSIM

#11 globally:

http://vlab.stern.nyu.edu/analysis/RISK.WORLDFIN-MR.GMES
Title: Re: BAC-WT - Bank of America Warrants
Post by: berkshiremystery on March 28, 2012, 04:24:20 PM
SYSTEMIC RISK ANALYSIS (DYNAMIC MES WITH SIMULATION) OF U.S. FINANCIALS
http://vlab.stern.nyu.edu/welcome/risk/
BAC tops the list for the US http://vlab.stern.nyu.edu/analysis/RISK.USFIN-MR.MESSIM

#11 globally:

http://vlab.stern.nyu.edu/analysis/RISK.WORLDFIN-MR.GMES

I once read the Deutsche Bank annual report, and my gut feeling was always that DB had the most suspicious balance sheet leverage (equity vs assets). But what do I know,... I only like to look through the eyes of a 12 year old at the numbers,...  ::)

I just saw this year it's almost the same:
-> http://www.db.com/ir/en/content/ordinary_share.htm (http://www.db.com/ir/en/content/ordinary_share.htm)
--> http://www.db.com/ir/en/content/reports_2011.htm (http://www.db.com/ir/en/content/reports_2011.htm)
---> http://www.db.com/ir/en/download/Deutsche_Bank_Annual_Report_2011_entire.pdf (http://www.db.com/ir/en/download/Deutsche_Bank_Annual_Report_2011_entire.pdf)


#1 DB, currently as of 2011:
2,164 assets
53.4 total equity

#11 BofA, currently as of 2011:
2,129 assets
230 total equity



Title: Re: BAC-WT - Bank of America Warrants
Post by: vinod1 on March 28, 2012, 05:16:50 PM
SYSTEMIC RISK ANALYSIS (DYNAMIC MES WITH SIMULATION) OF U.S. FINANCIALS
http://vlab.stern.nyu.edu/welcome/risk/
BAC tops the list for the US http://vlab.stern.nyu.edu/analysis/RISK.USFIN-MR.MESSIM

#11 globally:

http://vlab.stern.nyu.edu/analysis/RISK.WORLDFIN-MR.GMES

I once read the Deutsche Bank annual report, and my gut feeling was always that DB had the most suspicious balance sheet leverage (equity vs assets). But what do I know,... I only like to look through the eyes of a 12 year old at the numbers,...  ::)

I just saw this year it's almost the same:
-> http://www.db.com/ir/en/content/ordinary_share.htm (http://www.db.com/ir/en/content/ordinary_share.htm)
--> http://www.db.com/ir/en/content/reports_2011.htm (http://www.db.com/ir/en/content/reports_2011.htm)
---> http://www.db.com/ir/en/download/Deutsche_Bank_Annual_Report_2011_entire.pdf (http://www.db.com/ir/en/download/Deutsche_Bank_Annual_Report_2011_entire.pdf)


#1 DB, currently as of 2011:
2,164 assets
53.4 total equity

#11 BofA, currently as of 2011:
2,129 assets
230 total equity

There might be something to Dimon's complaint about how european banks risk weight their assets. DB RWA are $380 billion on total asset base of $2100 billion.

Vinod
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on March 29, 2012, 10:17:27 AM
Dismissed! Good for BAC, bad for Baupost. Now ... to read the ruling in detail.


http://newsandinsight.thomsonreuters.com/uploadedFiles/Reuters_Content/2012/03_-_March/Walnut_place_I_decision_order.pdf
Title: Re: BAC-WT - Bank of America Warrants
Post by: Grenville on March 29, 2012, 10:34:26 AM
Dismissed! Good for BAC, bad for Baupost. Now ... to read the ruling in detail.


http://newsandinsight.thomsonreuters.com/uploadedFiles/Reuters_Content/2012/03_-_March/Walnut_place_I_decision_order.pdf

Nice! Thanks for the link to the decision.
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on March 29, 2012, 10:58:22 AM

Moreover, the trustee did in fact act upon plaintiff's complaints as demonstrated by the settlement agreement reached with the defendents

Hurray?
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on March 29, 2012, 11:05:47 AM
Hurray!

http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=43567&terms=@ReutersTopicCodes+CONTAINS+'ANV'


Given that the pooling and servicing agreements governing the 503 Countrywide MBS trusts in the proposed settlement are similar to those at issue in the Walnut case, it's hard to see how any investor could get past Kapnick's reasoning on the trustee's action. That means all Countrywide reps and warranties claims against BofA and BNY Mellon are at stake in the proposed global deal.

Kapnick's ruling also seems to me to reduce the leverage of settlement objectors as the Article 77 proceeding continues before her. For one thing, Walnut and the few other objectors who brought their own suits against Countrywide, BofA, and BNY Mellon can't argue that the settlement is usurping their individual claims; under Kapnick's reasoning, they don't have viable cases because of the settlement. For another, Kapnick's ruling means more uncertainty for investors thinking about blowing up the settlement and bringing individual claims. At the very least, it gives the banks an argument that investors are procedurally barred from bringing individual suits, even if Kapnick decides BNY Mellon's agreement to the deal was unreasonable. The procedural argument would further complicate an already unprecedented scenario. Those pooling and servicing agreements never contemplated anything like the Countrywide MBS litigation. (Walnut Place counsel David Grais and Owen Cyrulnik of Grais & Ellsworth didn't respond to an email request for comment.)

Meanwhile, next week will officially relaunch the Article 77 proceeding before Kapnick. The case returned to state court last month. BNY Mellon counsel Matthew Ingber of Mayer Brown sent a letter outlining the issues to the judge on March 12; Daniel Reilly of Reilly Pozner, on behalf of the steering committee for settlement objectors, responded on March 16 with a letter contending that Article 77 is an improper vehicle for deciding the case.

Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on March 29, 2012, 11:26:31 AM
Hurray!

Yep, I'll second that. Hurray!!
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on March 29, 2012, 11:59:53 AM
At today's low of $4.50 the BAC class A warrants are now down 18.2% from their recent peak of $5.50.
Title: Re: BAC-WT - Bank of America Warrants
Post by: onyx1 on March 29, 2012, 12:03:13 PM
Great news indeed, and a step closer to validation of the BNY settlement.  Validation is very important since the BNY settlement is the basis for most of BAC's non-GSE R&W liability reserves.
Title: Re: BAC-WT - Bank of America Warrants
Post by: rranjan on March 29, 2012, 12:37:57 PM
Dismissed! Good for BAC, bad for Baupost. Now ... to read the ruling in detail.


http://newsandinsight.thomsonreuters.com/uploadedFiles/Reuters_Content/2012/03_-_March/Walnut_place_I_decision_order.pdf

Baupost does look for obscure stuff but I thought it was strange for them to get involved like this.
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on March 29, 2012, 01:33:50 PM
Baupost does look for obscure stuff but I thought it was strange for them to get involved like this.

It does look litigious when the trustee was working on the reps and warranties issue. Does not look as if Baupost was suing in good faith, just looking for ways to put pressure on the trustee.
Title: Re: BAC-WT - Bank of America Warrants
Post by: value-is-what-you-get on March 29, 2012, 02:06:02 PM
Great news indeed, and a step closer to validation of the BNY settlement.  Validation is very important since the BNY settlement is the basis for most of BAC's non-GSE R&W liability reserves.

From an earnings perspective, are releases from reserves added straight to the bottom line when a suit is thrown out?
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on March 29, 2012, 04:34:39 PM
We closed out our BAC B warrants a few days ago.  This isn't necessarily being negative on BAC, but simply is a reflection that the position was initiated in anticipation of a rebound from the end of the year extreme low that BAC reached.  :)
Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on March 29, 2012, 04:48:00 PM
We closed out our BAC B warrants a few days ago.  This isn't necessarily being negative on BAC, but simply is a reflection that the position was initiated in anticipation of a rebound from the end of the year extreme low that BAC reached.  :)

I must say, you guys have some extreme timing! And I'm not only speaking of BAC. Impressive!

I did sell some common stock (1/5th of position = 5% of portfolio) myself yesterday, but that was only because I wanted to buy FTP with the proceeds.
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on March 29, 2012, 07:22:04 PM
We closed out our BAC B warrants a few days ago.  This isn't necessarily being negative on BAC, but simply is a reflection that the position was initiated in anticipation of a rebound from the end of the year extreme low that BAC reached.  :)

I must say, you guys have some extreme timing! And I'm not only speaking of BAC. Impressive!

I did sell some common stock (1/5th of position = 5% of portfolio) myself yesterday, but that was only because I wanted to buy FTP with the proceeds.

The rebound from extreme end of the year lows is a phenomenom that has high probability.  :)
Title: Re: BAC-WT - Bank of America Warrants
Post by: alertmeipp on March 29, 2012, 07:27:49 PM
yup. besides BAC, a lot other have bounced too. But financial was the key driver for this rally for sure.

I am waiting for energy to turn. :)
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on March 30, 2012, 09:41:33 AM
We closed out our BAC B warrants a few days ago.  This isn't necessarily being negative on BAC, but simply is a reflection that the position was initiated in anticipation of a rebound from the end of the year extreme low that BAC reached.  :)

I must say, you guys have some extreme timing! And I'm not only speaking of BAC. Impressive!

I did sell some common stock (1/5th of position = 5% of portfolio) myself yesterday, but that was only because I wanted to buy FTP with the proceeds.

The rebound from extreme end of the year lows is a phenomenom that has high probability.  :)

There is one more thing we considered before closing out the position.  Pricing of long dated options is exquisitely sensitive to volatility.  The historical volatility of the stock and the implied vol of options on the stock has been very high.  If BAC's stock becomes less volatile in the future, the price of the warrants should decline significantly, ceteris paribus.
Title: Re: BAC-WT - Bank of America Warrants
Post by: thomcapital on March 30, 2012, 09:52:00 AM
There is one more thing we considered before closing out the position.  Pricing of long dated options is exquisitely sensitive to volatility.  The historical volatility of the stock and the implied vol of options on the stock has been very high.  If BAC's stock becomes less volatile in the future, the price of the warrants should decline significantly, ceteris paribus.

I asked a related question about changing implied volatility several pages back in this thread (pg 34) but didn't get any takers. In the end, I decided implied volatility won't matter at expiration, which is when I plan on converting.  :)

Am still curious what others think about the matter, though.
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on March 30, 2012, 10:38:04 AM
There is one more thing we considered before closing out the position.  Pricing of long dated options is exquisitely sensitive to volatility.  The historical volatility of the stock and the implied vol of options on the stock has been very high.  If BAC's stock becomes less volatile in the future, the price of the warrants should decline significantly, ceteris paribus.

I asked a related question about changing implied volatility several pages back in this thread (pg 34) but didn't get any takers. In the end, I decided implied volatility won't matter at expiration, which is when I plan on converting.  :)

Am still curious what others think about the matter, though.

Implied vol does matter because it affected the price you paid for the warrants.  As BAC is now trading closer to a rational price, it doesn't make as much sense to pay a large premium for the warrants.  Owning the stock instead of the warrants is something to consider  as the price of the warrants will decay if the price of the stock becomes less volatile for an extended period.  :)
Title: Re: BAC-WT - Bank of America Warrants
Post by: yitech on March 30, 2012, 10:57:27 PM
I agree. I swapped A shares for common since I thought high implied vol may not be sustainable once the stock price appreciates/stabilizes and no longer the poster child of high frequency trading...
Title: Re: BAC-WT - Bank of America Warrants
Post by: thomcapital on March 31, 2012, 08:23:40 AM

Implied vol does matter because it affected the price you paid for the warrants.  As BAC is now trading closer to a rational price, it doesn't make as much sense to pay a large premium for the warrants.  Owning the stock instead of the warrants is something to consider  as the price of the warrants will decay if the price of the stock becomes less volatile for an extended period.  :)


But if I am satisfied with the size of my current warrant position, and at my purchase price expect to realize an outstanding return on the warrants (especially after adjusting the strike price down for expected dividends, etc), should I care what happens to the warrant price between now and expiration? I suppose I get what you're saying, but really I'd hate to screw up a great thing and am just content to sit still. Please feel free to convince me otherwise. :)
Title: Re: BAC-WT - Bank of America Warrants
Post by: berkshiremystery on March 31, 2012, 08:31:44 AM
Francis Chou bought these warrants until last summer at an average purchase price of $7.7 (3.9 million warrants at a cost of $30,013,801), and averaged down in the last half year to $5.89 (6.9 million warrants at a cost of $40,628,161), probably with purchases at around ~$3.3...something. At cost basis he put about 1/10 of his Chou Associates Funds assets into them. IMHO, I think Chou must have thought that he got his first warrants with a significant margin of safety,...why would he have bought them in first place. Well, in hindsight, with the recent lows, around $2 before x-mas, he got them a little high, but sure i bet he has some higher value in his head. These warrants are a leveraged form of investing, i.e. derivatives, like FFH former CDS positions, and heck they are volatile, sure they are, but FFH wouldn't have sold them just at double price. We also shouldn't forget that Francis was the mastermind, behind Fairfax CDS ideas. You also have to be emotionally stable and patient. I only can follow Sanjeev's opinion for the BAC share price estimate, as it's also somehow my gut feeling and estimate,... BAC at tangible book value in one year, at book value probably in 2 years, further beyond they will be a good likelihood to pay good dividends and share repurchases. The warrants have a time frame until 2019. I rather would sit still, too much trading action (*sights, don't like the  word "trading action") can be sometimes hazardous to your wealth, i.e. paying capital gain taxes.
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on March 31, 2012, 09:09:31 AM

Implied vol does matter because it affected the price you paid for the warrants.  As BAC is now trading closer to a rational price, it doesn't make as much sense to pay a large premium for the warrants.  Owning the stock instead of the warrants is something to consider  as the price of the warrants will decay if the price of the stock becomes less volatile for an extended period.  :)


But if I am satisfied with the size of my current warrant position, and at my purchase price expect to realize an outstanding return on the warrants (especially after adjusting the strike price down for expected dividends, etc), should I care what happens to the warrant price between now and expiration? I suppose I get what you're saying, but really I'd hate to screw up a great thing and am just content to sit still. Please feel free to convince me otherwise. :)

I don't have a fixed opinion on the merits of owning the stock vs the A or B warrants as a long term investment.  In fact, I like leaps.  These are ultra leaps, and the A warrants have substantial protection if increased dividends are paid.  Also, a possible rise in interest rates in the years ahead may cancel out some of the possible decay in value from future normalization of the very high implied vol of the warrants.
Title: Re: BAC-WT - Bank of America Warrants
Post by: MrB on April 01, 2012, 10:26:38 AM
Martin Cap advisors neg view on BofA
see page 7 http://www.mcmadvisors.com/downloads/mcm_2011_annual_report__public_version.pdf
Title: Re: BAC-WT - Bank of America Warrants
Post by: rranjan on April 01, 2012, 12:09:24 PM
Martin Cap advisors neg view on BofA
see page 7 http://www.mcmadvisors.com/downloads/mcm_2011_annual_report__public_version.pdf

I was hoping for something new but most of the comments are not applicable in current situation. He is talking about historical mistakes made during last 15-20 years. Mistakes were made but investors need to look at the steps taken by current management and find the flaws. How much downside is still left due to mistakes made by past managements?

Somewhere he is mentioning about below average loans made during 2004 to 2008. Well, we are in 2012 and investors need to look how much bad loans are left and what's the impact due to these bad loans going forward. Total loan portfolio also has above average loans made after 2007-2008 but it was conveniently left out.


There is no point in only highlighting mistakes made by old management and ignore the good work done by new management. I also don't see the point of some older bad loans without seeing their impact going forward. No talk about earning powers of banks at all. It seems that he covered the negatives pretty well but ignored the positives completely. He has been negative on BAC for long time and it was correct decision to be negative initially but now he is using outdated arguments. Lots of this talk seems to be made mainly to convince his clients that he told them so without looking at the current situation rationally.
Title: Re: BAC-WT - Bank of America Warrants
Post by: racemize on April 01, 2012, 12:28:53 PM
Martin Cap advisors neg view on BofA
see page 7 http://www.mcmadvisors.com/downloads/mcm_2011_annual_report__public_version.pdf

I was hoping for something new but most of the comments are not applicable in current situation. He is talking about historical mistakes made during last 15-20 years. Mistakes were made but investors need to look at the steps taken by current management and find the flaws. How much downside is still left due to mistakes made by past managements?

Somewhere he is mentioning about below average loans made during 2004 to 2008. Well, we are in 2012 and investors need to look how much bad loans are left and what's the impact due to these bad loans going forward. Total loan porfolio also has above average loans made after 2007-2008 but it was conveniently left out.


There is no point in only highlighting mistakes made by old management and ignore the good work done by new management. I also don't see the point of some older bad loans without seeing their impact going forward. No talk about earning powers of banks at all. It seems that he covered the negatives pretty well but ignored the positives completely. He has been negative on BAC for long time and it was currect decision to be negative initially but now he is using outdated arguments. Lots of this talk seems to be made mainly to convince his clients that he told them so without looking at the current sitaution rationally.

I agree--the only point he seemed to have was on the FICA scores for 80 billion of the loans (compared to 120 billion of tier 1 equity), otherwise it seemed to be in the past (except for a reminder of the dividend issue, which I don't really care about).  Further, I don't care for the "clearly we were right because the stock dropped 50%" argument, particularly from someone who appears to be a value guy. 

Interesting letter, otherwise, though.  I'm on board with the debt level concerns.
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on April 01, 2012, 06:31:01 PM
Martin Cap advisors neg view on BofA
see page 7 http://www.mcmadvisors.com/downloads/mcm_2011_annual_report__public_version.pdf

That was a great letter Mr. B.  thanks for sharing.

The charts showing the massive destruction of shareholders' value by all the mega banks except WFC , which dramatically increased shareholders' value by passing on all the risky stuff and merely concentrating on blocking and tackling, were quite an eye opener.

It's possible that the serial offenders will at some point repent and will never do that stuff again, but the evidence shows they aren't there yet.  I can see why WEB likes the one that consistently avoided temptation and walked the straight and narrow.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Rabbitisrich on April 01, 2012, 06:58:11 PM
That's true but the advantage of relatively more cautious managers is much greater during the optimistic periods than in the recovery stage. MCM management underestimates the significance of Moynihan's management, perhaps as a result of overstating the significance of the dividend screwup last year.
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on April 01, 2012, 07:13:10 PM
That's true but the advantage of relatively more cautious managers is much greater during the optimistic periods than in the recovery stage. MCM management underestimates the significance of Moynihan's management, perhaps as a result of overstating the significance of the dividend screwup last year.

And then there was the observation in the letter that neither the CFO nor the Chief Accounting Officer were aware that the screwup had to be disclosed in their regulatory filings.  I guess they left that detail to one of the lawyers and advisors that they pay almost one billion dollars a quarter to take care of such things. 

The amount they pay lawyers and financial advisors annually is almost as much as the actual and implied rent they pay on all their properties such as branches  that are necessary to conduct business, according to Martin.
Title: Re: BAC-WT - Bank of America Warrants
Post by: treasurehunt on April 01, 2012, 11:43:43 PM
I agree--the only point he seemed to have was on the FICA scores for 80 billion of the loans (compared to 120 billion of tier 1 equity), otherwise it seemed to be in the past (except for a reminder of the dividend issue, which I don't really care about).

Wells Fargo has 88 billion of loans to people with FICO scores below 640 on their books, compared to 80 billion with FICO below 620 for BAC (see pages 148 and 158 in the Wells annual report for details). Wells has Tier 1 capital of 114 billion. Doesn't look like BAC is that much worse off than Wells on this metric that Martin cites as a concern. The 80 billion for BAC and the 88 billion for WFC both include PCI loans -- option ARMs from Golden West in the case of Wells and mainly Countrywide loans in the case of BAC -- which I believe means that many of these loans are already written down significantly.

On page 7 of the letter, Martin mentions that BAC has 2.7 trillion in assets. The latest annual report shows just over 2.1 trillion in assets. Any idea how he got the 2.7 trillion number? Given all the research that he says he has done on the company, it can't just be a mistake, can it?
Title: Re: BAC-WT - Bank of America Warrants
Post by: sswan11 on April 02, 2012, 10:45:37 AM
From 4/2/12 Credit Suisse report on BAC:

■  The impact of Basel III is meaningful for certain banks given the impact on certain investment and trading businesses. We expect that the large cap banks will meet the minimums within varying timelines.  We view BAC as the
bank requiring the longest time horizon  to become compliant with fullyphased in B3 minimums.  We expect BAC to reach its 9.0% target in 2H’14  which represent our estimate of the fully phased-in minimum, inclusive of an
estimated 200bp SIFI buffer.

■  We are forecasting a 7.1% Basel III Tier 1 ratio by year-end 2012. Given the
company’s capital positioning, Bank of America did not request any capital
management activities with the 2012 CCAR process.  The company
continues to optimize the balance–which has included sales of financial
stakes, as well as sales of MSRs and RWA mitigation. We estimate an
improvement in regulatory capital ratios as capital deductions become
smaller as MSRs and DTAs wind-down and RWA mitigation continues.
Title: Re: BAC-WT - Bank of America Warrants
Post by: sswan11 on April 02, 2012, 10:48:29 AM
Management Guidance: Bank of America provided guidance of Basel III Tier 1 common ratio of 7.25-7.5% by year-end 2012.
Our 2012 Basel III estimate of 7.1% comes in lower than management guidance as we factored in negative ACOI, while we estimate that management guidance includes a $0 AOCI balance.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ShahKhezri on April 02, 2012, 11:31:37 AM
I agree--the only point he seemed to have was on the FICA scores for 80 billion of the loans (compared to 120 billion of tier 1 equity), otherwise it seemed to be in the past (except for a reminder of the dividend issue, which I don't really care about).

Wells Fargo has 88 billion of loans to people with FICO scores below 640 on their books, compared to 80 billion with FICO below 620 for BAC (see pages 148 and 158 in the Wells annual report for details). Wells has Tier 1 capital of 114 billion. Doesn't look like BAC is that much worse off than Wells on this metric that Martin cites as a concern. The 80 billion for BAC and the 88 billion for WFC both include PCI loans -- option ARMs from Golden West in the case of Wells and mainly Countrywide loans in the case of BAC -- which I believe means that many of these loans are already written down significantly.

On page 7 of the letter, Martin mentions that BAC has 2.7 trillion in assets. The latest annual report shows just over 2.1 trillion in assets. Any idea how he got the 2.7 trillion number? Given all the research that he says he has done on the company, it can't just be a mistake, can it?

Only difference is Wells doesn't stuff everyones mail box with credit card offers, it's a cross sell.  For everone else, this unsecured debt to below avg. fico scores is a risk.
Title: Re: BAC-WT - Bank of America Warrants
Post by: vinod1 on April 02, 2012, 12:34:12 PM
I agree--the only point he seemed to have was on the FICA scores for 80 billion of the loans (compared to 120 billion of tier 1 equity), otherwise it seemed to be in the past (except for a reminder of the dividend issue, which I don't really care about).

Wells Fargo has 88 billion of loans to people with FICO scores below 640 on their books, compared to 80 billion with FICO below 620 for BAC (see pages 148 and 158 in the Wells annual report for details). Wells has Tier 1 capital of 114 billion. Doesn't look like BAC is that much worse off than Wells on this metric that Martin cites as a concern. The 80 billion for BAC and the 88 billion for WFC both include PCI loans -- option ARMs from Golden West in the case of Wells and mainly Countrywide loans in the case of BAC -- which I believe means that many of these loans are already written down significantly.

On page 7 of the letter, Martin mentions that BAC has 2.7 trillion in assets. The latest annual report shows just over 2.1 trillion in assets. Any idea how he got the 2.7 trillion number? Given all the research that he says he has done on the company, it can't just be a mistake, can it?

He is very likely including off balance sheet items such as loan commitments and standby letters of credit/commercial letters of credit. Very roughly from memory this is around $500 billion.

This would be detailed in the foot notes if you are interested in with something like "contingencies".

Vinod
Title: Re: BAC-WT - Bank of America Warrants
Post by: treasurehunt on April 02, 2012, 02:00:49 PM
He is very likely including off balance sheet items such as loan commitments and standby letters of credit/commercial letters of credit. Very roughly from memory this is around $500 billion.

This would be detailed in the foot notes if you are interested in with something like "contingencies".

Vinod

Good guess. From Note 14 of the annual report, BAC has almost $450 billion of "legally binding commitments" and another $450 billion of unused credit card lines. Maybe Martin is including the legally binding commitments in total assets.

I don't think Martin's letter made a very good bear case against BAC, but he did get me to take a closer look at the BAC annual report.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Rabbitisrich on April 02, 2012, 11:22:03 PM
I agree--the only point he seemed to have was on the FICA scores for 80 billion of the loans (compared to 120 billion of tier 1 equity), otherwise it seemed to be in the past (except for a reminder of the dividend issue, which I don't really care about).

Wells Fargo has 88 billion of loans to people with FICO scores below 640 on their books, compared to 80 billion with FICO below 620 for BAC (see pages 148 and 158 in the Wells annual report for details). Wells has Tier 1 capital of 114 billion. Doesn't look like BAC is that much worse off than Wells on this metric that Martin cites as a concern. The 80 billion for BAC and the 88 billion for WFC both include PCI loans -- option ARMs from Golden West in the case of Wells and mainly Countrywide loans in the case of BAC -- which I believe means that many of these loans are already written down significantly.

On page 7 of the letter, Martin mentions that BAC has 2.7 trillion in assets. The latest annual report shows just over 2.1 trillion in assets. Any idea how he got the 2.7 trillion number? Given all the research that he says he has done on the company, it can't just be a mistake, can it?

Only difference is Wells doesn't stuff everyones mail box with credit card offers, it's a cross sell.  For everone else, this unsecured debt to below avg. fico scores is a risk.

I think MCM referred specifically to < 620 FICO of residential mortgages (secured and unsecured). Ex-PCI and insured loans, BAC and WFC are pretty similar at around 15% below 620/640. The point he misses is the thing that Berkowitz keeps saying: what are likely losses relative to PPTP. The declining NIM and the presumably temporary non-interest expense level is still mitigated by estimating a conservative range of PPTP to likely losses relative to price.
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on April 03, 2012, 01:07:53 AM
I agree--the only point he seemed to have was on the FICA scores for 80 billion of the loans (compared to 120 billion of tier 1 equity), otherwise it seemed to be in the past (except for a reminder of the dividend issue, which I don't really care about).

Wells Fargo has 88 billion of loans to people with FICO scores below 640 on their books, compared to 80 billion with FICO below 620 for BAC (see pages 148 and 158 in the Wells annual report for details). Wells has Tier 1 capital of 114 billion. Doesn't look like BAC is that much worse off than Wells on this metric that Martin cites as a concern. The 80 billion for BAC and the 88 billion for WFC both include PCI loans -- option ARMs from Golden West in the case of Wells and mainly Countrywide loans in the case of BAC -- which I believe means that many of these loans are already written down significantly.

On page 7 of the letter, Martin mentions that BAC has 2.7 trillion in assets. The latest annual report shows just over 2.1 trillion in assets. Any idea how he got the 2.7 trillion number? Given all the research that he says he has done on the company, it can't just be a mistake, can it?

There isn't a dramatic difference in those FICO scores, but how did they get these bad loans?  A lot of BAC's bad mortgages came with the Countrywide acquisition that has caused a massive destruction of shareholder value.  The great majority of WFC's bad mortgages came from the Wacovia acquisition that has produced a huge increase in WFC's IV and ultimately an increase in their IV per share.

The Wacovia acquisition was a classic good bank / bad bank deal.  The Wacovia good bank part of the deal doubled WFC's deposits through a conservative banking culture.   The bad bank Golden West part of the deal was the source of most of the bad mortgages.  That was the price WFC had to pay to get the good bank, Wacovia.  :)
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on April 04, 2012, 03:37:46 PM
Where we are on the Article 77 litigation?

http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=44099&terms=@ReutersTopicCodes+CONTAINS+'ANV'


http://newsandinsight.thomsonreuters.com/Legal/News/2012/04_-_April/Does_Pauley_s_BNYM_ruling_spell_new_liability_for_MBS_trustees_/
Title: Re: BAC-WT - Bank of America Warrants
Post by: sswan11 on April 05, 2012, 04:53:16 PM
Dick Bove likes MS and still likes BAC throughout the summer:

http://www.cnbc.com/id/46971027
Title: Re: BAC-WT - Bank of America Warrants
Post by: racemize on April 06, 2012, 04:44:34 PM
anyone have any strong opinions on the shareholder votes/directors?  I'm reading through the material now, but if anyone's already given it some thought, please post!
Title: Re: BAC-WT - Bank of America Warrants
Post by: CONeal on April 06, 2012, 10:55:24 PM
anyone have any strong opinions on the shareholder votes/directors?  I'm reading through the material now, but if anyone's already given it some thought, please post!

Voted with management with the exception of #6 Execs being required to hold large portions of stock. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: sswan11 on April 08, 2012, 10:58:17 PM
NYTimes on BAC vs C:

http://www.nytimes.com/2012/04/09/business/taking-the-measure-of-citigroup-and-bank-of-america.html?ref=business
Title: Re: BAC-WT - Bank of America Warrants
Post by: WarrenWatsa on April 09, 2012, 12:52:55 AM
"Both trade at about 70 percent of book value, and both have been steadily increasing their capital levels since the dark days of 2008."

?

BAC is at 0.46 P/B while C is at 0.57 P/B.

Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on April 09, 2012, 05:27:16 AM
The word "tangible" was omitted.  .7x is correct.
Title: Re: BAC-WT - Bank of America Warrants
Post by: benchmark on April 17, 2012, 10:05:55 AM
How about Jan 14 in the money call? $7 call is trading at around $3.15. It seems an easy double or tripple, comparing to the common?
Title: Re: BAC-WT - Bank of America Warrants
Post by: lessthaniv on April 17, 2012, 12:56:30 PM
How about Jan 14 in the money call? $7 call is trading at around $3.15. It seems an easy double or tripple, comparing to the common?

I own some $10 & $12's.
Both strikes below TBV and more leverage.
Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on April 19, 2012, 06:43:47 AM
Kinda quiet here. Not sure why!

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-newsArticle&ID=1684843&highlight=
Title: Re: BAC-WT - Bank of America Warrants
Post by: racemize on April 19, 2012, 06:52:38 AM
I missed the call, anything of note?  e.g., any news on Reps and Warranties front?
Title: Re: BAC-WT - Bank of America Warrants
Post by: Parsad on April 19, 2012, 07:17:31 AM
They are just killing it from a balance sheet perspective.  I think they will hit Basel III by the end of this year!  No reason whatsoever this thing should be trading at anything less than tangible book.  European exposure down to $9.8B!  Cheers!
Title: Re: BAC-WT - Bank of America Warrants
Post by: keerthiprasad on April 19, 2012, 09:22:38 AM
Agreed.  They are continuing to move in the right direction.  I'm actually surprised we didn't see a positive bump in the share price today.
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on April 19, 2012, 09:31:29 AM
Capital ratios doing great, profitable, cheap. Stay the course.
Title: Re: BAC-WT - Bank of America Warrants
Post by: bmichaud on April 19, 2012, 09:39:23 AM
Earnings transcript if anyone is interested....

Adjusted PTPP earnings look great! Reported FTE PTPP was $3.3B versus $9.4B after adjusting for debt/trps repurchase gains, FVA and DVA, R&W provision, non-core LAS NIE and preferred dividends.
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on April 19, 2012, 10:14:08 AM
Earnings transcript if anyone is interested....

Adjusted PTPP earnings look great! Reported FTE PTPP was $3.3B versus $9.4B after adjusting for debt/trps repurchase gains, FVA and DVA, R&W provision, non-core LAS NIE and preferred dividends.

Thanks for the transcript! Where did you find the adjusted PTPP?  Page 5 shows some one time gains too.
Title: Re: BAC-WT - Bank of America Warrants
Post by: racemize on April 19, 2012, 11:10:16 AM
here's the zerohedge, for fun:

http://www.zerohedge.com/news/bank-america-earnings-cutting-through-noise

Title: Re: BAC-WT - Bank of America Warrants
Post by: bmichaud on April 19, 2012, 11:11:36 AM
I adjusted it myself. I left in equity investment income and gains on sales of debt securities since those are lumpy quarter-to-quarter (i.e. they are not one-time gains such as the CCB sale was last year). LAS noninterest expense was $3B, found on page 13 - I assume $300MM is "core LAS" expense, as guided by the Company last year, so I add back $2.7B to come up with "adjusted PTPP". Preferred dividends of $325MM I adjusted using a 35% tax rate to come up with $500MM pre-tax (since they are not tax deductible). Lastly, I added back R&W provision of $282MM.
Title: Re: BAC-WT - Bank of America Warrants
Post by: nkp007 on April 19, 2012, 11:31:27 AM
Earnings transcript if anyone is interested....

Adjusted PTPP earnings look great! Reported FTE PTPP was $3.3B versus $9.4B after adjusting for debt/trps repurchase gains, FVA and DVA, R&W provision, non-core LAS NIE and preferred dividends.

I made some conservative, broad adjustments and came to ~$7 billion in PTPP. Annualized ($28 billion) and on a share count of 11 billion, that's around $2.55 per share of PTPP.

What this tells me is that BAC has significant cash coming in through the door to handle liabilities. I also think we're still near a trough margins type of situation for big U.S. banks. As BAC settles its cloudy litigation and the U.S. economy strengthens, the crowd will start to love it.

I've been buying the warrants for months, from as far back as when the stock was trading ~$5 to buying a few yesterday. As far as valuation, BAC is definitely worth more than tangible book value. In 2019, I think we'll be smiling back on these times.





Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on April 19, 2012, 12:13:49 PM
here's the zerohedge, for fun:

http://www.zerohedge.com/news/bank-america-earnings-cutting-through-noise

Did not they hear that the new home equity NPAs are performing? And their issue with the reps and warranties reserve ... OK I will stop there.
Title: Re: BAC-WT - Bank of America Warrants
Post by: racemize on April 19, 2012, 12:20:53 PM
here's the zerohedge, for fun:

http://www.zerohedge.com/news/bank-america-earnings-cutting-through-noise

Did not they hear that the new home equity NPAs are performing? And their issue with the reps and warranties reserve ... OK I will stop there.

yeah for a group that makes fun of the short term nature of the reports, they sure are ignoring the long term trends...
Title: Re: BAC-WT - Bank of America Warrants
Post by: CONeal on April 19, 2012, 05:38:17 PM
Wondering if WB will expose this little wonder company during his annual meeting.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Cardboard on April 20, 2012, 08:59:43 AM
http://blogs.wsj.com/deals/2012/04/20/mike-mayo-cuts-bofa-to-sell/?mod=yahoo_hs

Another a-hole, just like Meredith Whitney. At least Paulson was able to see a rebound after the depth. Can't believe that the Street is still so influenced by these 2 with BAC down over 2% today.

Cardboard
Title: Re: BAC-WT - Bank of America Warrants
Post by: goldfinger on April 20, 2012, 10:14:32 AM
Quote
http://blogs.wsj.com/deals/2012/04/20/mike-mayo-cuts-bofa-to-sell/?mod=yahoo_hs

Another a-hole, just like Meredith Whitney. At least Paulson was able to see a rebound after the depth. Can't believe that the Street is still so influenced by these 2 with BAC down over 2% today.

Cardboard

Agreed. What an idiot!
But I am wondering if the downside today is not related to the article 78 hearing (MBIA is also down). That's how the market deals with "uncertainty"! :-X
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on April 20, 2012, 10:33:22 AM
Sounds like this Brian Charles, an analyst at RW Pressprich & Co,  has actually run the numbers and is following the legal process. Has anyone heard of him before?
http://www.bloomberg.com/video/90938665/
Title: Re: BAC-WT - Bank of America Warrants
Post by: bmichaud on April 20, 2012, 10:50:38 AM
Never heard of him, but his process for analyzing remaining R&W exposure is nearly identical to mine, though I come up with about $25B of potential exposure (I think he said his was $15B). If BAC can continue to generate the "core PTPP" it did this last quarter and phase out non-core LAS expenses, it should pretty easily be able to handle $25B.
Title: Re: BAC-WT - Bank of America Warrants
Post by: nkp007 on April 20, 2012, 11:17:38 AM
Never heard of him, but his process for analyzing remaining R&W exposure is nearly identical to mine, though I come up with about $25B of potential exposure (I think he said his was $15B). If BAC can continue to generate the "core PTPP" it did this last quarter and phase out non-core LAS expenses, it should pretty easily be able to handle $25B.

When you say exposure, do you mean R&W expenses beyond what have already been reserved for?
Title: Re: BAC-WT - Bank of America Warrants
Post by: bmichaud on April 20, 2012, 11:37:05 AM
Never heard of him, but his process for analyzing remaining R&W exposure is nearly identical to mine, though I come up with about $25B of potential exposure (I think he said his was $15B). If BAC can continue to generate the "core PTPP" it did this last quarter and phase out non-core LAS expenses, it should pretty easily be able to handle $25B.

When you say exposure, do you mean R&W expenses beyond what have already been reserved for?

Correct. "Possible" exposure if you will - BAC estimates possible exposure is around $5B, whereas I think it's more like $25B.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Kraven on April 20, 2012, 12:04:15 PM
Never heard of him, but his process for analyzing remaining R&W exposure is nearly identical to mine, though I come up with about $25B of potential exposure (I think he said his was $15B). If BAC can continue to generate the "core PTPP" it did this last quarter and phase out non-core LAS expenses, it should pretty easily be able to handle $25B.

When you say exposure, do you mean R&W expenses beyond what have already been reserved for?

Correct. "Possible" exposure if you will - BAC estimates possible exposure is around $5B, whereas I think it's more like $25B.

I assume you are familiar with the saying that it's better to be approximately right, than precisely wrong?  You are absolutely kidding yourself if you think you can estimate this better than the bank itself.  That's not to say that their estimate is God's gift to estimation, but at least they have more facts than you and it's not like they really have a huge incentive to under estimate it.  Yes, it increases current earnings, but better to do the big bath now.  I could give you the documents for a single MBS transaction including all of the appendices that list out the properties, etc.  Do you really believe it is possible to get a great estimate on thousands of properties and dozens of different reps?  If so, I would be interested in the methodology.  I am quite familiar with the underlying documentation and I wouldn't undertake to estimate even a single deal, not to mention the hundreds of deals done between Countrywide, BAC itself, etc. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: bmichaud on April 20, 2012, 12:11:31 PM
I would be DELIGHTED if I am wildly off base with a $25B estimate. Just trying to come up with a worst case scenario to see if BAC can earn its way through without needing to dilute any further.

All I did was take the remaining principle with 25 pmts or fewer payments and apply to-date repurchase and loss rates. More than likely they won't come anywhere near that amount, but it's just a worst case scenario for margin of safety purposes.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Kraven on April 20, 2012, 12:17:46 PM
I would be DELIGHTED if I am wildly off base with a $25B estimate. Just trying to come up with a worst case scenario to see if BAC can earn its way through without needing to dilute any further.

All I did was take the remaining principle with 25 pmts or fewer payments and apply to-date repurchase and loss rates. More than likely they won't come anywhere near that amount, but it's just a worst case scenario for margin of safety purposes.

I understand.  Better to be safe than sorry.  My point is simply that it's almost impossible to even guess this.  As you can see just from this thread, from the bank's estimate to the analyst to yours, we're talking differences of, what, $20 bil?  The number is actually not capable of being calculated.  It will depend on things that happen in real time.  When the judgment comes down or the settlement is reached, whatever, that's when we'll know.  I am not sure a worst case scenario can be calculated with any precision either.  It might make one feel better, but it's not that accurate in my opinion.  What it comes down to is that the matter seems to be under control and that looking at what has occurred so far we can (hopefully) be comfortable that the company has it well in hand.  But there is always the possibility of an armageddon scenario, although that seems highly unlikely at this point, but difficult to impossible to quantify.
Title: Re: BAC-WT - Bank of America Warrants
Post by: bmichaud on April 20, 2012, 12:34:17 PM
I hear what you're saying, I guess I'm just not following your point. Isn't that exactly what investing is all about, trying to handicap the unknown to the best of our ability? So if the loss ends up being $50B and I get diluted, then BAC ends up being fairly valued at $12 versus $16 (hypothetical numbers of course) but by buying with a margin of safety at $8 I still realize a return if it ends up at $12?

Perhaps I'm too simple minded with how I'm looking at it...
Title: Re: BAC-WT - Bank of America Warrants
Post by: Kraven on April 20, 2012, 12:52:34 PM
Yes, of course.  My point is that you are trying to quantify something that can't be quantified.  Whether the number is $5 bil, $25 bil or $50 bil, it would seem as if there is a MOS here.  But I don't think you can say well I'll go with $25 bil and state it as a matter of certainty.  It isn't knowable.  I also don't think it provides comfort to view that number as providing you a measure of safety.  I don't think you are being simple minded at all.  I think you are trying too hard in fact and making it more complicated than it is.  Think back to the Graham example of not needing to know exactly what a man weighs to know he is fat (or the very un PC example of not needing to know a woman's age to know that she is able to vote).  It seems clear that we know the man is heavier than he should be here.  We don't need to guess the weight. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: alertmeipp on April 20, 2012, 01:15:29 PM
Love the market, bought some of BAC at ~mid 8 today. When are they going to replay the insolvent news?
Title: Re: BAC-WT - Bank of America Warrants
Post by: nkp007 on April 20, 2012, 01:42:41 PM
Yes, of course.  My point is that you are trying to quantify something that can't be quantified.  Whether the number is $5 bil, $25 bil or $50 bil, it would seem as if there is a MOS here.  But I don't think you can say well I'll go with $25 bil and state it as a matter of certainty.  It isn't knowable.  I also don't think it provides comfort to view that number as providing you a measure of safety.  I don't think you are being simple minded at all.  I think you are trying too hard in fact and making it more complicated than it is.  Think back to the Graham example of not needing to know exactly what a man weighs to know he is fat (or the very un PC example of not needing to know a woman's age to know that she is able to vote).  It seems clear that we know the man is heavier than he should be here.  We don't need to guess the weight.

I think bmichaud is acting similar to Graham by stating simply that he thinks a conservative estimate of exposure is $25B. He's judging it based on a worst case scenario that's 5X what BAC estimates.

In other words, even if BAC is wrong by a significant amount, it still should be OK given the PTPP cash coming in.

Even if his number was $15B or $35B, the same applies. BAC is cheap. How cheap? I don't know, but it is fat.
Title: Re: BAC-WT - Bank of America Warrants
Post by: bmichaud on April 20, 2012, 01:53:46 PM
Yes, of course.  My point is that you are trying to quantify something that can't be quantified.  Whether the number is $5 bil, $25 bil or $50 bil, it would seem as if there is a MOS here.  But I don't think you can say well I'll go with $25 bil and state it as a matter of certainty.  It isn't knowable.  I also don't think it provides comfort to view that number as providing you a measure of safety.  I don't think you are being simple minded at all.  I think you are trying too hard in fact and making it more complicated than it is.  Think back to the Graham example of not needing to know exactly what a man weighs to know he is fat (or the very un PC example of not needing to know a woman's age to know that she is able to vote).  It seems clear that we know the man is heavier than he should be here.  We don't need to guess the weight.

I hear what you're saying - though I think we may disagree on how much this BAC individual weighs. WFC at $22 with hardly any R&W exposure is/was an obese investment - BAC with significantly more R&W exposure and not nearly the juicy returns WFC has is not nearly as fat at almost any price given the risk of impairment.

We could debate ad nauseum. But your point is well taken, and I hear what your saying.
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on April 20, 2012, 01:58:40 PM
Obese.
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on April 20, 2012, 02:19:53 PM
Hey, this Brian Charles sounds like a smart guy. He does not even sound like an analyst.

http://search1.bloomberg.com/search/?content_type=video&page=1&template=tv&q=brian%20charles

His PTPP seems a little high. For that a lot of things would have to go right, but not that much.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on April 20, 2012, 03:41:44 PM
Never heard of him, but his process for analyzing remaining R&W exposure is nearly identical to mine, though I come up with about $25B of potential exposure (I think he said his was $15B). If BAC can continue to generate the "core PTPP" it did this last quarter and phase out non-core LAS expenses, it should pretty easily be able to handle $25B.

When you say exposure, do you mean R&W expenses beyond what have already been reserved for?

Correct. "Possible" exposure if you will - BAC estimates possible exposure is around $5B, whereas I think it's more like $25B.

BAC estimates "non-GSE" exposure at possible $5b above accruals.

What about the GSE exposure?  It's not included in that figure and the bank has not estimated it for us.  GSE claims grew by nearly $2b in Q1 2012.

Title: Re: BAC-WT - Bank of America Warrants
Post by: Kraven on April 20, 2012, 03:45:37 PM
Yes, of course.  My point is that you are trying to quantify something that can't be quantified.  Whether the number is $5 bil, $25 bil or $50 bil, it would seem as if there is a MOS here.  But I don't think you can say well I'll go with $25 bil and state it as a matter of certainty.  It isn't knowable.  I also don't think it provides comfort to view that number as providing you a measure of safety.  I don't think you are being simple minded at all.  I think you are trying too hard in fact and making it more complicated than it is.  Think back to the Graham example of not needing to know exactly what a man weighs to know he is fat (or the very un PC example of not needing to know a woman's age to know that she is able to vote).  It seems clear that we know the man is heavier than he should be here.  We don't need to guess the weight.

I hear what you're saying - though I think we may disagree on how much this BAC individual weighs. WFC at $22 with hardly any R&W exposure is/was an obese investment - BAC with significantly more R&W exposure and not nearly the juicy returns WFC has is not nearly as fat at almost any price given the risk of impairment.

We could debate ad nauseum. But your point is well taken, and I hear what your saying.

Fair enough.  The interesting thing though is I thought the exact opposite.  BAC is obese, as Plan says.  WFC is and was a nice, trim athletic fellow.  Remember who won the race between the tortoise and the hare.  But I digress.
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on April 20, 2012, 04:31:14 PM
Analysts going into last earnings:

Buys: 11
Holds: 23
Sells: 5

With many of those holds from sell-side analysts that do not want to put a sell recommendation. Average target price: $9.63. Cheery consensus.

http://www.youtube.com/watch?v=5tlWAxSsTe0
Title: Re: BAC-WT - Bank of America Warrants
Post by: hardincap on April 20, 2012, 04:57:21 PM
Yes, of course.  My point is that you are trying to quantify something that can't be quantified.  Whether the number is $5 bil, $25 bil or $50 bil, it would seem as if there is a MOS here.  But I don't think you can say well I'll go with $25 bil and state it as a matter of certainty.  It isn't knowable.  I also don't think it provides comfort to view that number as providing you a measure of safety.  I don't think you are being simple minded at all.  I think you are trying too hard in fact and making it more complicated than it is.  Think back to the Graham example of not needing to know exactly what a man weighs to know he is fat (or the very un PC example of not needing to know a woman's age to know that she is able to vote).  It seems clear that we know the man is heavier than he should be here.  We don't need to guess the weight.

I hear what you're saying - though I think we may disagree on how much this BAC individual weighs. WFC at $22 with hardly any R&W exposure is/was an obese investment - BAC with significantly more R&W exposure and not nearly the juicy returns WFC has is not nearly as fat at almost any price given the risk of impairment.

We could debate ad nauseum. But your point is well taken, and I hear what your saying.

Fair enough.  The interesting thing though is I thought the exact opposite.  BAC is obese, as Plan says.  WFC is and was a nice, trim athletic fellow.  Remember who won the race between the tortoise and the hare.  But I digress.

Im confused. Obese = good value or poor value?
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on April 20, 2012, 05:03:10 PM
Im confused. Obese = good value or poor value?

I meant good but who knows by now.
Title: Re: BAC-WT - Bank of America Warrants
Post by: bmichaud on April 20, 2012, 05:14:09 PM
Never heard of him, but his process for analyzing remaining R&W exposure is nearly identical to mine, though I come up with about $25B of potential exposure (I think he said his was $15B). If BAC can continue to generate the "core PTPP" it did this last quarter and phase out non-core LAS expenses, it should pretty easily be able to handle $25B.

When you say exposure, do you mean R&W expenses beyond what have already been reserved for?

Correct. "Possible" exposure if you will - BAC estimates possible exposure is around $5B, whereas I think it's more like $25B.

BAC estimates "non-GSE" exposure at possible $5b above accruals.

What about the GSE exposure?  It's not included in that figure and the bank has not estimated it for us.  GSE claims grew by nearly $2b in Q1 2012.

My $25B estimate includes non GSE principle less than 25 payments. Don't have the number handy but I think the principle is something like $64 billion.
Title: Re: BAC-WT - Bank of America Warrants
Post by: bmichaud on April 20, 2012, 05:27:39 PM
Yes, of course.  My point is that you are trying to quantify something that can't be quantified.  Whether the number is $5 bil, $25 bil or $50 bil, it would seem as if there is a MOS here.  But I don't think you can say well I'll go with $25 bil and state it as a matter of certainty.  It isn't knowable.  I also don't think it provides comfort to view that number as providing you a measure of safety.  I don't think you are being simple minded at all.  I think you are trying too hard in fact and making it more complicated than it is.  Think back to the Graham example of not needing to know exactly what a man weighs to know he is fat (or the very un PC example of not needing to know a woman's age to know that she is able to vote).  It seems clear that we know the man is heavier than he should be here.  We don't need to guess the weight.

I hear what you're saying - though I think we may disagree on how much this BAC individual weighs. WFC at $22 with hardly any R&W exposure is/was an obese investment - BAC with significantly more R&W exposure and not nearly the juicy returns WFC has is not nearly as fat at almost any price given the risk of impairment.

We could debate ad nauseum. But your point is well taken, and I hear what your saying.

Fair enough.  The interesting thing though is I thought the exact opposite.  BAC is obese, as Plan says.  WFC is and was a nice, trim athletic fellow.  Remember who won the race between the tortoise and the hare.  But I digress.

Perhaps I should rephrase - WFC is obese while BAC is obese with diabetes and at risk of heart attack. WFC is CURRENTLY earning 12.5% on total book value while paying out 50% of earnings. BAC can only dream about that type of ROE right now. I still think BAC is more attractive at this price, but it is not as fat as it appears, IMO.

Title: Re: BAC-WT - Bank of America Warrants
Post by: alertmeipp on April 20, 2012, 05:39:59 PM
Analysts going into last earnings:

Buys: 11
Holds: 23
Sells: 5

With many of those holds from sell-side analysts that do not want to put a sell recommendation. Average target price: $9.63. Cheery consensus.

http://www.youtube.com/watch?v=5tlWAxSsTe0

Mayo downgrades BAC to SELL after earning beat, why he didn't issue SELL when BAC was $10? Maybe he was actually da ultimate bull on BAC couple days ago.

Many of these analysts are ..
Title: Re: BAC-WT - Bank of America Warrants
Post by: thomcapital on April 20, 2012, 05:50:25 PM
Hey, this Brian Charles sounds like a smart guy. He does not even sound like an analyst.

http://search1.bloomberg.com/search/?content_type=video&page=1&template=tv&q=brian%20charles

His PTPP seems a little high. For that a lot of things would have to go right, but not that much.

Maybe I missed it - did Charles state his PTPP estimate? All I heard was normalized earnings of $16-17b...
Title: Re: BAC-WT - Bank of America Warrants
Post by: rranjan on April 20, 2012, 06:11:08 PM
Hey, this Brian Charles sounds like a smart guy. He does not even sound like an analyst.

http://search1.bloomberg.com/search/?content_type=video&page=1&template=tv&q=brian%20charles

His PTPP seems a little high. For that a lot of things would have to go right, but not that much.

Maybe I missed it - did Charles state his PTPP estimate? All I heard was normalized earnings of $16-17b...

I think somewhere he said 32B/year. He does not sound like analyst at all.
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on April 20, 2012, 07:42:23 PM
Maybe I missed it - did Charles state his PTPP estimate? All I heard was normalized earnings of $16-17b...

In one of those videos he says $45-50B PTPP, and after he deducts taxes (that actually they won't pay for a while) and steady state provisions he gets to mid 20s earnings power.

This is it: http://www.bloomberg.com/video/68727754
Title: Re: BAC-WT - Bank of America Warrants
Post by: hardincap on April 20, 2012, 09:12:45 PM
Maybe I missed it - did Charles state his PTPP estimate? All I heard was normalized earnings of $16-17b...

In one of those videos he says $45-50B PTPP, and after he deducts taxes (that actually they won't pay for a while) and steady state provisions he gets to mid 20s earnings power.

This is it: http://www.bloomberg.com/video/68727754

this was early last year, before revenues collapsed across the board in all of bac's businesses
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on April 20, 2012, 10:08:53 PM

Mayo downgrades BAC to SELL after earning beat, why he didn't issue SELL when BAC was $10? Maybe he was actually da ultimate bull on BAC couple days ago.

Many of these analysts are ..

Judging by the tone and content of Mayo's comments and the tone of the replies Mayo gets from executives at banks like BAC and Citigroup, I decided to Google the phrase "Mike Mayo obnoxious".

I came up with this commentary on him:

http://www.bankstocks.com/ArticleViewer.aspx?ArticleID=6379&ArticleTypeID=2


Mayo set a new mark for sell-side absurdity last month when he put out a note lambasting Bank of America for not having the guts to take a question from him on its third-quarter conference call—then had to issue a retraction soon after when it turned out he’d mistakenly dialed in on the listen-only telephone number.

...

When I was on the sell-side and heard some of the questions Mayo used to ask at conferences and on earnings calls, I got the impression that his work was perhaps slightly above average, but not much better than that, and that his grasp of the banking business could be shaky. When I moved to the buy-side and began reading his work more often, that suspicion was confirmed. (Since he moved to CLSA, I haven’t read a single report of his.)


Title: Re: BAC-WT - Bank of America Warrants
Post by: alertmeipp on April 21, 2012, 05:41:48 AM

Mayo downgrades BAC to SELL after earning beat, why he didn't issue SELL when BAC was $10? Maybe he was actually da ultimate bull on BAC couple days ago.

Many of these analysts are ..

Judging by the tone and content of Mayo's comments and the tone of the replies Mayo gets from executives at banks like BAC and Citigroup, I decided to Google the phrase "Mike Mayo obnoxious".

I came up with this commentary on him:

http://www.bankstocks.com/ArticleViewer.aspx?ArticleID=6379&ArticleTypeID=2


Mayo set a new mark for sell-side absurdity last month when he put out a note lambasting Bank of America for not having the guts to take a question from him on its third-quarter conference call—then had to issue a retraction soon after when it turned out he’d mistakenly dialed in on the listen-only telephone number.

...

When I was on the sell-side and heard some of the questions Mayo used to ask at conferences and on earnings calls, I got the impression that his work was perhaps slightly above average, but not much better than that, and that his grasp of the banking business could be shaky. When I moved to the buy-side and began reading his work more often, that suspicion was confirmed. (Since he moved to CLSA, I haven’t read a single report of his.)


How many times can these analysts make some stupid calls and still have their jobs?
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on April 21, 2012, 08:19:25 AM

Mayo downgrades BAC to SELL after earning beat, why he didn't issue SELL when BAC was $10? Maybe he was actually da ultimate bull on BAC couple days ago.

Many of these analysts are ..

Judging by the tone and content of Mayo's comments and the tone of the replies Mayo gets from executives at banks like BAC and Citigroup, I decided to Google the phrase "Mike Mayo obnoxious".

I came up with this commentary on him:

http://www.bankstocks.com/ArticleViewer.aspx?ArticleID=6379&ArticleTypeID=2


Mayo set a new mark for sell-side absurdity last month when he put out a note lambasting Bank of America for not having the guts to take a question from him on its third-quarter conference call—then had to issue a retraction soon after when it turned out he’d mistakenly dialed in on the listen-only telephone number.

...

When I was on the sell-side and heard some of the questions Mayo used to ask at conferences and on earnings calls, I got the impression that his work was perhaps slightly above average, but not much better than that, and that his grasp of the banking business could be shaky. When I moved to the buy-side and began reading his work more often, that suspicion was confirmed. (Since he moved to CLSA, I haven’t read a single report of his.)


How many times can these analysts make some stupid calls and still have their jobs?

On the other hand, Brown was touting all sorts of financial companies, especially First Marblehead, and mystery meat banks as they were going down the tubes during the financial crisis.

He's right that Mayo has a rather different sort of personality.
Title: Re: BAC-WT - Bank of America Warrants
Post by: thomcapital on April 21, 2012, 08:26:38 AM
Maybe I missed it - did Charles state his PTPP estimate? All I heard was normalized earnings of $16-17b...

In one of those videos he says $45-50B PTPP, and after he deducts taxes (that actually they won't pay for a while) and steady state provisions he gets to mid 20s earnings power.

This is it: http://www.bloomberg.com/video/68727754

His estimates don't seem that out of line compared to Moynihan's $35-40b in normalized pre-tax income? It's interesting to see where we are now, vs. what people thought a year ago, and what people think now about "normal" vs. what Moynihan said last March:

http://blogs.wsj.com/deals/2011/03/09/bank-of-america-investor-day-five-takeaways/
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on April 21, 2012, 09:16:19 AM
But Tom Brown is right in that Mayo asks questions which should lead us to wonder how well Mayo understands the business of the companies that he is covering.  For example, when BAC reports a revenue decline in excess of $10b and doesn't realize that what caused it was how R&W is accounted for. 

From Q4's conference call:

Mike Mayo - CLSA: Just one separate and last question. New project BAC, are you cutting enough? I guess, if you look at results for last year, revenues reported were down $17 billion, expenses were down $3 billion, that’s a big gap between the decline in revenues and decline in expenses and you can back out LAS and some other items, it's still seems to be a pretty big negative gap. So are you cutting as much as you need to? Do you have the structural project, but perhaps more cutting through this cycle, is that needed?


Brian T. Moynihan - CEO:
... snip ...
I would say you need to be -- just to remind you, and you know this Mike is that, there is negative revenue, rep and warranty cost is actually a negative revenues, so that has a fairly big impact.
... snip ...
Title: Re: BAC-WT - Bank of America Warrants
Post by: benchmark on April 21, 2012, 10:24:32 AM
http://www.nytimes.com/2012/04/21/business/bank-of-america-settlement-in-lawsuit-is-challenged.html?_r=1&hpw

laywers can't get enough fees
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on April 21, 2012, 10:26:36 AM
this was early last year, before revenues collapsed across the board in all of bac's businesses

Check Ericopoly's comment just above.

They have also increased undisclosed legal reserves like the recent $11.8B robosigning/foreclosure settlement that was already reserved but not disclosed. Capital ratios do not include these but they impact results.

http://www.revenuerecognition.com/content/experts/9011.asp
http://www.investopedia.com/terms/u/undisclosedreserves.asp#axzz1shFAvoFn
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on April 21, 2012, 10:50:03 AM
http://www.nytimes.com/2012/04/21/business/bank-of-america-settlement-in-lawsuit-is-challenged.html?_r=1&hpw

laywers can't get enough fees

So where are we? Comments? Misses?

GSEs: Settled. But Fannie asking to putback mortgage with failing insurance.
Private Label: Article 77 to go.
Monolines: AGO settled, MBIA and AMBAC to go
Foreclosure/Robosigning: Most AGs Settled, a couple of AGs to go.
Merrill Acquisition: settled
AIG: in process, but far cry.
FHFA: just starting



Title: Re: BAC-WT - Bank of America Warrants
Post by: CONeal on April 21, 2012, 12:12:59 PM
http://www.nytimes.com/2012/04/21/business/bank-of-america-settlement-in-lawsuit-is-challenged.html?_r=1&hpw

laywers can't get enough fees

So where are we? Comments? Misses?

GSEs: Settled. But Fannie asking to putback mortgage with failing insurance.
Private Label: Article 77 to go.
Monolines: AGO settled, MBIA and AMBAC to go
Foreclosure/Robosigning: Most AGs Settled, a couple of AGs to go.
Merrill Acquisition: settled
AIG: in process, but far cry.
FHFA: just starting

Wish the lawyers were a publicly trade company.  They are the real winners of this whole mess.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on April 21, 2012, 11:22:19 PM
His estimates don't seem that out of line compared to Moynihan's $35-40b in normalized pre-tax income? It's interesting to see where we are now, vs. what people thought a year ago, and what people think now about "normal" vs. what Moynihan said last March:

http://blogs.wsj.com/deals/2011/03/09/bank-of-america-investor-day-five-takeaways/

And the passing of 12 months hasn't led Moynihan to change his estimate at all.  He said $35b-$40b pre-tax income in March 2011, and he reiterated those same numbers in March 2012 -- he is sticking by his $35b-$40b pre-tax income numbers.

So Moynihan didn't change his story over the past 12 months.  He has had a lot of time to think about it, learn the company better... yet no change in his conclusion.

So $35b-$40b is the number I'm going with too.  I'll take his estimate over the rest of the analysts out there.

He made the comment at the Citigroup Financial Conference on 3/8/12:
http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/bac-longs-already-know-this/msg71351/#msg71351

I don't know where to find the video anymore.
Title: Re: BAC-WT - Bank of America Warrants
Post by: mankap on April 22, 2012, 06:59:07 AM
As I understand that BAC has reserves of $16B for R&W.This is as per 2011 10k.Even if we assume the worst case scenario of R&W cost of $25B, this means additional $9B cost which BAC can absorb.
Am I getting it right here or missing something?
Title: Re: BAC-WT - Bank of America Warrants
Post by: Grenville on April 22, 2012, 07:10:34 AM
I don't remember this being posted: The 2011 Annual Report is out with Brian Moynihan's letter to shareholder.

http://media.corporate-ir.net/Media_Files/IROL/71/71595/AR2011.pdf (http://media.corporate-ir.net/Media_Files/IROL/71/71595/AR2011.pdf)

He continues to stay focused, and has shown results in the areas of focus. I like their work in strengthening the balance sheet and reducing risk weighted assets especially so much in the last quarter.

Quote from the report:
Quote
Resolving these and other claims will take time, but we are moving through these issues aggressively and resolving them in the best interest of our shareholders — settling when appropriate, and contesting them when we believe that is the right course. There is considerable disclosure on our mortgage exposure in the Financial Review section of this report, and I encourage all shareholders to review this section.
Title: Re: BAC-WT - Bank of America Warrants
Post by: bmichaud on April 22, 2012, 07:18:06 AM
As I understand that BAC has reserves of $16B for R&W.This is as per 2011 10k.Even if we assume the worst case scenario of R&W cost of $25B, this means additional $9B cost which BAC can absorb.
Am I getting it right here or missing something?

The $25B is over and above the reserves. Just like the $5B "possible" BAC cites is over and above reserve estimates.
Title: Re: BAC-WT - Bank of America Warrants
Post by: mankap on April 22, 2012, 12:57:51 PM
Thanks Bmi for clarification.
In 2 years time BAC tangible book value can still be close to $13, assuming the additional hit because of R&W (around $20B) will be compensated by increase in book value due to earning and other factors.
Title: Re: BAC-WT - Bank of America Warrants
Post by: hardincap on April 22, 2012, 02:59:49 PM
His estimates don't seem that out of line compared to Moynihan's $35-40b in normalized pre-tax income? It's interesting to see where we are now, vs. what people thought a year ago, and what people think now about "normal" vs. what Moynihan said last March:

http://blogs.wsj.com/deals/2011/03/09/bank-of-america-investor-day-five-takeaways/

And the passing of 12 months hasn't led Moynihan to change his estimate at all.  He said $35b-$40b pre-tax income in March 2011, and he reiterated those same numbers in March 2012 -- he is sticking by his $35b-$40b pre-tax income numbers.

So Moynihan didn't change his story over the past 12 months.  He has had a lot of time to think about it, learn the company better... yet no change in his conclusion.

So $35b-$40b is the number I'm going with too.  I'll take his estimate over the rest of the analysts out there.

He made the comment at the Citigroup Financial Conference on 3/8/12:
http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/bac-longs-already-know-this/msg71351/#msg71351

I don't know where to find the video anymore.

The trouble is we wont be in a "normal" environment for a long while. People have to get used to "new normal" subpar growth from here, as Charlie Munger and Bill Grows says.  Revenues have collapsed in all of BAC's businesses--not just due to higher mortgage related provisioning, but credit card rules, poor investment banking climate, etc.

It's interesting he mentioned 35-40bn number, because during one of the conf calls last year when someone asked him that question he sidestepped it, saying something to the effect of the economy is running poorer than he anticipated.
Title: Re: BAC-WT - Bank of America Warrants
Post by: txlaw on April 22, 2012, 03:32:41 PM
http://www.nytimes.com/2012/04/21/business/bank-of-america-settlement-in-lawsuit-is-challenged.html?_r=1&hpw

laywers can't get enough fees

So where are we? Comments? Misses?

GSEs: Settled. But Fannie asking to putback mortgage with failing insurance.
Private Label: Article 77 to go.
Monolines: AGO settled, MBIA and AMBAC to go
Foreclosure/Robosigning: Most AGs Settled, a couple of AGs to go.
Merrill Acquisition: settled
AIG: in process, but far cry.
FHFA: just starting

Wish the lawyers were a publicly trade company.  They are the real winners of this whole mess.

I wish some of these big law firms were publicly traded companies.  I might actually start shorting stocks for the first time ever.
Title: Re: BAC-WT - Bank of America Warrants
Post by: txlaw on April 22, 2012, 03:40:23 PM
His estimates don't seem that out of line compared to Moynihan's $35-40b in normalized pre-tax income? It's interesting to see where we are now, vs. what people thought a year ago, and what people think now about "normal" vs. what Moynihan said last March:

http://blogs.wsj.com/deals/2011/03/09/bank-of-america-investor-day-five-takeaways/

And the passing of 12 months hasn't led Moynihan to change his estimate at all.  He said $35b-$40b pre-tax income in March 2011, and he reiterated those same numbers in March 2012 -- he is sticking by his $35b-$40b pre-tax income numbers.

So Moynihan didn't change his story over the past 12 months.  He has had a lot of time to think about it, learn the company better... yet no change in his conclusion.

So $35b-$40b is the number I'm going with too.  I'll take his estimate over the rest of the analysts out there.

He made the comment at the Citigroup Financial Conference on 3/8/12:
http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/bac-longs-already-know-this/msg71351/#msg71351

I don't know where to find the video anymore.

The trouble is we wont be in a "normal" environment for a long while. People have to get used to "new normal" subpar growth from here, as Charlie Munger and Bill Grows says.  Revenues have collapsed in all of BAC's businesses--not just due to higher mortgage related provisioning, but credit card rules, poor investment banking climate, etc.

It's interesting he mentioned 35-40bn number, because during one of the conf calls last year when someone asked him that question he sidestepped it, saying something to the effect of the economy is running poorer than he anticipated.

This is precisely why BAC is such a good long term investment opportunity.  You are getting a great market price for the company based on the non-normal earnings that will show themselves after expenses and provisioning goes down, and the cross selling a la WFC starts to work. 

And when a normalized NIM environment does come back, people are going to be crazy-surprised by the hidden earnings power embedded in the BAC deposit franchise.  Also, I have to say that I'm getting less negative on ML the more I read about what's going on there. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: Kraven on April 22, 2012, 03:47:56 PM
http://www.nytimes.com/2012/04/21/business/bank-of-america-settlement-in-lawsuit-is-challenged.html?_r=1&hpw

laywers can't get enough fees

So where are we? Comments? Misses?

GSEs: Settled. But Fannie asking to putback mortgage with failing insurance.
Private Label: Article 77 to go.
Monolines: AGO settled, MBIA and AMBAC to go
Foreclosure/Robosigning: Most AGs Settled, a couple of AGs to go.
Merrill Acquisition: settled
AIG: in process, but far cry.
FHFA: just starting

Wish the lawyers were a publicly trade company.  They are the real winners of this whole mess.

I wish some of these big law firms were publicly traded companies.  I might actually start shorting stocks for the first time ever.

There are 1 or 2 public law firms in Australia.  No idea how they've done.
Title: Re: BAC-WT - Bank of America Warrants
Post by: hardincap on April 22, 2012, 03:49:26 PM
txlaw, when Moynihan says he intends to be basel iii compliant before doing any stock repurchases or dividend increases, is he including the SIFI buffer of 2.5%?
Title: Re: BAC-WT - Bank of America Warrants
Post by: benchmark on April 22, 2012, 04:38:05 PM

This is precisely why BAC is such a good long term investment opportunity.  You are getting a great market price for the company based on the non-normal earnings that will show themselves after expenses and provisioning goes down, and the cross selling a la WFC starts to work. 

And when a normalized NIM environment does come back, people are going to be crazy-surprised by the hidden earnings power embedded in the BAC deposit franchise.  Also, I have to say that I'm getting less negative on ML the more I read about what's going on there.

The cross-selling that works wonder for WFC isn't something that BAC can master easily, I wouldn't count on that.
Title: Re: BAC-WT - Bank of America Warrants
Post by: hardincap on April 22, 2012, 04:52:15 PM
Agree w benchmark.. Wishful thinking!
Title: Re: BAC-WT - Bank of America Warrants
Post by: txlaw on April 22, 2012, 04:55:30 PM
txlaw, when Moynihan says he intends to be basel iii compliant before doing any stock repurchases or dividend increases, is he including the SIFI buffer of 2.5%?

Not sure.  Actually, didn't Moynihan say he would not up the dividend or do buybacks until he was sure the Fed would approve? 

Since Basel III, which includes the SIFI surcharge, is being phased in, I would assume that compliance would mean being safely on track to meet the phase in targets. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: hardincap on April 22, 2012, 04:58:42 PM
Txlaw, they are way ahead of phase in reqs. Moynihan said he wants to "blow through" Basel reqs before returning capital, but not sure he is including sifi buffer of 2.5. If so it could take a while...
Title: Re: BAC-WT - Bank of America Warrants
Post by: txlaw on April 22, 2012, 05:01:25 PM

This is precisely why BAC is such a good long term investment opportunity.  You are getting a great market price for the company based on the non-normal earnings that will show themselves after expenses and provisioning goes down, and the cross selling a la WFC starts to work. 

And when a normalized NIM environment does come back, people are going to be crazy-surprised by the hidden earnings power embedded in the BAC deposit franchise.  Also, I have to say that I'm getting less negative on ML the more I read about what's going on there.

The cross-selling that works wonder for WFC isn't something that BAC can master easily, I wouldn't count on that.

Well, even without cross selling working, it is cheap on a non-normal earnings basis.

But I believe BAC will actually do quite well with cross selling, primarily because I believe in Moynihan getting the job done.  Also, the BAC deposit franchise makes BAC more likely to pull off a WFC cross selling model than any other big bank.
Title: Re: BAC-WT - Bank of America Warrants
Post by: txlaw on April 22, 2012, 05:12:19 PM
Txlaw, they are way ahead of phase in reqs. Moynihan said he wants to "blow through" Basel reqs before returning capital, but not sure he is including sifi buffer of 2.5. If so it could take a while...

I should have said that BAC would probably want to more than adequately meet those milestones, including SIFI buffer -- fortress balance sheet-style. 

BAC said they would be at 7.5% Tier 1 ratio by EOY.  I have not been keeping track of what the phase in milestones are, but I assume that's not blowing out Basel III reqs.  But I could be wrong about that. 

Do you have a link to the presentation where he said he wanted to "blow through" the Basel III requirements before returning capital?  Was that in the last CC?
Title: Re: BAC-WT - Bank of America Warrants
Post by: enoch01 on April 22, 2012, 05:20:37 PM


Do you have a link to the presentation where he said he wanted to "blow through" the Basel III requirements before returning capital?  Was that in the last CC?

http://www.bloomberg.com/news/2012-03-14/pandit-repeats-moynihan-misstep-as-fed-rebuffs-citigroup.html

“We are not asking to change the dividend posture because, frankly, we’re close enough to Basel 3 that we just want to blow through it,” Moynihan said in a Jan. 19 staff meeting. “For 2012, we’re sticking to building back capital.”
Title: Re: BAC-WT - Bank of America Warrants
Post by: txlaw on April 22, 2012, 05:27:54 PM


Do you have a link to the presentation where he said he wanted to "blow through" the Basel III requirements before returning capital?  Was that in the last CC?

http://www.bloomberg.com/news/2012-03-14/pandit-repeats-moynihan-misstep-as-fed-rebuffs-citigroup.html

“We are not asking to change the dividend posture because, frankly, we’re close enough to Basel 3 that we just want to blow through it,” Moynihan said in a Jan. 19 staff meeting. “For 2012, we’re sticking to building back capital.”

Thanks!
Title: Re: BAC-WT - Bank of America Warrants
Post by: hardincap on April 22, 2012, 05:56:31 PM
txlaw, since you think the co is cheap compared to its non normal earnings, what do you estimate yearly PTPP rate to be currently?
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on April 22, 2012, 06:10:25 PM

BAC said they would be at 7.5% Tier 1 ratio by EOY.  I have not been keeping track of what the phase in milestones are, but I assume that's not blowing out Basel III reqs.  But I could be wrong about that. 


As far as the phase in milestones, it's a complete joke.  They need to hit 3.5% by 2013.  As you read this they are likely already prepared to hit the 2017 numbers.

See slide 21 for the rest of the milestones:

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDQ3ODAyfENoaWxkSUQ9NDcxNjkzfFR5cGU9MQ==&t=1

They are now saying "above 7.5%" by end of 2012 per latest CC. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on April 22, 2012, 06:14:14 PM
His estimates don't seem that out of line compared to Moynihan's $35-40b in normalized pre-tax income? It's interesting to see where we are now, vs. what people thought a year ago, and what people think now about "normal" vs. what Moynihan said last March:

http://blogs.wsj.com/deals/2011/03/09/bank-of-america-investor-day-five-takeaways/

And the passing of 12 months hasn't led Moynihan to change his estimate at all.  He said $35b-$40b pre-tax income in March 2011, and he reiterated those same numbers in March 2012 -- he is sticking by his $35b-$40b pre-tax income numbers.

So Moynihan didn't change his story over the past 12 months.  He has had a lot of time to think about it, learn the company better... yet no change in his conclusion.

So $35b-$40b is the number I'm going with too.  I'll take his estimate over the rest of the analysts out there.

He made the comment at the Citigroup Financial Conference on 3/8/12:
http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/bac-longs-already-know-this/msg71351/#msg71351

I don't know where to find the video anymore.

The trouble is we wont be in a "normal" environment for a long while. People have to get used to "new normal" subpar growth from here, as Charlie Munger and Bill Grows says.  Revenues have collapsed in all of BAC's businesses--not just due to higher mortgage related provisioning, but credit card rules, poor investment banking climate, etc.

It's interesting he mentioned 35-40bn number, because during one of the conf calls last year when someone asked him that question he sidestepped it, saying something to the effect of the economy is running poorer than he anticipated.

I agree environment won't be normal for a while.  However I think he is being conservative in the 35-40bn number in that he (I don't believe) is not adding in any gains from cross selling success.
Title: Re: BAC-WT - Bank of America Warrants
Post by: sswan11 on April 22, 2012, 06:34:46 PM
VIC write-up.  Probably some have already seen:

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/60745

 
The long case for Bank of America is not novel and was last formulated here by sag301 in June when the stock traded $10.60. Since then, BAC is down ~50% without a fundamental change to the thesis.

The upside is well understood and was advertised by Paulson, Berkowitz to be $3/share earnings power and a $30 stock price at 10x earnings, when earnings recover. With the implementation of various pernicious pieces of legislation (Durbin, Dodd-Frank, etc) and minor dilution from the Buffett deal and the recent preferred exchanges, the per-share earnings power has certainly decreased and been pushed out. With the fed’s rejection of BAC’s dividend request, returns of capital are no longer a short-term catalyst but, I would argue, do not change the intrinsic value of the franchise. A more realistic upside today would be closer to $1.50-2.00 EPS without increased interest rates, which translates to a $15-$20 stock if/when uncertainty over capital and legacy losses.

The downside comes from the prospect of highly dilutive 08-style capital raises forced upon Bank of America by regulators at the most inopportune time. Unlike the salad oil crisis at American Express, the downside is highly unlikely to be worse than $0 in the common. This is an extreme case, as even in extreme 2008 conditions, having a thin common equity cushion, BAC equity was not completely wiped out. To be intellectually honest, however, any ”believer” must admit that there are scenarios under which current BAC common is nearly wiped out a-la AIG.

If the upside is a $20 stock and the downside is highly dilutive capital raises at the most inopportune time, reward is 4x and risk is -100%. For purposes of analysis BAC can be thought of as a binary situation that boils down to whether the bank needs to raise expensive equity capital at very bad prices. In reality, of course, between the upside and downside cases lies a probability distribution of outcomes for equity holders. Everyone saw this with the Buffett preferred, which will increase the outstanding share count beyond the 10.1bn shares assumed by Paulson, but which clearly still makes BAC a home run if the final share count is 10.8bn after Warren exercises his warrant.

To tilt the odds further in our favor and take advantage of the asymmetry of the bet, we are buying a LEAP call spread between $7 and $12, expiring January 2014. The spread can currently be bought for under $1.00 per share  - the ask on $7 calls is $1.38 and bid on $12 calls is $0.41, so worst case cost of $0.97. If the stock trades $12 or above, the spread will mature at $5 in two years, earning a 5x return.  If the stock is below $7, the loss is 100%, and the break-even is $8.00.

This bet is not without historical precedent. In November 1992, Joel Greenblatt read an article in the OID where Bruce Berkowitz (then at Lehman) made a passionate case for his thesis on Wells Fargo (that article is here: http://www.fairholmefunds.com/pdf/oid1992.pdf). The abridged math for Wells at the time was: stock at $61, normalized pretax preprovision earnings of $36 per share, $30 normalized pretax, $18 normalized EPS, $180+ stock after recovery.

After seeing the article, Greenblatt had the insight to make the bet even more asymmetric.  He explained his options bet in “You Can Be A Stock Market Genius”, excerpt at http://www.scribd.com/doc/67041669/Excerpt-WFC-leaps. Simply put, he recognized that there *was* a possibility that Berkowitz and Buffett were wrong on Wells and that a confluence of a more severe California recession and company-specific issues could tank Wells, saying “but still—a bank is a funny animal. You never really know exactly what makes up its loan portfolio.”  Although he ascribed a low probability to the downside case, he structured his investment through 2-year LEAPSs struck at $80 per share, paying $14 in premium with the stock at the time trading at $77.

I am reluctant to conflate the thesis for 1992 WFC with 2012 BAC.  The problems at BAC today are different than those at Wells in the early 90s.  Unlike 1992 Wells, which gave details of real estate occupancy and cash flow, Bank of America does not provide the loan book transparency to allow investors to get supremely comfortable with the economics of the underlying collateral. Global regulators weren’t trying to overshoot on capital requirements. Wells was not facing the uncertainty of reps & warranties litigation, mortgage putbacks, etc.

At the same time, Bank of America has several very positive attributes today that make this bet very positive in expected value.  After all, we need a 20% probability of a 5x return for it to start to make sense and think the odds are significantly better than that.

The math at BAC is actually better in some respects than the math of the 1992 Wells thesis. With the stock at $5.60 and current pretax preprovision earnings over $3 per share (Moynihan cited $8.9bn as the quarterly number), investors pay under 2x PTPP.  Normalized earnings are higher, as the company is spending over $2bn a quarter cleaning up the mortgage mess, which translates to an additional $0.80 pretax earnings.  At over $13 in tangible book and a Merrill Lynch business that is less capital intensive, we can easily see BAC trading north of $12 in two years, which is all we need for our bet to be a home run.

The bears would argue that the company needs more capital and will be forced to raise it (without putting forth specific math for why they think more capital is needed).  This static argument ignores the fact that Bank of America has options at its disposal, such as a bankruptcy of Countrywide, the issuance of tracking stock for MER, accretive sales of business units, and the further shrinking of its risk weighted assets to meet Basel III on an accelerated schedule, if push came to shove.

Importantly, despite repeated assurance that significant equity dilution is not necessary, BAC could issue a lot of equity and *still* do well for common holders.  As a mathematical exercise, it is instructive to run the math on a doubling of the share count at current prices.  If BAC issued 10 billion shares at $5.50, it would raise $55bn of equity and have 20 billion shares outstanding. Its tangible book per share would be diluted to about $9.30 per share, which would grow above $10 over 2 years through retained earnings. This would make BAC the best capitalized large bank in the country and it could still earn over $1 per share in a normalized environment.  There is, of course, the nightmare scenario that a capital raise would be forced with the stock at $1, in which case the math is very unpleasant (and why we prefer the options bet to the common).

It is also interesting to look at the sum of the parts of the various businesses BAC acquired over the years.  For example, Merrill through the 90s and before the beginning of the housing boom earned $2-5bn pretax (depending on the year) and is likely worth more under BofA. Our conversations with individual wealth advisors suggest anecdotally that the potential book of business is much bigger today through cross-selling opportunities to existing BofA clients. Within BofA, the Merrill businesses are allocated $40bn of equity and earn mid-teens returns on equity, which is roughly worth today’s entire BAC market cap. Similarly, MBNA earned over $2bn pretax before being acquired for $35bn. For those interested, BAC in its 2011 investor day lay out the normalized metrics on the cards business, and the returns are very high even after including Durbin impacts.

For our bet to be a home run, we need a stock price of $12 by January of 2014. 2 years is a long time for a number of catalysts to play out, including less legacy mortgage issue uncertainty, investor confidence that banks will have a phased-in period of meeting Basel III + SIFI, improved economy, etc.  Meanwhile, BAC organically generates a significant amount of capital (estimates of over $2 per share in combined 2012+2013 earnings). Simply put, if investors figure out that the “worst is over” and BAC has over $14 in tangible book, with earnings power of $1.50-$2 per share, we have a hard time seeing the stock below $8 (our break-even) and can easily get to north of $12.
Title: Re: BAC-WT - Bank of America Warrants
Post by: hardincap on April 22, 2012, 06:46:43 PM
sswan11,

"current pretax preprovision earnings over $3 per share (Moynihan cited $8.9bn as the quarterly number"

this is Q2 number, before bac's businesses got whacked bigtime.

Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on April 22, 2012, 08:15:20 PM
this is Q2 number, before bac's businesses got whacked bigtime.

hardincap, did you read Eric's comment on how the reps and warranties reserve was accounted and my comment about undisclosed reserves? BAC's business has not changed that much with the exception of the fight with Fannie.
Title: Re: BAC-WT - Bank of America Warrants
Post by: hardincap on April 22, 2012, 08:43:45 PM
i think you need to read the quarterly numbers better, specifically, card services and global banking & markets
Title: Re: BAC-WT - Bank of America Warrants
Post by: txlaw on April 22, 2012, 10:30:00 PM
txlaw, since you think the co is cheap compared to its non normal earnings, what do you estimate yearly PTPP rate to be currently?

To be clear, when I say non-normal earnings, I include expense reductions that I think will occur over the next five years, include returns on incrementally invested capital that is generated through core ops and rationalization/freeing up of capital from non-core ops and assets, exclude accounting issues such as debt valuation adjustments, and adjust for segments that currently bleed cash like CRES.  All conservative estimates and I like to look at ranges of outcomes.

But I also assume a "not normal" macroeconomic environment.  In other words, the way I have valued BAC for my own purposes, I assume a compressed NIM for a long time and very little bounce back in income from i-banking activities and other non-interest income such as card services.  I also don't factor in cross selling success.

But I'm still looking out five years from now, so I don't really feel that current annualized PTPP means much in the analysis.  Suffice it to say I can see BAC easily hitting the $35b number five years from now if we get to a normalized macro environment and even if we don't get to a normalized macro environment.  10% ROE is not a fantasy, IMO.
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on April 22, 2012, 11:31:14 PM
i think you need to read the quarterly numbers better, specifically, card services and global banking & markets

Thanks for the short view advice.
Title: Re: BAC-WT - Bank of America Warrants
Post by: hardincap on April 23, 2012, 12:57:55 AM
i think you need to read the quarterly numbers better, specifically, card services and global banking & markets

Thanks for the short view advice.

Just making sure u have your "facts" straight

Before you delude yourself, remind yourself that all bad ideas are born good. Collapsing revenues need to be critically examined not brushed aside just because it's a "short view"
Title: Re: BAC-WT - Bank of America Warrants
Post by: hardincap on April 23, 2012, 01:01:41 AM
txlaw, since you think the co is cheap compared to its non normal earnings, what do you estimate yearly PTPP rate to be currently?

To be clear, when I say non-normal earnings, I include expense reductions that I think will occur over the next five years, include returns on incrementally invested capital that is generated through core ops and rationalization/freeing up of capital from non-core ops and assets, exclude accounting issues such as debt valuation adjustments, and adjust for segments that currently bleed cash like CRES.  All conservative estimates and I like to look at ranges of outcomes.

But I also assume a "not normal" macroeconomic environment.  In other words, the way I have valued BAC for my own purposes, I assume a compressed NIM for a long time and very little bounce back in income from i-banking activities and other non-interest income such as card services.  I also don't factor in cross selling success.

But I'm still looking out five years from now, so I don't really feel that current annualized PTPP means much in the analysis.  Suffice it to say I can see BAC easily hitting the $35b number five years from now if we get to a normalized macro environment and even if we don't get to a normalized macro environment.  10% ROE is not a fantasy, IMO.

We all agree bac is cheap on a normalized basis but you haven't answered why it's cheap on today's nonnormal basis.
Title: Re: BAC-WT - Bank of America Warrants
Post by: hardincap on April 23, 2012, 01:09:26 AM
Sorry if I'm being a pain. I'd like to challenge some of the long views in this forum bc they seem a bit facile to me. Just bc berkowitz is long doesn't mean it's a good investment. I have my suspicions about berkowitz. And no, Buffett isn't long. At his terms he pretty much got a gift.
Title: Re: BAC-WT - Bank of America Warrants
Post by: bmichaud on April 23, 2012, 04:16:02 AM
Who cares about today's non-normal basis or today's anything? As Grantham says in his latest letter, the majority of a business's value is derived from what happens beyond the next twenty years - i.e. the terminal value. The primary job today is to determine whether or not BAC can earn its way through this restructuring period and come out the other side with a clean terminal value. Thus the only relevance today has is how well BAC can earn its way through with today's cash flow.

This quarter BAC generated $9B of PTPP before LAS expenses, which is $36B annualized or $180B cumulative over the next five years. 

In 5 years, BAC will be 100% through pre-fin crisis underwriting (assuming 7 year average loan life). R&W exposure will be entirely null and void unless fannie and freddie go after pre-2004 vintages and/or go after loans with greater than 25 payments.

Total 2004-2008 principle exposed to repurchase demands for both agency and non-agency is less than $200B - this is the big bad scary number that Zero Hedge will cite as what could potentially wipe out BAC's equity. Doesn't take much to figure out that there is a certain rate of request BAC has historically faced and then further a loss rate on what is actually repurchased - rendering that $200B number not nearly as relevant as it seems.

So let's say annual LAS non-core expense is $12B or $60B cumulative over 5 years, remaining RW exposure is $25B, and annual provision expense is $13B or $65B over 5 years - that's $150B of crap that BAC has to earn its way through over five years. If cumulative PTPP is $180B, that means $30B is left over in five years, or $2.60 per share assuming 11.5B shares out.

For sake of simplicity let's say in year six BAC is able to earn 10% on BV, or $1.80 per share - 10x that is $18 + the $2.60 of cash left over is a $21 share price in five years. Discounted back at 12% is $11.92 in today's terms or $13 at 10%. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: Kraven on April 23, 2012, 05:42:11 AM

The cross-selling that works wonder for WFC isn't something that BAC can master easily, I wouldn't count on that.

Seriously?  You really believe WFC cross sells better than BAC?  Are they also more client focused?  Are they better at being a trusted advisor?  All meaningless drivel.
Title: Re: BAC-WT - Bank of America Warrants
Post by: racemize on April 23, 2012, 07:04:34 AM
Sorry if I'm being a pain. I'd like to challenge some of the long views in this forum bc they seem a bit facile to me. Just bc berkowitz is long doesn't mean it's a good investment. I have my suspicions about berkowitz. And no, Buffett isn't long. At his terms he pretty much got a gift.

I guess I'm missing the part where you are challenging the long views--the answers given all have to do with where the bank will be in a few years, but you keep asking where it will be in the short term.  Also, no one is providing the reason, "because [Berkowitz/Buffett/etc.] did it", so I think your second point is not pertinent.

Edit: Also +1 to bmichaud's post above
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on April 23, 2012, 07:26:12 AM
Sorry if I'm being a pain. I'd like to challenge some of the long views in this forum bc they seem a bit facile to me. Just bc berkowitz is long doesn't mean it's a good investment. I have my suspicions about berkowitz. And no, Buffett isn't long. At his terms he pretty much got a gift.

You are not being a pain, you can easily be ignored if needed. Breathe before you write. Do not insult and focus on the facts. Recognize the facts that are pointed to you. Do not play innuendo or hyperbole. Protect the forum and the quality of the discussion.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on April 23, 2012, 07:41:24 AM
Sorry if I'm being a pain. I'd like to challenge some of the long views in this forum bc they seem a bit facile to me. Just bc berkowitz is long doesn't mean it's a good investment. I have my suspicions about berkowitz. And no, Buffett isn't long. At his terms he pretty much got a gift.

Forget Berkowitz and Buffett, I'm long because a month ago hardincap wrote that he wanted the company to buy back stock before it hits $15-$20 in a year.
Title: Re: BAC-WT - Bank of America Warrants
Post by: txlaw on April 23, 2012, 08:11:15 AM
txlaw, since you think the co is cheap compared to its non normal earnings, what do you estimate yearly PTPP rate to be currently?

To be clear, when I say non-normal earnings, I include expense reductions that I think will occur over the next five years, include returns on incrementally invested capital that is generated through core ops and rationalization/freeing up of capital from non-core ops and assets, exclude accounting issues such as debt valuation adjustments, and adjust for segments that currently bleed cash like CRES.  All conservative estimates and I like to look at ranges of outcomes.

But I also assume a "not normal" macroeconomic environment.  In other words, the way I have valued BAC for my own purposes, I assume a compressed NIM for a long time and very little bounce back in income from i-banking activities and other non-interest income such as card services.  I also don't factor in cross selling success.

But I'm still looking out five years from now, so I don't really feel that current annualized PTPP means much in the analysis.  Suffice it to say I can see BAC easily hitting the $35b number five years from now if we get to a normalized macro environment and even if we don't get to a normalized macro environment.  10% ROE is not a fantasy, IMO.

We all agree bac is cheap on a normalized basis but you haven't answered why it's cheap on today's nonnormal basis.

I think I was trying to demonstrate in my last post that I am taking into account a non-normal macroeconomic environment when I say BAC is cheap.  I don't really see why you want to annualize current PTPP based on "collapsed revenues," negative spreads for certain segments, and elevated expenses, and take that as what BAC earns forever going forward.

bmichaud has obliged in terms of giving specific numbers, but I hate doing that in board posts because it just invites nitpicking.  If I were to give a range of earnings, which present a MOS and potential great upside, that would not be enough for people, and people would annoyingly try to dissect every single thing about the projections.

This isn't the VIC, and I don't like having to resort to false precision in order to make a point.
Title: Re: BAC-WT - Bank of America Warrants
Post by: txlaw on April 23, 2012, 08:16:50 AM

BAC said they would be at 7.5% Tier 1 ratio by EOY.  I have not been keeping track of what the phase in milestones are, but I assume that's not blowing out Basel III reqs.  But I could be wrong about that. 


As far as the phase in milestones, it's a complete joke.  They need to hit 3.5% by 2013.  As you read this they are likely already prepared to hit the 2017 numbers.

See slide 21 for the rest of the milestones:

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDQ3ODAyfENoaWxkSUQ9NDcxNjkzfFR5cGU9MQ==&t=1

They are now saying "above 7.5%" by end of 2012 per latest CC.

Those milestones are shockingly low.  I guess, because of the problems at the European banks?
Title: Re: BAC-WT - Bank of America Warrants
Post by: hardincap on April 23, 2012, 08:32:42 AM

The cross-selling that works wonder for WFC isn't something that BAC can master easily, I wouldn't count on that.

Seriously?  You really believe WFC cross sells better than BAC?  Are they also more client focused?  Are they better at being a trusted advisor?  All meaningless drivel.

yes wfc has a long reputation for being masters at cross selling.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Kraven on April 23, 2012, 08:43:02 AM

The cross-selling that works wonder for WFC isn't something that BAC can master easily, I wouldn't count on that.

Seriously?  You really believe WFC cross sells better than BAC?  Are they also more client focused?  Are they better at being a trusted advisor?  All meaningless drivel.

yes wfc has a long reputation for being masters at cross selling.

LOL, stop please, my sides hurt.  Is there a camera on me?  Masters of cross selling?  Perhaps you would be so kind as to educate me on how they are better at cross selling.  Some examples and details would be great.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on April 23, 2012, 08:51:04 AM

BAC said they would be at 7.5% Tier 1 ratio by EOY.  I have not been keeping track of what the phase in milestones are, but I assume that's not blowing out Basel III reqs.  But I could be wrong about that. 


As far as the phase in milestones, it's a complete joke.  They need to hit 3.5% by 2013.  As you read this they are likely already prepared to hit the 2017 numbers.

See slide 21 for the rest of the milestones:

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDQ3ODAyfENoaWxkSUQ9NDcxNjkzfFR5cGU9MQ==&t=1

They are now saying "above 7.5%" by end of 2012 per latest CC.

Those milestones are shockingly low.  I guess, because of the problems at the European banks?

Also noteworthy is the 0% capital deduction for 2013.  Compare that against BAC's guidance for 7.5%+ on a capital deduction fully phased in basis (this doesn't even become the official rule until 2018).


Title: Re: BAC-WT - Bank of America Warrants
Post by: Tim Eriksen on April 23, 2012, 10:13:18 AM
Who cares about today's non-normal basis or today's anything? As Grantham says in his latest letter, the majority of a business's value is derived from what happens beyond the next twenty years - i.e. the terminal value. The primary job today is to determine whether or not BAC can earn its way through this restructuring period and come out the other side with a clean terminal value. Thus the only relevance today has is how well BAC can earn its way through with today's cash flow.


Not to side track the conversation, but the idea that "the majority of a business's value is derived from what happens beyond the next twenty years" contradicts that the value of a firm is the present value of future cash flows discounted back to the present.  Grantham actually wrote, "As GMO's Ben Inker has written, two-thirds of all corporate value lies out beyond 20 years" which seems even more absurd. 
 
Grantham appears to have a different valuation model than typical value investors.  What happens beyond year 20 is typically 25% of a firm's value.   If an analysts terminal value is much more than that he/she likely has irrational future assumptions.   

Title: Re: BAC-WT - Bank of America Warrants
Post by: bmichaud on April 23, 2012, 11:45:20 AM
Quote
Grantham appears to have a different valuation model than typical value investors.  What happens beyond year 20 is typically 25% of a firm's value.   If an analysts terminal value is much more than that he/she likely has irrational future assumptions.
 

Going to have to respectfully disagree with you here. Curious how you arrive at the 25% figure.....

The attached spreadsheet is 20-year DCF of the S&P 500 using a normalized EPS figure of $70 per share as a starting point:

Cost of equity:       9%  (long-run return of the market according to GMO)
Growth rate:          6%  (long-run average earnings growth)
Terminal PE:          16.2 (times (the current history-to-date median Schiller PE ratio)
Payout ratio:         40%

Based on this DCF, which is a reasonable approximation of corporate America (is it not?), the present value of the terminal value represents 62% of the estimated fair value (i.e. all cash flows discounted back to today).

Perhaps we can banter about the inputs and bring the TV's influence down to 50%, but the point stands that the terminal value is critically important to the CURRENT fair value of any infinite-lived asset, MUCH more so than the 25% you cite.

Title: Re: BAC-WT - Bank of America Warrants
Post by: StubbleJumper on April 23, 2012, 12:07:26 PM

The cross-selling that works wonder for WFC isn't something that BAC can master easily, I wouldn't count on that.

Seriously?  You really believe WFC cross sells better than BAC?  Are they also more client focused?  Are they better at being a trusted advisor?  All meaningless drivel.

yes wfc has a long reputation for being masters at cross selling.

LOL, stop please, my sides hurt.  Is there a camera on me?  Masters of cross selling?  Perhaps you would be so kind as to educate me on how they are better at cross selling.  Some examples and details would be great.


Is WFC better at cross selling based on actual numbers?  Hard to know because there is no official definition of what constitutes a bank "product."  It's virtually certain that all banks measure their cross selling success differently.

However, that being said, having spent a few years perusing the investor propaganda on the WFC website, I can tell you that cross selling figures prominently in virtually every management presentation that I've flipped through.  WFC is very proud to show modest increases in the number of products per customer over a 5 or 6 year time frame, and identifies cross-selling as an opportunity to get further value from the Wachovia takeover.  It's hard to know whether WFC is actually drastically better than the other banks because there is no official measure and no systematic methodology to compare banks.  But if management's seeming obsession actually drives results (by training and compensating employees for cross-sales), then I would have no trouble believing that they'd be ahead of the crowd.

But ultimately, nobody really knows for sure which of WFC and BAC has the superior cross-sell results.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Tim Eriksen on April 23, 2012, 12:44:50 PM
Quote
Grantham appears to have a different valuation model than typical value investors.  What happens beyond year 20 is typically 25% of a firm's value.   If an analysts terminal value is much more than that he/she likely has irrational future assumptions.
 

Going to have to respectfully disagree with you here. Curious how you arrive at the 25% figure.....

The attached spreadsheet is 20-year DCF of the S&P 500 using a normalized EPS figure of $70 per share as a starting point:

Cost of equity:       9%  (long-run return of the market according to GMO)
Growth rate:          6%  (long-run average earnings growth)
Terminal PE:          16.2 (times (the current history-to-date median Schiller PE ratio)
Payout ratio:         40%

Based on this DCF, which is a reasonable approximation of corporate America (is it not?), the present value of the terminal value represents 62% of the estimated fair value (i.e. all cash flows discounted back to today).

Perhaps we can banter about the inputs and bring the TV's influence down to 50%, but the point stands that the terminal value is critically important to the CURRENT fair value of any infinite-lived asset, MUCH more so than the 25% you cite.

The primary difference is that I analyze as a business owner (even though I am buying a fractional ownership via shares) and you look at it as an investor.  In other words you only value the dividends you will receive in the first twenty years while I value the firm's earnings/free cash flow.  You are valuing your cash flows while I am valuing the firm's cash flows.   Minor differences are that I use a slightly higher discount rate and lower terminal value PE. 

I would still argue that the majority of value is derived from the next twenty years and not the terminal value.  While your approach makes it appear that the terminal value generates most of the value, it is due to the retained earnings from the next twenty years not what occurs in years 21 and later.
     
Title: Re: BAC-WT - Bank of America Warrants
Post by: Kraven on April 23, 2012, 12:45:13 PM
Is WFC better at cross selling based on actual numbers?  Hard to know because there is no official definition of what constitutes a bank "product."  It's virtually certain that all banks measure their cross selling success differently.

However, that being said, having spent a few years perusing the investor propaganda on the WFC website, I can tell you that cross selling figures prominently in virtually every management presentation that I've flipped through.  WFC is very proud to show modest increases in the number of products per customer over a 5 or 6 year time frame, and identifies cross-selling as an opportunity to get further value from the Wachovia takeover.  It's hard to know whether WFC is actually drastically better than the other banks because there is no official measure and no systematic methodology to compare banks.  But if management's seeming obsession actually drives results (by training and compensating employees for cross-sales), then I would have no trouble believing that they'd be ahead of the crowd.

But ultimately, nobody really knows for sure which of WFC and BAC has the superior cross-sell results.

Cross selling and other buzzwords of it's type are like the Yeti or Big Foot of the business world.  Lots of people claim to have seen them, but there's only fuzzy pictures and no real proof.  It's a lofty goal to look for it, but plenty have tried and failed.  Cross selling well is like being the best house painter.  Sure, someone has to be the best, but presumably anyone can really learn it and worst case you hire the guy doing it.

Anyone who has ever been involved in any kind of banking business or a similar customer oriented business knows about cross selling.  There's also the focus on only high value engagements, being a trusted advisor to clients, etc.  All drivel.  Nothing wrong with trying to do these things, but typically they are done for a while after some kind of in person meeting and then it fades.  It can do something with the carrot and the stick, but the carrot will never be enough for someone who fears that their business is going to get stolen and the stick will never be applied to anyone who actually has business.  Sure, if you're talking about some bank teller cross selling the mortgage department, whatever.  But if you think that every bank on the street isn't doing the exact same thing, that wouldn't be accurate.

I just wouldn't put any weight on that type of amorphous positive to an institution.  It can change on a dime.  Wait for it, once BAC and/or C run up to book value, whenever that is, you will see articles in the paper and magazines on how the culture is simply so much better than it was and people are working together, cross selling, etc.  Just means business has picked up a bit and people aren't trying to kill each other.  Once there's enough money sloshing around and people aren't afraid of losing a chair when the music stops, sure, they're happy to recommend a colleague . . . but of course only if they get credit for it too!
Title: Re: BAC-WT - Bank of America Warrants
Post by: Vish_ram on April 23, 2012, 01:09:19 PM
check this WSJ article on cross-selling

http://online.wsj.com/article/SB10001424052748704430304576170702480420980.html

I think this is a useless metric, I'm a WFC customer; I've two IRA accounts with wellstrade, and to qualify for PMA, I had to setup 2 dummy accounts with $100 deposit. In total, I've 2 savings, 2 checkings and 2 IRA. In reality, I only use one checking for all transactions.

During wells fargo & first union days, I hardly get pitched on new products. In WFC, hardly a day goes by without seeing annoying pop-up or initial screen about signing up for some product (e-vault anyone?)
Title: Re: BAC-WT - Bank of America Warrants
Post by: StubbleJumper on April 23, 2012, 01:15:05 PM

Anyone who has ever been involved in any kind of banking business or a similar customer oriented business knows about cross selling.  There's also the focus on only high value engagements, being a trusted advisor to clients, etc.  All drivel.  Nothing wrong with trying to do these things, but typically they are done for a while after some kind of in person meeting and then it fades.  It can do something with the carrot and the stick, but the carrot will never be enough for someone who fears that their business is going to get stolen and the stick will never be applied to anyone who actually has business.  Sure, if you're talking about some bank teller cross selling the mortgage department, whatever.  But if you think that every bank on the street isn't doing the exact same thing, that wouldn't be accurate.



Sure, every bank is doing it.  But, not every bank is dedicating one or two slides talking about the importance of cross selling in virtually EVERY investor presentation.  My experience is that when senior management is focused on a metric (like number of products per client) and when they drive bonuses from that metric, they normally get what they pay for (for better or for worse).  Call it drivel if you like, but WFC's obsession seems to have resulted in moderate, steady growth in products per client and hopefully that results in improved profitability.

Is BAC achieving a similar result (or better?) without the obsession of presenting it "up front and centre" in its investor propaganda?  Possibly.  But given their financial results for the past few years, you'd think that they'd be trying to seize on ANY positive metric they could find which they do not seem to have done.


SJ
Title: Re: BAC-WT - Bank of America Warrants
Post by: bmichaud on April 23, 2012, 01:21:01 PM
Quote
In other words you only value the dividends you will receive in the first twenty years while I value the firm's earnings/free cash flow.  You are valuing your cash flows while I am valuing the firm's cash flows.


No matter public or private, the only cash flow you will receive as an owner or investor (not entirely sure what the difference is) is in the form of dividends/buybacks, is it not? The only benefit you reap from retained earnings profitability reinvested for growth is in the form of a higher overall future valuation - i.e. a terminal value.

Quote
You are valuing your cash flows while I am valuing the firm's cash flows.


What is the difference? Free cash flow to equity holders is the cash flow available to pay dividends, buyback stock, payback debt or reinvest for growth - FCF to equity in its entirety is MY cash flow available for me to do what I want. If I owned 100% of the business then I could decide - rather, as a public shareholder, I elect a board to oversee a management team to hopefully intelligently allocate MY free cash flow.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Kraven on April 23, 2012, 01:26:24 PM
Sure, every bank is doing it.  But, not every bank is dedicating one or two slides talking about the importance of cross selling in virtually EVERY investor presentation.  My experience is that when senior management is focused on a metric (like number of products per client) and when they drive bonuses from that metric, they normally get what they pay for (for better or for worse).  Call it drivel if you like, but WFC's obsession seems to have resulted in moderate, steady growth in products per client and hopefully that results in improved profitability.

Is BAC achieving a similar result (or better?) without the obsession of presenting it "up front and centre" in its investor propaganda?  Possibly.  But given their financial results for the past few years, you'd think that they'd be trying to seize on ANY positive metric they could find which they do not seem to have done.


SJ

Well, there you go.  It's in the slides.  Look, I'm not saying it's not something to work for, but I could also cynically tell you that when things like this are in not 1, but 2 dedicated slides it's because there's nothing else better to say. 

Bonuses on things like cross selling are for people like bank tellers.  The people who actually make money for the bank aren't impacted unless it doesn't matter anyway.  Think about it.  So some low level guy gets dinged 1% on his bonus for not cross selling enough.  But the guy who brings in $50 mil a year, is a raging asshole and everyone knows hoards every single business contact isn't impacted in the least.  If he was, he leaves. 

It's like the shell game.  Focusing on these kinds of metrics takes your eyes off the prize.  Just my 2 cents.  You obviously view it differently than me and that's fine.  No worries.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Tim Eriksen on April 23, 2012, 03:14:17 PM
Quote
In other words you only value the dividends you will receive in the first twenty years while I value the firm's earnings/free cash flow.  You are valuing your cash flows while I am valuing the firm's cash flows.


No matter public or private, the only cash flow you will receive as an owner or investor (not entirely sure what the difference is) is in the form of dividends/buybacks, is it not? The only benefit you reap from retained earnings profitability reinvested for growth is in the form of a higher overall future valuation - i.e. a terminal value.

Quote
You are valuing your cash flows while I am valuing the firm's cash flows.


What is the difference? Free cash flow to equity holders is the cash flow available to pay dividends, buyback stock, payback debt or reinvest for growth - FCF to equity in its entirety is MY cash flow available for me to do what I want. If I owned 100% of the business then I could decide - rather, as a public shareholder, I elect a board to oversee a management team to hopefully intelligently allocate MY free cash flow.

The difference is that your interpretation of your spreadsheet is incorrect.  Let's go back to the point of disagreement which was with the statement that "the majority of a business's value is derived from what happens beyond the next twenty years - i.e. the terminal value."  This is not a true statement and leads to wrong conclusions.  The majority of the value of most businesses is actually derived from what happens in the next ~ twelve years.  The present matters much more than twenty years from now.  The terminal value in your spreadsheet increased due to reinvesting the cash flows from the preceding twenty years.  We can clearly see that by changing the payout ratio - increasing it over the next twenty years lowers the terminal value.   Why?  Because the increased terminal value was based on reinvested cash flows from year 1-20. 

I'll end this discussion since this off topic from BAC.  I'd be more than happy to continue to discuss it but I don't want to irritate those looking for info on BAC.
 
 
   
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on April 24, 2012, 07:59:04 PM
Judge denies AIG motion in BofA $8.5 billion settlement
http://finance.yahoo.com/news/judge-denies-aig-motion-bofa-234551117.html

A New York judge on Tuesday rejected an effort by AIG Inc (AIG) and other objectors to Bank of America Corp's (BAC) proposed $8.5 billion mortgage bond settlement to convert the case to a proceeding that may have widened its scope.
....

Kapnick said at a hearing on Tuesday that she could accomplish what was necessary under the Article 77. "I really think I have a lot of discretion," she said.
....

The judge asked the parties to work out proposals for providing documents. Objectors to the proposed settlement want wide discovery, while the trustee wants less. "Everybody's going to get part of what they want," Kapnick said.



Title: Re: BAC-WT - Bank of America Warrants
Post by: alertmeipp on April 25, 2012, 03:42:15 PM
Some of us own BAC, AIG and MBIA. Kind of say to see our companies sue each other. Just because BAC bot the evil CFC doesn't mean companies like MBI and AIG are innocent.
Title: Re: BAC-WT - Bank of America Warrants
Post by: bengrahamofthenorth on April 27, 2012, 09:16:06 AM
Anyone have any thoughts on BAC pretax preprovision earnings in light of continued consumer deleveraging over the long term? I'm counting on solid profitability cushioning any liability issues. But a Japan like anemic growth situation is certainly possible.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on April 27, 2012, 10:12:32 AM
Anyone have any thoughts on BAC pretax preprovision earnings in light of continued consumer deleveraging over the long term? I'm counting on solid profitability cushioning any liability issues. But a Japan like anemic growth situation is certainly possible.

Most of the consumer debt is mortgage, at historically low fixed rates.  Household debt service is at historically low levels.  Low interest amortizations pay down faster in the early years. 

Why is this a cause for concern? 
Title: Re: BAC-WT - Bank of America Warrants
Post by: bengrahamofthenorth on April 27, 2012, 03:55:25 PM
Anyone have any thoughts on BAC pretax preprovision earnings in light of continued consumer deleveraging over the long term? I'm counting on solid profitability cushioning any liability issues. But a Japan like anemic growth situation is certainly possible.

Most of the consumer debt is mortgage, at historically low fixed rates.  Household debt service is at historically low levels.  Low interest amortizations pay down faster in the early years. 

Why is this a cause for concern? 


If the US consumer were to head back to pre2000 levels of debt to income, new loan growth and revenue would be pretty weak for an extended period of time.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on April 27, 2012, 04:06:59 PM
Anyone have any thoughts on BAC pretax preprovision earnings in light of continued consumer deleveraging over the long term? I'm counting on solid profitability cushioning any liability issues. But a Japan like anemic growth situation is certainly possible.

Most of the consumer debt is mortgage, at historically low fixed rates.  Household debt service is at historically low levels.  Low interest amortizations pay down faster in the early years. 

Why is this a cause for concern? 


If the US consumer were to head back to pre2000 levels of debt to income, new loan growth and revenue would be pretty weak for an extended period of time.


The household debt service ratio is already at nearly the lowest level of the past 30 years.

See slide # 9:

http://investor.shareholder.com/common/download/download.cfm?companyid=ONE&fileid=515337&filekey=85746b44-384f-4eab-8c22-498b7d509acf&filename=BAAB%20Conference%20Presentation%20Final_11.4.11.pdf

Title: Re: BAC-WT - Bank of America Warrants
Post by: racemize on April 27, 2012, 04:14:11 PM
Nice slide--however, Prem showed a slide in his presentation where private sector debt was extremely large, historically on a percentage basis as supporting the deleverage/deflation thesis.  I can't remember the specific metric though, so perhaps another attendee could remind me.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on April 27, 2012, 04:24:36 PM
Nice slide--however, Prem showed a slide in his presentation where private sector debt was extremely large, historically on a percentage basis as supporting the deleverage/deflation thesis.  I can't remember the specific metric though, so perhaps another attendee could remind me.

The analysis is too simplistic.

Would you personally rather have a 30 yr $50,000 loan with 4% interest rate or a $40,000 loan with 8% interest rate?

Me too -- I'd pick the 50% cheaper financing cost even though it comes with a 25% higher principal burden.

Wouldn't Prem?  I mean, if somebody came to him and said how about you owe me 25% more principal on your loans but in return I'll halve your interest rates?  He should be eager to accept those terms.

This is elementary math, and common sense is you'd be better off owing more on the far cheaper financing terms.

So why should the consumer be any different?

These guys never normalize these slides to account for the cost of servicing the debt. (and the rates are primarily fixed given that's it's mostly mortgage)

Let's review:
1)  The debt service costs are nearly the lowest in 30 years 
2)  The mortgages are paid off in 30 years without extra payments (so who cares how big they are)
3)  Cash flow matters -- slides ignore cash flow

Additionally, going forward housing is already back at historically normal price levels.  So new mortgage debt is of normal size.  As days go by the new smaller mortgages dilute the average loan size in the pool of larger ones, so the total consumer debt-to-GDP contraction happens through natural decay, not additional payments.  Secondarily, the payments (once again) on low interest amortization schedules are very highly weighted towards principle repayment -- so the principle balance on each low interest loan decays at an accelerated rate.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Rabbitisrich on April 27, 2012, 05:03:05 PM
Nice slide--however, Prem showed a slide in his presentation where private sector debt was extremely large, historically on a percentage basis as supporting the deleverage/deflation thesis.  I can't remember the specific metric though, so perhaps another attendee could remind me.

These guys never normalize these slides to account for the cost of servicing the debt. (and the rates are primarily fixed given that's it's mostly mortgage)

Let's review:
1)  The debt service costs are nearly the lowest in 30 years 
2)  The mortgages are paid off in 30 years without extra payments (so who cares how big they are)
3)  Cash flow matters -- slides ignore cash flow

Yeah good point. The FHFA posts a monthly survey of purchase SFR mortgages. Adjustable rate share fell from 35% in 2004 to 5% in 2010.
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on April 27, 2012, 05:08:40 PM
Nice slide--however, Prem showed a slide in his presentation where private sector debt was extremely large, historically on a percentage basis as supporting the deleverage/deflation thesis.  I can't remember the specific metric though, so perhaps another attendee could remind me.

* Did it include financial firms leverage? If yes, that's a chart that much exaggerates the problems
* Did include other the left side of the balance sheet? If no, probably it is not given the businesses credit for a very decent balance sheet (and a lot of foreign assets)
* As Eric says, did it include an analysis of the debt service history? People are managing and refinancing.

What matters is we are getting growth traction from the low interest rates for a substantial part of the economy, even if not all of it participates. And compared with Japan we are. When banks relax credit conditions, as they are starting to do, credit growth responds.

http://www.businessinsider.com/what-stagnation-looks-like-in-one-chart-2012-3

We do not have magneto problem. We are not pushing on a string ... well, just a little bit.



Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on April 27, 2012, 05:10:23 PM
Nice slide--however, Prem showed a slide in his presentation where private sector debt was extremely large, historically on a percentage basis as supporting the deleverage/deflation thesis.  I can't remember the specific metric though, so perhaps another attendee could remind me.

These guys never normalize these slides to account for the cost of servicing the debt. (and the rates are primarily fixed given that's it's mostly mortgage)

Let's review:
1)  The debt service costs are nearly the lowest in 30 years 
2)  The mortgages are paid off in 30 years without extra payments (so who cares how big they are)
3)  Cash flow matters -- slides ignore cash flow

Yeah good point. The FHFA posts a monthly survey of purchase SFR mortgages. Adjustable rate share fell from 35% in 2004 to 5% in 2010.

If Prem does another one of those question-and-answer sessions online, here is my question for him.

Would you refinance Fairfax's debt on these terms?:
1)  50% lower interest rate 
2)  30 year fixed rate
3)  25% higher principal amount  (so you are gifting 25% to the lender in exchange for 50% lower rate)

It's not an academic example.

Fairfax's cash flow would increased.  Why should that be a reason to feel stressed out? 
Title: Re: BAC-WT - Bank of America Warrants
Post by: Packer16 on April 27, 2012, 05:59:32 PM
The key assumption behind the Debt/GDP is crushing conclusion is high interest rates.  High interest rates occur in response to inflation or in the case of foreign debt when the foriegners decide to stop lending.  Given the history of deleveragings in cases where a good portion of the debt is domestically owed (the 1930s/1940s and 1990s/2000s Japan), interest rates are typically low for long periods of time.  In additon, the Fed has studied the Depression and Japan and seen that the only tool it has to fight deflation is easy money.  For the folks who think interest rates will rise, what is your rationale beyond this is what has happened over the last 50 years?   

As to inflation, I think we are in a new world were the labor supply will outstrip demand for generations.  If you look at history, labor has gained the upper hand when labor is scarce due to war, famine or epidemic.  Since we have prevented all three and the formally communist world has joined the capitalist world, the labor portion of goods and services will be in abundant supply.  Also if you look at most of the goods and services purchased in developed counrties it has a high labor cost component to it.  This will keep inflation down even if there is input inflation.  This will also reward capital versus labor in most industries.  That is why I am skeptical of the reversion to the mean for profit margins and for interest rates.       

Packer
Title: Re: BAC-WT - Bank of America Warrants
Post by: bengrahamofthenorth on April 27, 2012, 08:10:55 PM
Interesting take Packer, thanks for all the responses. This was Moynihan's response on the conference call in regard to pretax preprovision:

Andrew Marquardt - Evercore Partners Inc., Research Division

And do you still have confidence in, maybe it's an outdated range now of 45 to 50 on an annual basis? Is that still valid or have things changed enough that, that needs to be rethought?

Brian T. Moynihan

I think on the prior calls, we brought -- that range has been a lower range just because we sold off a lot of the credit card and stuff when that number was originally published, but I think as we said last quarter, we're continuing -- confident that we can push the number, given the time and the interest rate environment and over $10 billion a quarter, but it's going to take that normalized interest rate environment and economy growing at 3%. As opposed to the economy growing at 1.5% or 2%, which is what we've been consistently seeing.
Title: Re: BAC-WT - Bank of America Warrants
Post by: shalab on April 27, 2012, 09:33:59 PM
Eric is right, U.S household debt levels are at 17 year lows per NYTimes.

http://www.nytimes.com/2012/04/20/business/not-exactly-a-miracle-but-us-debt-levels-are-falling.html
Title: Re: BAC-WT - Bank of America Warrants
Post by: CONeal on April 28, 2012, 05:19:27 AM
If anyone has a question they want asked at the annual meeting for BAC let me know.  I'll do my best to squeeze in a question or two.

This is the first time I've ever attended a meeting so looking forward to the experience and to see what actually happens at one.
Title: Re: BAC-WT - Bank of America Warrants
Post by: redskin on April 28, 2012, 06:05:01 AM
The key assumption behind the Debt/GDP is crushing conclusion is high interest rates.  High interest rates occur in response to inflation or in the case of foreign debt when the foriegners decide to stop lending.  Given the history of deleveragings in cases where a good portion of the debt is domestically owed (the 1930s/1940s and 1990s/2000s Japan), interest rates are typically low for long periods of time.  In additon, the Fed has studied the Depression and Japan and seen that the only tool it has to fight deflation is easy money.  For the folks who think interest rates will rise, what is your rationale beyond this is what has happened over the last 50 years?   

As to inflation, I think we are in a new world were the labor supply will outstrip demand for generations.  If you look at history, labor has gained the upper hand when labor is scarce due to war, famine or epidemic.  Since we have prevented all three and the formally communist world has joined the capitalist world, the labor portion of goods and services will be in abundant supply.  Also if you look at most of the goods and services purchased in developed counrties it has a high labor cost component to it.  This will keep inflation down even if there is input inflation.  This will also reward capital versus labor in most industries.  That is why I am skeptical of the reversion to the mean for profit margins and for interest rates.       

Packer

My rational for higher interest rates is that fixed income investors will eventually demand a positive real return.  The CPI is currently running at a 2.7% annual rate.  This is with the current oversupply of labor.  An investor in 10yr treasuries at 2% is receiving approximately 1.4% after tax for a real return of -1.3%.  This has lasted for a while and can last for a period of time.  However, I don't believe it is sustainable over the long run.  As Herb Stein said, 'If something can not go on forever, it will stop.'
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on April 28, 2012, 07:01:16 AM
Eric is right, U.S household debt levels are at 17 year lows per NYTimes.

http://www.nytimes.com/2012/04/20/business/not-exactly-a-miracle-but-us-debt-levels-are-falling.html

I think the article makes the point that the debt service is at 17y lows, not the total level, thanks to low interest rates and refinancing.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on April 28, 2012, 07:09:52 AM
Eric is right, U.S household debt levels are at 17 year lows per NYTimes.

http://www.nytimes.com/2012/04/20/business/not-exactly-a-miracle-but-us-debt-levels-are-falling.html

I think the article makes the point that the debt service is at 17y lows, not the total level, thanks to low interest rates and refinancing.

Better than 17 year lows if you expand a bit beyond merely debt service...

But now the situation has turned around. The latest figures, for the final quarter of 2011, show that required debt service payments now make up just 10.9 percent of disposable income, the lowest proportion since 1994. A broader measure — which adds in such obligations as property tax and insurance premiums for homeowners, and rent for those who do not own their homes — has fallen to the lowest level since 1984.
Title: Re: BAC-WT - Bank of America Warrants
Post by: alertmeipp on April 28, 2012, 07:11:41 AM
Same old same old, savers are saving the borrowers thru ultra-low rate.
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on April 28, 2012, 07:16:09 AM
Same old same old, savers are saving the borrowers thru ultra-low rate.

Supply and demand. Sometimes you win (1982) sometimes you lose (2012). And even in this case it is not that clear

http://krugman.blogs.nytimes.com/2012/04/28/where-the-productivity-went/
Title: Re: BAC-WT - Bank of America Warrants
Post by: Packer16 on April 28, 2012, 12:33:30 PM
I agree eventually interest rates have to go up but in the 1930s/40s they stayed low for 15 to 20 years and slowly increased to levels lower than inflation until the 1960s/70s.  Financial repression by the central bank is a formadable force and today it is reducing the real level of debt of debtors. 

Packer
Title: Re: BAC-WT - Bank of America Warrants
Post by: mankap on April 28, 2012, 01:53:22 PM
I think the rates are going to stay low till the time Fed is forced to hike them by inflation rise.Fed can keep .The only constraint that Fed has is inflation.I think Fed strongly believes that inflation cannot increase till the time unemployment is high.So they are not increasing rates till the time unemployment comes down.
Title: Re: BAC-WT - Bank of America Warrants
Post by: benchmark on April 28, 2012, 03:11:11 PM
I think the rates are going to stay low till the time Fed is forced to hike them by inflation rise.Fed can keep .The only constraint that Fed has is inflation.I think Fed strongly believes that inflation cannot increase till the time unemployment is high.So they are not increasing rates till the time unemployment comes down.

Isn't inflation is already starting? food/gas prices have been creeping up for the last few years, and it will force fed to move
Title: Re: BAC-WT - Bank of America Warrants
Post by: mankap on April 28, 2012, 06:43:24 PM
Fed looks at core  PCE and not CPI.Core PCE excludes food and energy prices.Core PCE is 1.9% as per the latest report.PCE is still within Fed's range.Based on PCE Fed is not going to move anytime soon.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on May 03, 2012, 09:49:46 AM
The BAC class A warrants sold for $3.60 when the stock was at $8 last summer.

Nine months later the warrants are 10% higher and the stock is the same price.

However the volatility in the options is lower -- the 2014 $10 calls are cheaper than the 2013 $10 calls were at the time (but with a few extra months of time value on them).

So... warrants should continue to slide a bit further (relative to the common) is my guess.
Title: Re: BAC-WT - Bank of America Warrants
Post by: racemize on May 03, 2012, 09:51:37 AM
The BAC class A warrants sold for $3.60 when the stock was at $8 last summer.

Nine months later the warrants are 10% higher and the stock is the same price.

However the volatility in the options is lower -- the 2014 $10 calls are cheaper than the 2013 $10 calls were at the time (but with a few extra months of time value on them).

So... warrants should continue to slide a bit further (relative to the common) is my guess.

out of curiosity, are you moving in and out of the A/B warrants and common over time (e.g., to act on analysis like the above) or are you generally holding a mix?
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on May 03, 2012, 10:18:12 AM
The BAC class A warrants sold for $3.60 when the stock was at $8 last summer.

Nine months later the warrants are 10% higher and the stock is the same price.

However the volatility in the options is lower -- the 2014 $10 calls are cheaper than the 2013 $10 calls were at the time (but with a few extra months of time value on them).

So... warrants should continue to slide a bit further (relative to the common) is my guess.

out of curiosity, are you moving in and out of the A/B warrants and common over time (e.g., to act on analysis like the above) or are you generally holding a mix?

I initially bought them last summer, then changed my mind on them and went an unlevered calls route.  Then as the stock began to recover I bought some common, calls, and some warrants to juice the returns.  Then I sold some common and all warrants and bought AIG.  Then (last two days) I sold the AIG and I sit unlevered once again (in the BAC calls).  But I'm fidgety and I'm watching how the warrants behave.

Mostly I'm watching the volatility premium in the calls.  Should it rise enough I can gain a lot of intrinsic value by selling the ones I own and buying an equal amount of underlying shares.  I have some $7 strike that we might soon get down to (or lower) in the common -- depending of course on degree of market panic.

As for the options premium already in those calls -- I am chipping away at it by writing MBI puts which have much higher volatility.  Actually, the MBI volatility is off the charts.

One other part of the plan is I can move (now that there are no longer any gains in them) my $10 strike 2014 BAC calls out of my taxable account and into my RothIRA account.  That way on the upswing the gains won't get taxed.
Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on May 03, 2012, 10:24:05 AM
I've also noticed the warrants being pricey at the moment. If we drop lower (sub $7 would be very nice) I'll change some common for warrants if they correct accordingly. I assume they would do that very fast if we get a fast drop down from here.
Title: Re: BAC-WT - Bank of America Warrants
Post by: BRK7 on May 03, 2012, 10:38:16 AM
I just got a call from "AST Fund Solutions", apparently a proxy voting/solicitation firm hired by BAC.  My experience is that such firms are hired when either a) there is sensitive proposal in the proxy on which the board wants to reiterate its FOR/AGAINST recommendation, or b) there is some doubt that a quorum will be established, and the company does not want to risk having to incur the expense of another round of voting.

But, perhaps this is standard operating procedure for BofA?  Thoughts?
Title: Re: BAC-WT - Bank of America Warrants
Post by: Grenville on May 03, 2012, 01:02:56 PM
If anyone has a question they want asked at the annual meeting for BAC let me know.  I'll do my best to squeeze in a question or two.

This is the first time I've ever attended a meeting so looking forward to the experience and to see what actually happens at one.

Hi Coneal,

Sent you a PM with questions. Thanks for asking! I hope you enjoy the meeting.

Thanks,
grenville
Title: Re: BAC-WT - Bank of America Warrants
Post by: benchmark on May 04, 2012, 09:07:39 AM
Bought some common this morning,  and some Jan 14 calls.
Title: Re: BAC-WT - Bank of America Warrants
Post by: racemize on May 04, 2012, 03:34:59 PM
Eric and Plan, since the FFH slides are up, would you care to comment re private deleveraging thesis given the 290% private debt?  I feel like we might have been speaking across each other before (I wasn't disagreeing re bank rates).

http://www.fairfax.ca/Theme/Fairfax/files/2012%20AGM%20Slide%20Presentation_v001_f4dd72.pdf
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on May 04, 2012, 03:47:41 PM
Eric and Plan, since the FFH slides are up, would you care to comment re private deleveraging thesis given the 290% private debt?  I feel like we might have been speaking across each other before (I wasn't disagreeing re bank rates).

http://www.fairfax.ca/Theme/Fairfax/files/2012%20AGM%20Slide%20Presentation_v001_f4dd72.pdf

I was referring to the US consumer.  Consumer spending being a large % of GDP and consumer debt service ratio at very healthy level.

When you mention the 290% number I immediately can see that you aren't talking about household debt, which is nowhere near that high. 

So then, are you worried about household debt?  Or are you worried about corporate debt?  If corporate, then financial or non-financial, or both?

Here is an example of my thinking:
Total household debt fell by 0.9% in 2011 even though consumer debt expanded by 3.5%.  The increase in consumer debt was more than offset by the 2.1% decline in mortgage debt.  So there is a real world example from recent history of an increase in consumer debt concurrent with net household deleveraging.
Title: Re: BAC-WT - Bank of America Warrants
Post by: racemize on May 04, 2012, 06:06:12 PM
Eric and Plan, since the FFH slides are up, would you care to comment re private deleveraging thesis given the 290% private debt?  I feel like we might have been speaking across each other before (I wasn't disagreeing re bank rates).

http://www.fairfax.ca/Theme/Fairfax/files/2012%20AGM%20Slide%20Presentation_v001_f4dd72.pdf

I was referring to the US consumer.  Consumer spending being a large % of GDP and consumer debt service ratio at very healthy level.

When you mention the 290% number I immediately can see that you aren't talking about household debt, which is nowhere near that high. 

So then, are you worried about household debt?  Or are you worried about corporate debt?  If corporate, then financial or non-financial, or both?

Here is an example of my thinking:
Total household debt fell by 0.9% in 2011 even though consumer debt expanded by 3.5%.  The increase in consumer debt was more than offset by the 2.1% decline in mortgage debt.  So there is a real world example from recent history of an increase in consumer debt concurrent with net household deleveraging.

Sorry, I may not have been clear (and I was recalling from memory at the time)--I simply meant private debt as a whole.  Given it's peakish look on the chart (understanding that debt is cheap now), it seems reasonable that it would regress to a lower level, causing a natural lag on the economy. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on May 04, 2012, 10:28:38 PM
I initially bought them last summer, then changed my mind on them and went an unlevered calls route.  Then as the stock began to recover I bought some common, calls, and some warrants to juice the returns.  Then I sold some common and all warrants and bought AIG.  Then (last two days) I sold the AIG and I sit unlevered once again (in the BAC calls).  But I'm fidgety and I'm watching how the warrants behave.

Boy that was lucky on the AIG sale.  This really explains why AIG is so cheap -- people know it's cheap but it's painful to get in at $35 only to see it back at $31 two days later.  Might as well wait for the next Treasury sale they figure.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on May 05, 2012, 05:13:18 AM
I initially bought them last summer, then changed my mind on them and went an unlevered calls route.  Then as the stock began to recover I bought some common, calls, and some warrants to juice the returns.  Then I sold some common and all warrants and bought AIG.  Then (last two days) I sold the AIG and I sit unlevered once again (in the BAC calls).  But I'm fidgety and I'm watching how the warrants behave.

Boy that was lucky on the AIG sale.  This really explains why AIG is so cheap -- people know it's cheap but it's painful to get in at $35 only to see it back at $31 two days later.  Might as well wait for the next Treasury sale they figure.


Sometimes  lucky, sometimes not in the spec game.  I sold a small number of AIG leaps Thursday morning when it was up, and bought twice the number back yesterday, after the plunge. 

I doubt the treasury will price their shares below the market value.  Giethner wants to show a small gain, but not too much, on the shares.  My guess would be around 32.
Title: Re: BAC-WT - Bank of America Warrants
Post by: alertmeipp on May 05, 2012, 06:04:21 AM
I think the market will soon get used to these offerings and take them as opportunities for AIG to continue increase their book value per share. I have no AIG now - switched to other plays, purely because AIG has performed so well last few days. Judging from previous experience, AIG will experience weakness in next few days UNLESS WB is interested. I give that 30% chance especially if Fed decided to sell larger chunks.

Title: Re: BAC-WT - Bank of America Warrants
Post by: enoch01 on May 05, 2012, 06:32:30 AM

Sometimes  lucky, sometimes not in the spec game.  I sold a small number of AIG leaps Thursday morning when it was up, and bought twice the number back yesterday, after the plunge. 


I did almost the same exact thing.  There shouldn't be much more of this if Treasury wants out before the election.  That sets a deadline for the end of this kind of price action.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Rabbitisrich on May 05, 2012, 10:42:31 PM
http://www.pimco.com/EN/Insights/Pages/Global-Credit-Perspectives-May-2012.aspx (http://www.pimco.com/EN/Insights/Pages/Global-Credit-Perspectives-May-2012.aspx)
Quote
As a result of lower prices and rising rents, housing today is becoming more attractive than rental property across many areas of the country. Overall, home prices relative to income and relative to rents are currently at or below levels from eight years ago (Figure 3). Housing inventory for both new and existing homes is also declining (Figure 4) while sales activity is picking up. For example, inventories of existing homes on the market are now at 2.37 million units (near seven-year lows) while pending home sales are up 10.8% year-over-year through March 2012, according to the National Association of Realtors. Meanwhile, the inventory of new homes on the market at 144,000 is at a 50-year low as of March 2012, per the U.S. Census Bureau.


Even his cautionaries look good. Tight lending standards will become less tight as prices bottom and kids living with their parents represent future households after a few years of balance sheet repair.




Title: Re: BAC-WT - Bank of America Warrants
Post by: Sunrider on May 06, 2012, 06:31:32 AM
Dear all

I've been a lurker here for a while - but have followed both the BAC and AIG discussions with great interest. I'm long both common and warrants on both. I've finally sat down and done some digging to convince myself of the potential and risk/reward in BAC's case. Here is how I see things:

1. There's a decent chance BAC may continue to be able to wind down credit reserving, if the economy just sort-of-plots-along (Q1 run rate would indicate under 10bn vs. 13.4bn in 2011. Seeing that we are getting closer to the point where the portfolio will have churned over the stuff from the bad period, this should ultimately be good for another few billion in perhaps 2 - 4 year's time.
2. Allowance for credit losses at 3/share as well as those for R&W at 1.5/share (rough numbers, I know) seem pretty substantial. Whether they are adequate is, of course, the question. However, run rate of R&W provisions is down significantly from last year based on Q1 - which if it continues may free up 10bn or so in costs. Of course, the contingency here is that they (a) win BNY settlement and (b) the put-back volume keeps declining. The recent Q seemed to indicate that they believe a lot of what has come to them this Q was invalid and thus will be contested and not ultimately be payable. So in the absence of really bad news on the legal front it seems that perhaps the reserving run rate from Q1 is not too far off.
3. If I run a bad case scenario with current assets growing by 1%, margin stabilising and increasing to 2.8% by 2016 (find it hard to believe that rates can drop further), NIR at last year's level but with credit reserves running at 13.4bn p.a. and R&W provisions at 4bn p.a. and taxes on FTE basis as per current quarter (conservative), then they would still be generating 3.4bn after pref and common dividends in 2016 (without accounting for further buy-backs of prefs along the way).
4. That number could obviously swing a lot higher to, perhaps, >20bn depending on the above and it is very sensitive to margin assumptions. If one assumes that interest rates will start rising sometime after 2014 and given that BAC's margin should then improve, the results may well be better.

So far so good - and most of you here probably reached similar conclusions. If you think I've missed something then please let me know. In summary - clearly BAC will be ok and the contingencies with respect to R&W liabilities and exposure to the economy (credit loss provisions) really only shift (in time) the profit that it will ultimately generate. When it stops there's effectively another 15bn compared to last year's earnings that would come through on R&W alone. (Mis)Using Plan's multiple of 10 for P/E (or more accurately PTPP) would indicate a value of >20/share by that time.

What bothers me, however, in deciding how much more money to dump into this now is two things:

1. Deterioration in BV, TCE/share, etc. in the last quarter -- how would you guys look at this and what do you think about it?
2. The warrants seem to be the favourite of the day but they are very expensive at 63%ish IV. If BAC goes to 12 by Jan 2014 and IV stays the same the warrants go to >6. If IV goes down to 40% they will trade at 4 only, which clearly won't be a great return from the current level.
- Any views on how the market will treat these going forward?
- Alternatives are obviously (a) DITM 2014 Leaps, which trade at less IV (although still a fair bit above the volatility of the stock) and (b) long stock. The former offers more attractive returns (especially if things go really well) and a smaller potential loss. What do members of this board think/prefer and why?
- The other option would be to buy 2014 calls, say 10 strike currently at about 1.05 - the increased profit potential comes at the cost of a higher break-even and it seems to me this would really only pay of if things go extremely well (say BAC trading at >15 then). What's your feeling on this? How confident are you that BAC will make sufficient progress until then (e.g. no more R&W, much reduced provisions) that the market may recognise the value and get the stock to that level?

Thank you very much,

C.
Title: Re: BAC-WT - Bank of America Warrants
Post by: alertmeipp on May 06, 2012, 07:20:48 AM
Silly thought. Merrill Lynch was bot by BAC for 50billions (as I recall) - you think it worth less than 50b now or more?
Anyone here got a sense how integrated BAC and ML has become?
Title: Re: BAC-WT - Bank of America Warrants
Post by: nkp007 on May 06, 2012, 06:00:37 PM
With European banks weakening (daily) because of their exposure to bad sovereign debt, I am thinking that Bank of America / Citigroup should see some benefit.

In fact, I read in the WSJ: "Domestic banks, however, continued to benefit from European troubles. About two-thirds of institutions that compete with European lenders "noted an increase in business as a result of decreased competition from European banks and their affiliates or subsidiaries, a somewhat larger fraction than in January," the Fed said."

I wonder if this effect will be substantial and whether it will be a greater benefit to C and BAC than the costs of the European recession.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on May 06, 2012, 07:41:04 PM
Hi Sunrider,  Long post.  I don't really like to price speculate.  My largest chunk in BAC is the 2014  - $10.00 leaps.  I bought them around an average of about 1.30 (I averaged up).  I see no reason blocking BAC from reaching $13 before next June or July (2013).   That will still leave enough time value to triple my money on the investment.  BAc traded at $13 last May 4th (011).  The economics of the business and the sentiment are all askew right now.  It's a far safer investment than it was a year ago, and may as mentioned by npk007, be able to grow profitable business, in Europe.

alert, I would think that ML is worth 50 B still.  Perhaps more.  They will soon be an investment bank sub of a SIFI bank.  so that leaves 30 B for the rest of a worldwide banking franchise, kind of ludicrous when you do a sum of the parts.  Eurozone, & UK banks have had to slow investment banking while they deal with more pressing matters.  ML remains 3rd or 4 th in a deeply depressed IB market if memory serves.  Goldman, JPM, ML/BAC. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: Kraven on May 07, 2012, 04:32:40 AM
Silly thought. Merrill Lynch was bot by BAC for 50billions (as I recall) - you think it worth less than 50b now or more?
Anyone here got a sense how integrated BAC and ML has become?

No idea what they're worth, but it's pretty integrated.  These types of businesses though always operate in the same way.  When things are going really good the bankers want all the money for themselves and bitch and moan about how other areas of the bank suck cash out.  When banking isn't good, people like the brokers want more money and want it taken from the bankers, while the bankers bitch and moan about how they thought they were all one team and they're shocked at the response from the others.  That's integrated.
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on May 07, 2012, 02:35:08 PM
Eric and Plan, since the FFH slides are up, would you care to comment re private deleveraging thesis given the 290% private debt?  I feel like we might have been speaking across each other before (I wasn't disagreeing re bank rates).

http://www.fairfax.ca/Theme/Fairfax/files/2012%20AGM%20Slide%20Presentation_v001_f4dd72.pdf


US consumers flock to borrow
http://www.ft.com/intl/cms/s/0/c4022712-987f-11e1-ad3e-00144feabdc0.html#axzz1u5moAiXL

US consumer credit surged in March by the most in more than a decade as Americans borrowed more to pay for education and autos, suggesting growing confidence in the economy. Credit jumped $21.36bn, or 10.2 per cent, to $2.54tn, the Federal Reserve announced on Monday. That was more than twice the $9.8bn increase forecast by economists and was the biggest rise since November 2001.
....

“The bullish view is that the positive March surprise is a signal that households simply took some time to pay down the credit card debt that they incurred during the holiday season. With those balances at more manageable levels, consumers are now willing to accumulate additional debt,” he said. “The bearish view, however, is that with income growth anaemic, households needed to use their credit cards to pay for higher gasoline prices in March. It is unclear without further evidence which view is correct.”

Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on May 09, 2012, 11:53:33 AM
It is interesting to see an example of the low hanging fruit:

"Customer letters were mailed late last week to give them ample time to become familiar with another location, including two (808 Beacon Street and 235 Needham Street) that are less than one mile away," Bank of America spokesman T.J. Crawford said. "Currently, there are seven full-service banking centers in the city (of Newton), all within two miles of one another. Based on foot traffic and other metrics, we determined that we can continue to efficiently serve our customers with one less location."

"The property is in fact owned, and will be marketed," Crawford said.


http://www.bizjournals.com/boston/news/2012/05/09/bofa-closing-selling-newton-highlands.html?ana=yfcpc
Title: Re: BAC-WT - Bank of America Warrants
Post by: Grenville on May 09, 2012, 01:20:24 PM
Objectors to $8.5 bln BofA settlement to get more info
http://newsandinsight.thomsonreuters.com/Legal/News/2012/05_-_May/Objectors_to_$8_5_bln_BofA_settlement_to_get_more_info/ (http://newsandinsight.thomsonreuters.com/Legal/News/2012/05_-_May/Objectors_to_$8_5_bln_BofA_settlement_to_get_more_info/)

Quote
"You can have access to any settlement discussions where the trustee was present," Kathy Patrick, an attorney for investors who support the deal, told counsel for the opponents of the settlement at a court hearing on Tuesday.
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on May 10, 2012, 07:49:16 AM
Perfect positive trading record in the first quarter:

http://ftalphaville.ft.com/blog/2012/05/04/988981/as-good-as-moynihan/

Goldman too:

http://ftalphaville.ft.com/blog/2012/05/10/994901/goldman-loses-to-bank-of-america-in-the-least-q1-negative-revenue-trading-days-contest/
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on May 10, 2012, 10:05:27 AM
I was reading yesterday that BAC is forgiving $150,000 in principal on average to 200,000 homeowners -- part of the RoboSigning settlement.  It lowers their monthly payment size on average by 30%.

That's $3b dollars.  However, it's only non-performing hard-luck cases that qualify for the loan forgiveness, and I'd expect that a good portion of those loans were  already written down anyhow.

In some cases, you could imagine a loan having already been written down in excess of $150,000.  The result would be a loan that returns to performing status and BAC could, ironically, actually mark UP the value of the loan on the books.

I have been wondering how they managed to quietly ferret away the 12.5b for the settlement into their legal reserves -- this is perhaps how some of it was reserved... through non-performing loans that have been already marked down.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on May 10, 2012, 02:23:23 PM
Tomorrow is shaping up to be a real bleeder thanks to JPM's mistake:

http://blogs.wsj.com/deals/2012/05/10/j-p-morgan-to-host-surprise-conference-call/

Dimon says capital positions under Basel III, the all important future rules, will fall to 8.2% of risk-weighted capital from 8.4%.

Title: Re: BAC-WT - Bank of America Warrants
Post by: biaggio on May 10, 2012, 02:37:19 PM
Dimon, asked if any other banks will have similar trouble: "Just because we were stupid, doesn't mean anyone else was."

Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on May 10, 2012, 02:44:02 PM
I am wondering who is on the other side? 

Dimon did say he would only buy back under 45.  Looks like they have a great opportunity.....
Title: Re: BAC-WT - Bank of America Warrants
Post by: Grenville on May 11, 2012, 12:44:18 PM
New article from Frankel. The article 78 trial starts Monday according to her.

Can BofA and SocGen undo MBIA's restructuring?
http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=47226&terms=%40ReutersTopicCodes+CONTAINS+'ANV' (http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=47226&terms=%40ReutersTopicCodes+CONTAINS+'ANV')

Quote
BofA seems to be convinced that MBIA needs the bank's money more than BofA needs MBIA's.

The bank could well be right. MBIA's May 10 filing concedes that the insurer "did not write a meaningful amount of U.S. public finance insurance" in the first quarter of 2012, and does not expect to write new muni bond policies unless and until it resolves the litigation challenging its restructuring. That means MBIA doesn't have a business future as long as the banks keep litigating the propriety of its restructuring.

Any comments from the folks following MBIA, has MBIA's Muni business been curtailed by the overhang of this case as implied by Frankel?
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on May 14, 2012, 07:03:01 AM
Strange to see it down 1/2 as much as JPM and WFC on a big "Euro-fears" day.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on May 14, 2012, 07:42:03 AM
Interesting observation - nothing else to say.

Re Euro fears.  I dont get what everyone is excited about.  It strikes me that Eu austerity is toast as a concept.  A whole combination of factors such as Merkel losing an important election, France's new anti- auterity stance, Greeces rebellion, suggest to me that the floodgates will open soon with stimulus programs.  The EU cant help but learn from the US success.
Title: Re: BAC-WT - Bank of America Warrants
Post by: bmichaud on May 14, 2012, 07:50:03 AM
way to jinx it Eric haha

Al, exactly to your point Kiron Sakar over at The Big Picture has some interesting thoughts on the Germans accepting a higher rate of inflation and the likelihood of much great ECB involvement. See: http://www.ritholtz.com/blog/2012/05/a-change-in-ez-policies-is-coming/

Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on May 14, 2012, 08:20:09 AM
Interesting observation - nothing else to say.

Re Euro fears.  I dont get what everyone is excited about.  It strikes me that Eu austerity is toast as a concept.  A whole combination of factors such as Merkel losing an important election, France's new anti- auterity stance, Greeces rebellion, suggest to me that the floodgates will open soon with stimulus programs.  The EU cant help but learn from the US success.

Just for fun:


'Never underestimate the power of human stupidity.'
'To the fool, he who speaks wisdom will sound foolish.'
'Never attribute to malice that which is adequately explained by stupidity.'
'Cock-up before conspiracy'
'Any man can make mistakes, but only an idiot persists in his error.'
‘Insanity is doing the same thing over and over, and expecting a different result.’
'The difference between genius and stupidity is that even genius has its limits.'
'Anything that can go wrong, will—at the worst possible moment'
'The whole problem with the world is that fools and fanatics are always so certain of themselves, but wiser people so full of doubts.'
'Only two things are certain: the universe and human stupidity—and I’m not certain about the universe.'
'Let us be thankful for the fools. But for them the rest of us could not succeed.'

Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on May 14, 2012, 08:45:20 AM
way to jinx it Eric haha

No kidding.

For a moment there I was just giddy that BAC and IWM were down the same amount (I bought puts on IWM to hedge). 

Well at least my MBI position is holding up.  Something has to outperform the hedge
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on May 14, 2012, 09:00:53 AM


Just for fun:


'Never underestimate the power of human stupidity.'
'To the fool, he who speaks wisdom will sound foolish.'
'Never attribute to malice that which is adequately explained by stupidity.'
'Cock-up before conspiracy'
'Any man can make mistakes, but only an idiot persists in his error.'
‘Insanity is doing the same thing over and over, and expecting a different result.’
'The difference between genius and stupidity is that even genius has its limits.'
'Anything that can go wrong, will—at the worst possible moment'
'The whole problem with the world is that fools and fanatics are always so certain of themselves, but wiser people so full of doubts.'
'Only two things are certain: the universe and human stupidity—and I’m not certain about the
universe.'
'Let us be thankful for the fools. But for them the rest of us could not succeed.'

Lol -
Title: Re: BAC-WT - Bank of America Warrants
Post by: Grenville on May 14, 2012, 09:02:41 AM
Important to see how this plays out re Countrywide:

"Ally Hopes to End Mortgage Woes With ResCap Bankruptcy"
http://www.cnbc.com/id/47411694 (http://www.cnbc.com/id/47411694)
Title: Re: BAC-WT - Bank of America Warrants
Post by: racemize on May 14, 2012, 09:37:38 AM
Insider buys at AIG and BAC:

http://community.nasdaq.com/News/2012-05/weekly-top-insider-buys-msft-bac-aig-spg-oks.aspx?storyid=141019
Title: Re: BAC-WT - Bank of America Warrants
Post by: racemize on May 14, 2012, 12:23:22 PM
so, I know I'm late to the party on this one and there is still some speculation on the anti-dilution parameters of the warrants, but for those that have given it some thought, will those anti-dilution clauses kick in when Buffett exercises his warrants?  Perhaps his are a longer dated version and he'll dilute after the warrants are used though?
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on May 14, 2012, 12:47:04 PM
so, I know I'm late to the party on this one and there is still some speculation on the anti-dilution parameters of the warrants, but for those that have given it some thought, will those anti-dilution clauses kick in when Buffett exercises his warrants?  Perhaps his are a longer dated version and he'll dilute after the warrants are used though?

Buffett's warrants are longer dated.  Do his warrants also have antidilution protection?  It would be surprising if they didn't.
Title: Re: BAC-WT - Bank of America Warrants
Post by: meiroy on May 14, 2012, 06:27:25 PM
The EU cant help but learn from the US success.

Could you elaborate on that? I'm sensing there's some sarcasm there just not sure to what degree...
Title: Re: BAC-WT - Bank of America Warrants
Post by: alertmeipp on May 14, 2012, 06:57:34 PM
The EU cant help but learn from the US success.

Could you elaborate on that? I'm sensing there's some sarcasm there just not sure to what degree...

He is talking about massive QE.
Title: Re: BAC-WT - Bank of America Warrants
Post by: meiroy on May 14, 2012, 07:09:31 PM
The EU cant help but learn from the US success.

Could you elaborate on that? I'm sensing there's some sarcasm there just not sure to what degree...

He is talking about massive QE.

Right, does he see it as not really a success/short term success/long term success...
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on May 14, 2012, 08:35:13 PM
No sarcasm.  EU is where US was about two years ago, but stalled.  Individual countries cant devalue their currencies, making austerity at the country level useless.  The EU is a huge free trade zone, and needs to be further amalgamated so the EU as a whole issues bonds to back the entire system.  What they have been doing to now is half baked.

Massive QE is the only option that remains, and seems to be the only way to exit a balance sheet recession. 

Apologies, nothing really to do with BAC. 
Title: Re: BAC-WT - Bank of America Warrants
Post by: alertmeipp on May 14, 2012, 08:56:51 PM
No sarcasm.  EU is where US was about two years ago, but stalled.  Individual countries cant devalue their currencies, making austerity at the country level useless.  The EU is a huge free trade zone, and needs to be further amalgamated so the EU as a whole issues bonds to back the entire system.  What they have been doing to now is half baked.

Massive QE is the only option that remains, and seems to be the only way to exit a balance sheet recession. 

Apologies, nothing really to do with BAC.

It does, us banks shrink their balance sheet,eu haven't. Who is going to get cheap assets
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on May 14, 2012, 09:13:02 PM
Interesting observation - nothing else to say.

Re Euro fears.  I dont get what everyone is excited about.  It strikes me that Eu austerity is toast as a concept.  A whole combination of factors such as Merkel losing an important election, France's new anti- auterity stance, Greeces rebellion, suggest to me that the floodgates will open soon with stimulus programs.  The EU cant help but learn from the US success.

BAC's volume was also rather light today at only 67% of average volume.  All of the other large banks (JPM, WFC, C, even USB) had large (above average) volumes.  For nearly three hours BAC was significantly outperforming even USB.  If you remember (how can we forget) last Summer/Fall BAC was the most volatile of the bunch.

Well, enough about that.
Title: Re: BAC-WT - Bank of America Warrants
Post by: sswan11 on May 15, 2012, 02:45:31 PM
USB ahead of BofA, C in 1st qtr mortgage lending.  Wells Fargo had market share of 33.9%!!

http://www.trefis.com/stock/usb/articles/120794/u-s-bancorp-beats-bofa-citi-in-q1-mortgage-lending/2012-05-15?from=email%3Anotd

U.S. Bancorp (NYSE:USB) overtook banking giants Bank of America (NYSE:BAC) and Citigroup (NYSE:C) to become the third-largest mortgage originator in the U.S. for the first quarter of the year. [1] Data compiled by Inside Mortgage Finance details the performance of mortgage lending divisions of the country’s largest banks in Q1 2012 – a period over which mortgages worth $385 billion were originated. Wells Fargo (NYSE:WFC) continues to rule the roost with an unrivaled market share of 33.9% followed by JPMorgan Chase (NYSE:JPM) with a 10.6% market share. U.S. Bancorp’s share stood at 5.2% – indicating that the top three banks were responsible for nearly half of all mortgages given out over the period.

We maintain a $34 price estimate for U.S. Bancorp’s stock, about 8% higher than its current market price.
Title: Re: BAC-WT - Bank of America Warrants
Post by: benchmark on May 16, 2012, 09:45:46 AM
I have some jan 13 10 calls that has gone down quite a bit lately :(

I know the board has some option experts, how do you decide to unwind a position? (I still believe BAC will go back up, but timing is a bit tricky...)
Title: Re: BAC-WT - Bank of America Warrants
Post by: Uccmal on May 16, 2012, 02:35:38 PM
I have some jan 13 10 calls that has gone down quite a bit lately :(

I know the board has some option experts, how do you decide to unwind a position? (I still believe BAC will go back up, but timing is a bit tricky...)

Yeah, Its a bit torturous right now.  At a certain point they lose so much value, that I will let them ride.  I only have a handful of 2013s left (7.50).  All the rest of my holdings are 2014s.  I wont likely buy anymore 2014s now because its getting too tight for my tastes & I have a significant position.  I can wait for the 2015 s to arrive which is coincident with tax loss selling in November, if things dont turn around. 

BAC has alot going for it.  While the stock can certainly go lower, sooner or later it will recover.  The Big US banks are in an optimum position to buy up distressed assets.  BAC just bought a 600 m piece of something last week - I think it was Maidenlane3.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on May 16, 2012, 03:38:49 PM
I have some jan 13 10 calls that has gone down quite a bit lately :(

I know the board has some option experts, how do you decide to unwind a position? (I still believe BAC will go back up, but timing is a bit tricky...)

Down to 30 cents now... too late to buy canned food with it.  Maybe some dried beans from the bulk food section.

You could always write the 2013 $11 strike call for 20 cents and try to make 10x your money on the 10 cents that you leave on the table (if the stock hits $11+ at expiration).

Then you could use your 20 cents of cash and buy some 2014s -- or do whatever you choose with it.

Writing the covered calls is always better when the stock is up a lot higher than now, but I presume that's not the advice you want to hear right now.
Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on May 17, 2012, 06:59:06 AM
I'm actually starting to look at the 2014's. I might switch my common for the $10 strike price '14 but keeping the same 'notional upward potential' so that I can free cash for other things. This price is ridiculous but I fear 17 months is too short. Another thing is timing; can this thing really go back to $5 without extreme escalation of problems in Europe?
Title: Re: BAC-WT - Bank of America Warrants
Post by: value-is-what-you-get on May 17, 2012, 07:19:40 AM
Meanwhile, as manic depressive alcoholic Mr Market spews out bids, the value creators at head office continue asset sales and stick to the plan. 

http://www.reuters.com/finance/stocks/BAC/key-developmuents/article/2542759

Suppose they get the $2billion.  That's $0.20 per share in value.  As the division oversees 1/22 of the wealth management business of BAC (the particular part for sale principally located in Europe - meltdown pending, Asia not including Japan - hard crashlanding imminent etc no less!) the private market is willing to pay this amount for 1/22 of the business.  That means that to a private buyer, the current value of the wealth management division alone is around $4.40 per share.

It's a great demonstration of the nature of Mr. Market.
Title: Re: BAC-WT - Bank of America Warrants
Post by: nkp007 on May 17, 2012, 07:58:54 AM
Meanwhile, as manic depressive alcoholic Mr Market spews out bids, the value creators at head office continue asset sales and stick to the plan. 

http://www.reuters.com/finance/stocks/BAC/key-developments/article/2542759

Suppose they get the $2billion.  That's $0.50 per share in value.  As the division oversees 1/22 of the wealth management business of BAC (the particular part for sale principally located in Europe - meltdown pending, Asia not including Japan - hard crash landing imminent etc no less!) the private market is willing to pay this amount for 1/22 of the business.  That means that to a private buyer, the current value of the wealth management division alone is around $11 per share.

It's a great demonstration of the nature of Mr. Market.

Well said. Hopefully this is the once in a generation opportunity we've been waiting for.
Title: Re: BAC-WT - Bank of America Warrants
Post by: sswan11 on May 17, 2012, 10:12:35 AM
Negative Motley Fool article:

http://beta.fool.com/mhenage/2012/05/17/bank-america-earnings-behind-headlines/4670/?source=eogyholnk0000001
Title: Re: BAC-WT - Bank of America Warrants
Post by: enoch01 on May 17, 2012, 10:23:39 AM
Meanwhile, as manic depressive alcoholic Mr Market spews out bids, the value creators at head office continue asset sales and stick to the plan. 

http://www.reuters.com/finance/stocks/BAC/key-developments/article/2542759

Suppose they get the $2billion.  That's $0.50 per share in value.  As the division oversees 1/22 of the wealth management business of BAC (the particular part for sale principally located in Europe - meltdown pending, Asia not including Japan - hard crash landing imminent etc no less!) the private market is willing to pay this amount for 1/22 of the business.  That means that to a private buyer, the current value of the wealth management division alone is around $11 per share.

It's a great demonstration of the nature of Mr. Market.

Well said. Hopefully this is the once in a generation opportunity we've been waiting for.

I really like Moynihan, and have to be careful not to put a halo around him.

I have been adding aggressively recently.  This volatility has been wonderful.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on May 17, 2012, 11:19:11 AM
On Monday we will have a new BofA presentation webcast:

May. 14, 2012-- Bank of America Chief Executive Officer Brian Moynihan will present at the Deutsche Bank 2012 Global Financial Services Investor Conference in New York on Monday, May 21, 2012 at 2:30 p.m. ET

A live audio webcast of the presentation will be accessible through the Bank of America Investor Relations Web site


http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-newsArticle&ID=1695615&highlight=
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on May 17, 2012, 02:14:45 PM
A couple of questions:

How low did the BAC "B" warrants trade last December? 

How high did they go for at the peak in March?
Title: Re: BAC-WT - Bank of America Warrants
Post by: leftcoast on May 17, 2012, 02:16:14 PM
A couple of questions:

How low did the BAC "B" warrants trade last December? 

How high did they go for at the peak in March?

(http://bigcharts.marketwatch.com/kaavio.Webhost/charts/big.chart?nosettings=1&symb=bacwsb&uf=0&type=2&size=2&sid=4553784&style=320&freq=1&entitlementtoken=0c33378313484ba9b46b8e24ded87dd6&time=7&rand=679942293&compidx=&ma=0&maval=9&lf=1&lf2=0&lf3=0&height=335&width=579&mocktick=1)
Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on May 17, 2012, 03:20:44 PM
Here you go: http://www.investorpoint.com/stock/BAC.WS.A-BANK%20OF%20AMERICA%20WARRANTS/chart/?qm_page=25639
& http://www.investorpoint.com/stock/BAC%252EWS%252EB-BANK%20OF%20AMERICA%20CORPORATION%20WARRANTS/


Eric and others, what BAC options would you prefer if you had a fresh start now? I'm looking to change my bac common for jan 2014 7.5 and 10's. If I have to roll them over in November, so be it! I have cash coming in so I can handle extreme new bargains as well.  :)
Title: Re: BAC-WT - Bank of America Warrants
Post by: Shane on May 17, 2012, 03:27:01 PM
Motley Fool Article- "So what's the problem? Investors have other choices that just plain look better. While Bank of America sells for 12.25 times 2012 earnings, you can buy Wells Fargo (NYSE: WFC) for about 10 times forward earnings. The fact that Wells pays a dividend of 2.64% versus Bank of America's 0.52%, is another factor that argues for buying Wells instead. There are other problems that Bank of America has to own."

So instead of normalized earnings he uses a 1 or 2 year forward projection and compares it to WFC... Lost interest after reading that
Title: Re: BAC-WT - Bank of America Warrants
Post by: Parsad on May 17, 2012, 03:29:53 PM
Here you go: http://www.investorpoint.com/stock/BAC.WS.A-BANK%20OF%20AMERICA%20WARRANTS/chart/?qm_page=25639
& http://www.investorpoint.com/stock/BAC%252EWS%252EB-BANK%20OF%20AMERICA%20CORPORATION%20WARRANTS/


Eric and others, what BAC options would you prefer if you had a fresh start now? I'm looking to change my bac common for jan 2014 7.5 and 10's. If I have to roll them over in November, so be it! I have cash coming in so I can handle extreme new bargains as well.  :)

Our November $7 puts bought when BAC was just under $10 are up over 120% in a couple of months!  We've sold a third.  As we sell off the rest, we may get to buy more BAC at fantastic prices again.  We bought the puts to protect the equity gains.  Mr. Market is discounting a terrific bank executive and his reborn bank!  Cheers!
Title: Re: BAC-WT - Bank of America Warrants
Post by: tombgrt on May 17, 2012, 03:34:23 PM
Good job Parsad. (Btw on the other topic: I totally agree with you as well. ;)) I've sold 1/4th of my position back then at 9,6ish only to buy something that has dropped as much as BAC since then.  ;D

I'm just as stunned by the current price as I was in December but am aware that things could always get nastier. However, I'm not counting on it and believe the risk/reward is here again to take a bet with the options.
Title: Re: BAC-WT - Bank of America Warrants
Post by: sswan11 on May 17, 2012, 03:51:18 PM
A couple of questions:

How low did the BAC "B" warrants trade last December? 

How high did they go for at the peak in March?

According to ETrade low was .29 in December, high 1.15 in March at close on 3/16 (traded up to 1.21 intraday on 3/19 but closed at 1.08).
Title: Re: BAC-WT - Bank of America Warrants
Post by: racemize on May 17, 2012, 04:11:27 PM
A couple of questions:

How low did the BAC "B" warrants trade last December? 

How high did they go for at the peak in March?

According to ETrade low was .29 in December, high 1.15 in March at close on 3/16 (traded up to 1.21 intraday on 3/19 but closed at 1.08).

I'm having trouble getting behind the B warrants--they have a break over point that's way up there.  It seems a little too speculative to me, so I'm sticking with A and common.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Johnson on May 17, 2012, 04:16:40 PM
Hi All,

Been reading the board for a while, but just recently joined.  I went all in on BAC at 8.78.  Been painful to see it come down, but hoping it hits 15 by 2014, but if it doesn't, I can still wait longer. For those of you in the warrants/leaps, in what timeframe do you think the litigation and legacy issues will be behind them? That, along with the macro environment, would determine the price in the near time frame (1-2 years).


Regards,
Johnson
Title: Re: BAC-WT - Bank of America Warrants
Post by: Parsad on May 17, 2012, 05:23:33 PM
Hi All,

Been reading the board for a while, but just recently joined.  I went all in on BAC at 8.78.  Been painful to see it come down, but hoping it hits 15 by 2014, but if it doesn't, I can still wait longer. For those of you in the warrants/leaps, in what timeframe do you think the litigation and legacy issues will be behind them? That, along with the macro environment, would determine the price in the near time frame (1-2 years).


Regards,
Johnson

I suspect most of the litigation and legacy issues will be behind them after two years.  As each quarter goes by, and their Tier 1 capital ratio increases while lawsuits fall by the wayside, the market price will slowly move towards tangible book and then book.  It will depend heavily on how the U.S. recovers, especially housing, because a good portion of their engine is driven by loans and credit.  Cheers! 
Title: Re: BAC-WT - Bank of America Warrants
Post by: Rabbitisrich on May 17, 2012, 06:03:03 PM

I really like Moynihan, and have to be careful not to put a halo around him.

I have been adding aggressively recently.  This volatility has been wonderful.

The nice thing about the current price, and trends in collateral values, is that Moynihan doesn't have to be an amazing risk manager and revenue builder. He just has to stick to his stated principles and prioritize risk managers versus profit centers.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on May 17, 2012, 06:11:53 PM
Here you go: http://www.investorpoint.com/stock/BAC.WS.A-BANK%20OF%20AMERICA%20WARRANTS/chart/?qm_page=25639
& http://www.investorpoint.com/stock/BAC%252EWS%252EB-BANK%20OF%20AMERICA%20CORPORATION%20WARRANTS/


Eric and others, what BAC options would you prefer if you had a fresh start now? I'm looking to change my bac common for jan 2014 7.5 and 10's. If I have to roll them over in November, so be it! I have cash coming in so I can handle extreme new bargains as well.  :)

I dropped all my leverage when the stock was in the upper $9 range, and wrote some 2014 $15 strike calls for 82 cents.  I bought the calls back in when they were down as the price fell 50%.  Today, I bought a big chunk of common, and my leverage comes via the $5 and $7 2014 calls.  In order to keep the volatility decay from being a drag on my returns, I put a small amount into the 2014 $10 calls that I sold $12 calls against.  So if the stock is over $12 at expiry, the small amount tied up in that bull spread will gain about 6x (enough to pay for the current options premium embedded in my calls, plus an extra gain to just enjoy).

Then I also have some $10 strike 2014 calls for speculation, but only about 3% of portfolio.  I'll roll them into 2015 calls when available.
Title: Re: BAC-WT - Bank of America Warrants
Post by: enoch01 on May 17, 2012, 06:19:00 PM

I really like Moynihan, and have to be careful not to put a halo around him.

I have been adding aggressively recently.  This volatility has been wonderful.

The nice thing about the current price, and trends in collateral values, is that Moynihan doesn't have to be an amazing risk manager and revenue builder. He just has to stick to his stated principles and prioritize risk managers versus profit centers.

That's part of why I admire him - focus.  He's a great fit for this job, at this bank, in this environment.
Title: Re: BAC-WT - Bank of America Warrants
Post by: Parsad on May 17, 2012, 07:03:15 PM

I really like Moynihan, and have to be careful not to put a halo around him.

I have been adding aggressively recently.  This volatility has been wonderful.

The nice thing about the current price, and trends in collateral values, is that Moynihan doesn't have to be an amazing risk manager and revenue builder. He just has to stick to his stated principles and prioritize risk managers versus profit centers.

That's part of why I admire him - focus.  He's a great fit for this job, at this bank, in this environment.

Yes!  He would have been an odd duck six years ago when executives were going nuts.  I think if anyone had doubts about Moynihan, he's acquitted himself nicely.  This is a meat and potatoes guy, and what he's done so far has been extraordinary.  Cheers!
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on May 17, 2012, 10:19:31 PM
Once again the volume was below average (only slightly today).  The other large peers (WFC/C/JPM) have trading volumes far in excess of normal.

What's the significance of being a relatively low volume stock in a market full of high volume?  Not many sellers, a big buyer trying to accumulate?

Yes, I figure this is insignificant to most of you, but I'm interested in knowing why my dog is exhibiting strange behavior.
Title: Re: BAC-WT - Bank of America Warrants
Post by: kmukul on May 17, 2012, 10:29:42 PM
Well once there was a link posted which was talking about the fact that bac is very highly traded in using automated trading due to the fact price is low, may be there is a cut back to that kind of trading as market is "risky" now
Title: Re: BAC-WT - Bank of America Warrants
Post by: twacowfca on May 18, 2012, 06:39:31 AM
Once again the volume was below average (only slightly today).  The other large peers (WFC/C/JPM) have trading volumes far in excess of normal.

What's the significance of being a relatively low volume stock in a market full of high volume?  Not many sellers, a big buyer trying to accumulate?

Yes, I figure this is insignificant to most of you, but I'm interested in knowing why my dog is exhibiting strange behavior.

When a value stock (low P/B) drops a lot and then forms a bottom on relatively low volume for an extended time, it typically will gradually rise.  However, a brief decline in volume may not necessarily be such a strong signal.
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on May 18, 2012, 10:47:44 AM
Valueline
http://www3.valueline.com/dow30/f6291.pdf

2006     2011
 4458  10536  Shares Outstanding
 1459    2129  Assets $B
327.3   202.0  Assets/share
  29.7     20.4  BV/share
  9.3% 10.8% Leverage
1.45%   0.1% ROA
[41-55]    7.0  Price per share
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on May 18, 2012, 11:01:40 AM
Valueline
http://www3.valueline.com/dow30/f6291.pdf

2006     2011
 4458  10536  Shares Outstanding
 1459    2129  Assets $B
327.3   202.0  Assets/share
  29.7     20.4  BV/share
  9.3% 10.8% Leverage
1.45%   0.1% ROA
[41-55]    7.0  Price per share


The ROA figure is a bit strange.  For the pre-crisis years BofA had much better ROA than JPM, yet people think JPM is some kind of best in breed and that BAC is garbage.  Why was BAC's precrisis ROA so much better than JPMs?  The BAC-originated stuff fared rather well in the crisis, so I don't think we can blame it on reaching for yield.
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on May 18, 2012, 11:07:46 AM
The ROA figure is a bit strange.  For the pre-crisis years BofA had much better ROA than JPM, yet people think JPM is some kind of best in breed and that BAC is garbage.  Why was BAC's precrisis ROA so much better than JPMs?  The BAC-originated stuff fared rather well in the crisis, so I don't think we can blame it on reaching for yield.

Bank of America was a better retail bank at that time. It has a very low cost deposit franchise, one of the best in the country. The problem was its management history of bad acquisitions (explosion of shares outstanding 2006-2011).

JP Morgan's reputation was built on Dimon's operational improvement, but from a very low base must be said, and how they navigated the crisis. Now including WAMU's branch network things have improved but still not at the same level as Bank of America's franchise.
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on May 18, 2012, 11:18:54 AM
A sample from BankRegData but must be checked,

Cost of Funding
Zions Bancorporation 0.24%
Wells Fargo               0.35%
Fifth Third                 0.36%
Bank of America        0.37%
PNC Bank                  0.43%
M&T Bank Corp.        0.43%
JP Morgan                 0.46%
SunTrust Bank          0.52%
Regions Bank            0.52%
KeyBank                   0.56%
U.S. Bancorp             0.67%
BB&T                        0.70%
Capital One               0.89%
Citigroup                   0.94%
Title: Re: BAC-WT - Bank of America Warrants
Post by: bmichaud on May 18, 2012, 01:03:45 PM
Eric, you must like the support BAC is seeing today in a HIDEOUS market.
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on May 18, 2012, 01:06:18 PM
Eric, you must like the support BAC is seeing today in a HIDEOUS market.

Yup! 

BAC:  +0.57%   (on only 80% of average volume)

Other banks:
JPM:  -1.30%     (2x average volume)
WFC:  -1.58%     (1.6x average volume)
C:    -1.51%        (1.5x average volume)
USB:  -1.24%      (1.3x average volume)

Index ETFs:
IWM Russel 2000:  -1.1%
SPY S&P500     -.86%
DIA DJIA  -1.01%


Others:
FRFHF.PK:   -.73%
BRK.B:     -1.16%
Title: Re: BAC-WT - Bank of America Warrants
Post by: PlanMaestro on May 18, 2012, 01:14:03 PM
Yup! 

Nope! Another $5/$2 common/warrants please!
Title: Re: BAC-WT - Bank of America Warrants
Post by: ERICOPOLY on May 18, 2012, 01:20:26 PM
Yup!