ERICOPOLY

So this is a possibility (speculating of course): Both MBI's and BAC's legal counsel are advising their respective clients that piercing the veil is most probably ruled in BAC's favor. Thus, perhaps the only issue remaining is this bond consent issue. The tone of MBI's response so far reminds me of a song: He said, "Son, I've made my life out of readin' people's faces, And knowin' what their cards were by the way they held their eyes. So if you don't mind my sayin', I can see you're out of aces. For a taste of your whiskey I'll give you some advice."

Yes, it sucks. However, it is non-recourse leverage. You could instead leverage up a taxable margin account with common stock but it puts you in the same taxation boat. Somebody above compared the warrant's leverage to be the equivalent of going 150% long on the common. Scary to be that leveraged in the common without buying puts... and right there it really starts getting expensive.

Thanks onyx1, Unfortunately it sounds to be designed exactly as I would have designed it, and indeed as I mentioned above. From ERICOPOLY's fictional dictionary: "proportional interest" : the number of shares the warrant converts to (your proportional interest in the common stock) Thus, if your warrant converts to 1.5 shares and there is a 60 cent dividend declared on the common, then you need to pay dividend tax on 90 cents.

Urgency in what respect? Do you mean with regards to the ruling on the Article 78? The judge cannot rule on that until there is a monetization of the legal receivable. It's too big of an asset on the balance sheet. Who really believes that a judge can speculate on the outcome of another trial that hasn't even gone to court yet? Wouldn't that be viewed by peers as grossly unprofessional? You're right. That's my point. MBIA thinks they have a winning case, BAC knows they have to pay but they disagree on the amount. The judge obviously can't make a decision, tons of money spend on lawyers... Winning a case against Countrywide for $5b award is different from Countrywide having the money to pay them. Does Jay Brown really have the balls to risk a "piecing the veil" decision? This is where he then decides to get the consent of the bondholders. He can threaten and bluff and whatever, but BAC maybe doesn't believe his threats given that risk. So they block his maneuver buy buying these bonds -- make sure Jay Brown remembers that he has skin of his own in this game.

Urgency in what respect? Do you mean with regards to the ruling on the Article 78? The judge cannot rule on that until there is a monetization of the legal receivable. It's too big of an asset on the balance sheet. Who really believes that a judge can speculate on the outcome of another trial that hasn't even gone to court yet? Wouldn't that be viewed by peers as grossly unprofessional?

Founder of Autonomy said this today: The figures are just mad. You are talking about handing them an asset worth $12 billion and they are saying $9 billion of that they are taking off. That would be such an obvious massive thing with 300 people and all these firms doing due diligence, how could you possibly not spot it? http://blogs.wsj.com/digits/2012/11/20/qa-with-autonomy-founder-mike-lynch-on-h-p-allegations/?mod=yahoo_hs

Agreed on the fact that it will eventually be taxed as a capital gain when sold if not previously taxed along the way as dividens. In the US it makes a massive difference because the tax rate on dividends is probably about to go from 15% to the 40+% range (you've got to throw in the Obama care tax). Without the deferral, one has to sell of chunks of warrants along the way to pay the tax bill. This drive the cost of that tax even higher (opportunity cost) -- tax deferral is a wonderful thing.

So is Berkowitz IMO. Why is he giving up his vote so easy? Better move is to make MBIA pay him a premium to call his bonds if he wants his vote. Then, when MBIA needs to raise common equity, buy it from them really cheap. Then again... this is me talking and I'll defer to a better investor. Berkowitz.

#1 I remember when Fairfax needed more money back in 2004 or 2005 they got it, but it was expensive (common equity raise at low price). And those were how Prem's "friends" treated him (Markel and Southeastern). Why would Warburg Pincus similarly not make any help expensive? #2 If these bonds get called can BAC just bid on more bonds? Or is it too late at that point?

Quit your jibber jabber fool. Looks like Mr. T had a few words with the ISI analysts and they relented 8) BofA Seen Doling Out $10 Billion for Dividends, Buybacks http://www.bloomberg.com/news/2012-11-20/bofa-seen-doling-out-10-billion-for-dividends-buybacks.html?cmpid=yhoo

Here is how I would design the taxation of the warrant for the United States IRS: 1) Each strike reduction is taxed at the dividend rate (and of course multiplied by the number of shares the warrant was previously converted to) 2) Each strike reduction is added to the $4 cost basis of the warrant (to eliminate a double taxation situation) 3) When the number of shares it converts to is increase, this in itself is not taxable as it merely simulates the dividend being reinvested in the stock (just like a DRIP plan) Reason why it may not be that way in this case of TARP warrants: The warrants were not issued by choice, and they were done by design of the Treasury itself. Thus, any old corporation may not be allowed to replicate them willy nilly. Separately but on the same topic, There is precedent for the idea of taxing an adjustment even though no cash is disbursed. Look at how TIPS are taxed. The "gain" on annual adjustment of the TIPS due to inflation is actually taxed as regular income. It doesn't matter that you haven't yet sold the TIPS, you owe the tax each year anyhow. Your "gain" is not a cash gain, but nonetheless it is taxed as regular "income". But seriously, I really want to know why more companies don't issue these things. They're awesome. One of my biggest problems is being able to get a mortgage. I don't want to borrow on margin against my stocks, and I don't want to part with them either. Long term warrants issued with high strikes implying embedded interest rates that are comparable to jumbo mortgages are an awesome asset! I mean, they are so damned awesome! So one thing I'm doing in my taxable account is I have these warrants and I also have some common and calls for leverage. Once the stock pops a bit say in a year or so I'm going to liquidate the common and calls and just keep the warrants. Then I'll have the cash to purchase a house in full if I need to, while still retaining my upside in the stock through non-recourse leverage. For example, if they issued 1 warrant to every share outstanding, for one thing it would drive down the cost of your common share. You could then sell the common share (saving tax on capital gains because it would be driven down in price by the dilution) and hold onto the warrant. And if it's the way you describe, then the dividends would be compounding tax-deferred. And you don't need the cash anyhow, because you got all that liquidity from selling your common.

Assuming you guys are right... assuming the warrant is mechanism by which dividends can be converted to capital gains... Then why all this struggle over taxation of dividends? Why don't corporations offer to swap 100 yr warrants to their shareholders in exchange for their common shares? That way the shareholders who want the dividend can refuse to do the swap, and the shareholders who want to shelter their dividends can just swap their common for warrants. Surely the IRS would have a rule to eliminate this kind of tax sheltering. Maybe not, but this falls in my too good to be true pile.

He (like most people) probably thinks his case against BAC is rock solid. Follow this thread up to the beginning and count the number of times people say that BAC going in to court for Countrywide is suicide. He's got so much blackmail material. He rightfully believes BAC will pay a hefty premium to bury the dirty laundry. Why on Earth would he settle for nothing less than 100%.... hence BAC makes this move.

BAC won't have to pay as much on the Countrywide settlement if they make court too expensive for MBIA. So perhaps BAC's regulators figure the risk of a "payment in full" settlement just dropped enough to way more than compensate for a $130m debt writeoff. All true, but conjecture. Regulators don't tend to like to make their decisions on "what ifs" when there is something certain in front of them. That is, they aren't in the business of trying to handicap a contentious litigation. I suspect they will consider all the facts and circumstances, but they will need to make decisions (or not) based on the issue in front of them which is a regulated financial spending an extra $130 mil of depositor money on a potential downgraded insurer in order to fight what seems to be a very personal battle. The regulators I knew would say to BAC "look, you can fight whatever battles you want, but if you are going to waste money like this for what might or might not result in a better settlement down the road, then this isn't my happy face." I think this may, just may have put up a roadblock for BAC. I'd love a bank regulatory person to weigh in if any around here. Is it depositor money? Perhaps they'll buy it at the parent company. I can't imagine that regulators would wince about BAC flushing $130m down the drain. What are they going to do if BAC asks for a $15 billion capital return? Yeah, you're right. Obviously isn't depositor money at the hold co. I am not sure though they view things through the prism of $15 bil vs $130 mil. It's all about optics. Everything is. $130 mil is still real money. John Thain got nailed for spending $1 mil or so on his office renovation. Clearly that didn't do anything to Merrill one way or the other, but it's the optics. If BAC has an issue in the near future, $130 mil "wasted" will loom large I would think. Speaking of Merrill though, they're the one with the massive MBIA insured asset -- it would make the best sense for Merrill to block it (buy the bonds) as a "hedge" against MBIA trying to stiff them. It's easy to fall into the trap of saying "it's all BofA", but really it's not. Originally Countrywide and Merrill were completely separate. Our perception is that BofA is a big bad bully here, but consider an alternate reality. What if Citigroup had purchased Countrywide and BAC owned Merrill. Would BAC/Merrill be acting any differently here with respect to wanting to prevent the Merrill asset from falling to the mercy of the outcome from a legal receivable? What if MBIA loses in court? So, better optics. Prudent hedge.

BAC won't have to pay as much on the Countrywide settlement if they make court too expensive for MBIA. So perhaps BAC's regulators figure the risk of a "payment in full" settlement just dropped enough to way more than compensate for a $130m debt writeoff. All true, but conjecture. Regulators don't tend to like to make their decisions on "what ifs" when there is something certain in front of them. That is, they aren't in the business of trying to handicap a contentious litigation. I suspect they will consider all the facts and circumstances, but they will need to make decisions (or not) based on the issue in front of them which is a regulated financial spending an extra $130 mil of depositor money on a potential downgraded insurer in order to fight what seems to be a very personal battle. The regulators I knew would say to BAC "look, you can fight whatever battles you want, but if you are going to waste money like this for what might or might not result in a better settlement down the road, then this isn't my happy face." I think this may, just may have put up a roadblock for BAC. I'd love a bank regulatory person to weigh in if any around here. Is it depositor money? Perhaps they'll buy it at the parent company. I can't imagine that regulators would wince about BAC flushing $130m down the drain. What are they going to do if BAC asks for a $15 billion capital return? Yeah, you're right. Obviously isn't depositor money at the hold co. I am not sure though they view things through the prism of $15 bil vs $130 mil. It's all about optics. Everything is. $130 mil is still real money. John Thain got nailed for spending $1 mil or so on his office renovation. Clearly that didn't do anything to Merrill one way or the other, but it's the optics. If BAC has an issue in the near future, $130 mil "wasted" will loom large I would think. Good point about the optics. I hope somebody with a better idea weighs in.

BAC won't have to pay as much on the Countrywide settlement if they make court too expensive for MBIA. So perhaps BAC's regulators figure the risk of a "payment in full" settlement just dropped enough to way more than compensate for a $130m debt writeoff. All true, but conjecture. Regulators don't tend to like to make their decisions on "what ifs" when there is something certain in front of them. That is, they aren't in the business of trying to handicap a contentious litigation. I suspect they will consider all the facts and circumstances, but they will need to make decisions (or not) based on the issue in front of them which is a regulated financial spending an extra $130 mil of depositor money on a potential downgraded insurer in order to fight what seems to be a very personal battle. The regulators I knew would say to BAC "look, you can fight whatever battles you want, but if you are going to waste money like this for what might or might not result in a better settlement down the road, then this isn't my happy face." I think this may, just may have put up a roadblock for BAC. I'd love a bank regulatory person to weigh in if any around here. Is it depositor money? Perhaps they'll buy it at the parent company. I can't imagine that regulators would wince about BAC flushing $130m down the drain. What are they going to do if BAC asks for a $15 billion capital return?

BAC won't have to pay as much on the Countrywide settlement if they make court too expensive for MBIA. So perhaps BAC's regulators figure the risk of a "payment in full" settlement just dropped enough to way more than compensate for a $130m debt writeoff.

Another upgrade, but what does it mean for a stock to be "underowned"? All of the shares are owned. Where did this term come from? It's like saying that other silly statement "people are pulling money out of bonds and putting them into stocks", Wall Street is a place where logical reasoning goes to die (at least in some of the phrases tossed around it seems that way). Meeting the full Basel III requirement "should allow for the company to ask for and receive approval for a dividend increase during the upcoming [2012 Federal Reserve stress test] process, which could improve overall investor sentiment on a name that we believe is under-owned relative to other large cap banks," Mutascio said. http://www.thestreet.com/story/11770961/2/bank-of-america-will-cut-to-hit-earnings-analyst.html

I think that the assumption that BAC will be run conservatively indefinitely is aggressive. Banks seem to have a crisis every 15-20 years. That said, I don't think it's unreasonable to believe that in 10 years others will believe that banks are conservative, so maybe that's close enough. :) (Not that I'm bearish -- I'm long BAC. I just worry about analysis that assumes earthquakes won't happen in California.) I totally understand your point. I tend to try to make points with reductio ad adsurdum logic just because I get bored of being more plain. So my "to infinity" is basically to be taken with a grain of salt. It's just that I have an undergraduate math degree and this limit stuff from calculus is pretty much embedded in my everyday thinking. The idea behind my logic is that the market won't just give away 12.5% compounding forever as long as the management is highly trusted and conservative. So therefore I see 8x P/E as pretty damn unlikely over the lifetime of the Moynihan tenure (unless he changes his stripes).

I think Buffett's entire personal tax bill is something like $30 million or so. So what if it triples to $90 million? He's got something close to 99% of his money in Berkshire. How much is a corporate tax rate drop of 35% down to 28% going to save him? You gotta love it, the man is going to get rich even faster. I don't think he's being two-faced or anything, I'm just fascinated that the media seemingly doesn't notice this.

Tax reform is going to lower Buffett's taxes. It's going to lower mine too. Berkshire is taxed at 35%. They're going to cut it down to 28%. Even Obama wants to cut it to 28% (Republicans want even lower rate). His share of Berkshire's income dropping in tax is going to save him a hell of a lot more than he will actually pay extra in personal tax. Me too. The actual amount that I will have to pay tax... if BAC distributes 30% of income as a dividend... is unlikely to be more than the amount I'll save on the 100% of my BAC earnings when the corporate tax is paid. The dividend tax is a total red herring for some of the rich that are invested in companies that actually pay that 35% tax rate. We can't wait for this tax reform to lower our overall taxes!!! Especially me given that it's only like 1/6 of my income that will actually be distributed as a dividend given my Roth IRA is sheltering 1/2 of my dividends.

I could have expressed this better: My pessimistic case would be putting a 5x multiple on earning at the terminal value due to a market crash, and assigning only $1.50 (relative to current share count) of average capital return each year. That only gets me a 1.5x return on the warrants. When I'm saying $1.50 per share average year capital return, I meant it relative to their "basic earnings power". So if we're talking about a company that in the end will be making a 15% (basic earnings power) return on tangible book value, then $1 of capital returned when the stock is trading at tangible book value will be just as good as $1.50 worth of capital returned when the stock is trading for 1.5x tangible book value. So we could have several years of depressed capital return only averaging $1 per share, but as long as the stock is also depressed (trading for tangible book value) then I'm still getting the $1.50 per year that I need in order to make a 50% return on the warrants, as long as the stock is trading for at least 74% of tangible book value at expiration (it's depressed due to a market crash).. The only optimistic part of this scenario is the idea that the company is capable of earning 15% return on tangible common equity. Against that optimism I've applied a lot of stress, like a stock trading at 5x earnings (.74x tangile book value) and a very rocky road over the next 6 years (only paying out $1 a year is pretty harsh relative to our expectations).

The reason why no-growth PE are never 8x over the very long term for a business in which all earnings can be paid out is a mathematical reason. 12.5% compounding to infinity as long as the bank remains conservatively managed to survive recessions.. Sorry I didn't follow - are you saying the no growth PE is typically 10x versus 8x? I tend to think the traditional cost of equity is 10%, especially if BAC can continue to de-risk over the next several years. But I was throwing out 8x in case some want to be more conservative and use a 12.5% cost as you point out... I added more comments to my prior post after coming back from a walk. If BAC is really going to be a highly regarded, conservative, well run bank, then I'll happily compound my Roth IRA for 12.5% to infinity if they pay out all earnings as dividends/buybacks and stock keeps on trading at 8y x. That's why I'm saying 8x is not really conservative, it's totally unrealistic for a long term valuation of a well run conservative highly diversified bank like BAC. I'm not trying to beat you up, just saying don't get way too conservative here in choosing a very improbable outcome. But certainly for short period of time banks can trade at 8x. We see that all the time recently.

The reason why no-growth PE are never 8x over the very long term for a business in which all earnings can be paid out is a mathematical reason. 12.5% compounding to infinity as long as the bank remains conservatively managed to survive recessions. 10% to infinity is also pretty damn generous for the market if BAC is indeed a low-risk bank conservatively managed. Thus, I believe when confidence is restored it trades for more than 10x in 6 years. Maybe 12x. At 12x the money compounds at 8.33% to infinity. But I keep it conservative at 10x normally for discussion to keep people from calling me unrealistic.

And in the pessimistic case where the stock doesn't climb in response to boosted capital return, it doubles the value of that returned capital if the stock remains mired at $10. So bring it on. The pessimist's viewpoint on stock recovery/valuation is not exactly too upsetting to me. Although I'd rather just have the stock open at $20 tomorrow to be perfectly honest.