ERICOPOLY

Indeed, I am. I know, I know. I had that talk with Fidelity yesterday -- they reminded me of how they offer some premium services to me and could give me some help assessing the risk of my portfolio. To this I said, "I'm not going to carry an automatic weapon into a police station and ask if it's allowed".

I am also suspicious that my brain is a bit affected by selling before a drop -- it's probably subconsciously patting me on the back and offering an explanation to confirm my decision. So it's subconsciouly looking for reasons why I made the "correct move", even though this is purely random possibly. Psychologists probably have a term for that. Layman's term is "ass", but maybe if you can memorize a more scientific name you get awarded a PhD.

Eric, didn't you buy some Dell a while ago? Yes. I'm not trying to be a "pile on" with the negativity, I just immediately thought of that Shuckenbrock character who I distrust and if you watch the video produced just a few months ago he talked in a tone that suggested how everything was doing so great -- I only distrust him because he looks like a slimy salesman in that video, otherwise no axe to grind with him. It so happens that he and a few other execs sold a massive % of their holdings back in Feb/March. That could be a pure coincidence of course, like maybe after years of the stock being low they all talked at lunch about monetizing a bit due to concerns about perhaps another large market drop (like what Prem worries about). I also sold everything to buy BAC after they stated they're at 9% B3 already and provided more clarity on their expense reduction progess.

Remember that Shuckenbrock video I posted where he seemed to put some pretty heavy positive spin on everything? I notice he sold more than 2/3 of his stock earlier this year around $17/$18 -- and so did some other execs. Some pretty heavy insider selling. I think the video however came out after the selling. It always looks suspicious when there is heavy insider selling, videos about how great things are going, and then in the same year some pretty nasty turn of events in the business. Except last year Michael Dell bought a bunch.

Another link from the fantastic Calculated risk: "it seems likely at this point that the pendulum has swung too far the other way, and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery. emphasis added Clearly Bernanke and the Fed are concerned that credit isn't flowing to a large segment of the population. Read more at http://www.calculatedriskblog.com/2012/11/bernanke-suggests-mortgage-lending.html#RGA4sWgA1ibEA5Dd.99 " To me it seems that when the fed clearly states that, it's a tipping point in favor of the banks. Have they stated anything similar before? If not, it's absolutely huge. Regulation might be loosened instead of tightened. Just a random question regarding a scenario where corporate taxes get cut to 28% from 35%. I assume most of the big US banks today are paying 35% tax on the net interest income from the next incremental mortgage loan that they extend. So if that 35% were cut to 28%, the risk/reward of extending credit would in theory improve, right? So they could afford to relax their lending standards and/or interest rates a bit, correct? Or no?

Sometimes when Moynihan speaks (like on the webcast before the most recent one) he is much more cautious when he talks about the pace of reduction in LAS. On that webcast he merely promised that the work would be fully complete by FYE'14 and that the costs would be fully out by mid-FY'15, explaining that it can take 6 months for the costs to completely drop off after the work is complete. Yet sometimes when he is really happy (like during that Q3 conference call) he seems to provide a less cautious estimate that I presume is what he deems quite possible to happen. For example, here is an answer that he gave on the Q3 conference call transcript: Matthew O'Connor - Deutsche Bank: May be I'll just toss the numbers at there, you are at a $12 billion annual run rate right now. I feel like at one point you said $2 billion could be a more sustainable level as you move through all of this. So that's a $10 billion decline. Any guess on does it take two years to get through that, is it five years to get through that? Brian T. Moynihan - CEO: I think we'd look at it and say '13 and into '14 you would be through that based on everything we know today. But again, that's subject to caveat if someone is changing the rules – something changing the rules. But right now, as we said, we'd expect that the – as we move through next year, the year-end numbers would still be elevated. But as we move into '14, you'd see them come down to more normalized levels. We're doing everything we can do move – to get through this as quickly as possible. Now doesn't it sound like he means to suggest that the steepest part of the costs come out next year in FY'13? But that he concedes there still might be some costs to come out further in FY'14?

The work to comply with that legal settlement this year was completed by the LAS division. My comment on cost coming down in either Q1 or Q2 was motivated by this calculation: 250,000 - 300,000 normal run rate of delinquent loans will cost LAS $2b a year. 900,000 delinquent loans is currently costing them $12b a year. 3x the normal work load costs them 6x the normal cost. Under the present annual cost of 12b, they did extra work for that settlement yet still managed to burn through 300,000 of delinquent loans (last year it was 1,200,000 delinquent loans). Next year they plan to burn through another 300k of excess loans (and no settlement related work). The following year they plan to burn through the remaining 300k of excess loans (and no settlement related work). That will leave them with just 300k of loans (the normal run rate) What I'm wondering for next year is whether the phrase "and no settlement work" is worth anything from an expense standpoint for LAS. Like, weren't there live bodies assigned to these tasks?

I meant to imply that she would rule to block the split if a bankruptcy filing were imminent. That might come before the end of the putback trial. MBIA can argue that the split is working out for MBIA Insurance Corp policyholders until the split is no longer working out for MBIA Insurance Corp policyholders. EDIT: Why would the insurance regulator be upset with BofA over this? Isn't the real problem in the first place that MBIA Insurance Corp was walled off from the good assets of National so that Jay Brown can keep his money at the expense of policyholders if that subsidiary goes under?

MBIA itself makes the argument that Bank of America is putting MBIA Insurance Corp at risk of "rehabilitation or liquidation". So in light of this, how can Kapnick approve the split? Didn't MBIA just tell her that MBIA Insurance Corp is in jeopordy and at the mercy of BofA? Yet she is expected to rule in favor of the split? Kapnick has not control over whether BofA will ever pay. http://www.mbia.com/MBIA-Inc-Statement2.pdf it is not the Consent Solicitation that increases the risk of MBIA Insurance Corp. being placed in rehabilitation or liquidation, rather it is BofA’s own refusal to honor its obligations and its strategy of delaying the put back litigation.

I don't think bankruptcy is even in question. I think a ruling on the split is in question. There is no bankruptcy on the table because if that were the likely outcome then the split would not get approved by the judge.

Did he say all excess returned to shareholders? I thought the tune he's been singing was roughly 1/3rd buybacks, 1/3rd dividend, 1/3rd reinvestment That's right, he gave the 1/3, 1/3, 1/3. He also said everything above the minimum capital requirement (+50 bps) will be returned. So I interpret his words to be that he'd like to return anything that tips us over the 9% threshold -- when there is an opportunity to invest that 1/3 in the business (and leverage it up with loans so that it doesn't tip us over 9%) then he will do so. Maybe some gets pushed up to the parent to retire high cost debt, and meanwhile loans expand in the subsidiary -- keeping the 9% ratio neutral. Actually, the Fed has also said that returns can only be 30% dividend. So for those of you that are hoping for a higher mix of dividend yield, well it's not going to happen. EDIT: Maybe the game is to get dividend approval for 30% of your expected capital generation and buyback approval for all rest. Then you don't do as much buybacks if reinvestment (lending) opportunities arise. Otherwise (if there is not enough loan demand to reinvest anything back in the business), the capital ratio will just build up.

Question: How much does that affect the credit ratings of the parent? Does that in turn have a negative impact on National, even if the split were approved? In other words, would the parent have to issue some (even more costly) dilutive equity?

the bank reinforced that it is on track to meeting its total financial obligations within the first year of the three-year agreement. http://finance.yahoo.com/news/15-8-billion-mortgage-relief-173000332.html So do expenses drop off a fair chunk in Q1 or Q2?

And what does Berkowitz do now that BAC is offering him a big price for those bonds? Does he choose: A) not sell them to BAC and screw the Fairholme Focused Income holders out of a big bonanza B) sell them to BAC and have his Fairholme Allocation Fund suffer the pain of the common shareholders. One fund has only the common. One fund has only the bonds. Pick a winner.

Berkowitz's bonds and common are concentrated in different funds. He's got the "focused" fund stuffed with common, and he's got the "income" fund stuffed with bonds. He's got to pick a winner and a loser here. His allocation mix between the different funds might explain why he is playing this out this way -- meaning his granting of consent might have been unexpected by BAC's strategists.

Exactly! The premium to par is what you earn as a bondholder if you choose to force their hand and call your bonds early. So why give them your consent? They call the bonds using cash from a new bond issue. I know that's financially not optimal for the common shareholders (to say the least), but as the bondholder you get all of that premium for yourself and you share the cost of it with your fellow common shareholders. But maybe the almost certain higher interest cost from the new bond issue would make it not worth your while if you owned enough of the common vs how many bonds you owe. Gain on being called on the bonds would have to exceed your pro-rata share of pain it puts on the common. EDIT: However you might also be the new owner of the newly issued bonds at the higher interest rate, in which case you wouldn't be losing out at all. It might just be executed as a bond swap (admitted I'm a bit ignorant of how these things are really done).

But anyways, I figure somehow I must be wrong if the bondholders wanted to instead give their consent.

It prevents a liquidity event on the hold co from bond holders through cross default on mbia corp. National doesn't have the liquidity issue. The article below probably does a better job of explaining it. http://dealbreaker.com/2012/11/you-fight-with-bank-of-america-over-bad-mortgages-bank-of-america-fights-back/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+dealbreaker+%28Dealbreaker%29 Link from Plan Common share holders don't want a liquidity event forcing MBIA's hands in the settlement talks with BAC. They want the put back claim receivables paid, because a decent amount of upside comes from that. There isn't a liquidity event if the company raises new bonds -- enough to pay for the premium necessary to call the bonds. So what I'm saying is... even if BAC hadn't done this latest move, why were the bondholders willing to give their consent instead of forcing the bonds to be called at a premium? That way you have your bonds paid off at a premium, the ring fence is in place, and you still can put BAC to trial for Countrywide and get a big settlement. Yes, your common is worth a bit less due to the expensive cost of retiring those bonds, but you come out ahead because that cost is born amongst all of the shareholders.

Why would any of the bondholders who also owns the common approve the action that MBI is asking for? Why not act in your own self interest to wait for MBI to call your bonds at the big premium we're discussing. The cost of that premium is diluted amongst your fellow common shareholders, so you win overall. By now they all realize this, if not already then thanks to BAC.

I guess I'll just state the obvious here and say that the Article 78 ruling has been delayed until MBIA corp can show it has the liquid means to survive as a separate entity. Having a big legal receivable isn't enough for the judge -- she wants to see enough of it monetized to be comfortable making a ruling. So BAC has given MBIA a settlement offer that satisfies the judge enough to approve the split, but is way less than MBIA thinks it will get in trial. So then MBIA shows it doesn't need the settlement/liquidity after all because it can do the bond consent solicitation thing. BAC then counters with this new stunt. The next move for MBIA is to raise new debt funding and retire BAC's callable bonds at a steep premium. Presumably they can then get the Article 78 ruling, unless BAC's stunt has influenced the judge's opinion on the strength of the MBIA subsidiary in the absence of a settlement with BAC. I'm just trying to see if I understand it correctly. Am actually considering swapping a bit of the BAC for MBIA again. MBIA is roughly where BAC was last year when I swapped, and BAC is roughly where MBIA was.

Just leading the witness.

That sounds right. And then they expect to fully implement "NewBAC I" by end of Q3, giving them $2b of savings over Q4'13 and Q1'14. That gets them to $14.2b. Then I'm throwing in another billion for savings from LAS rundown, although I figure it will be more than just 1 billion. The Fed wording suggests they are allowed to return based on their forward looking capital generation, not their present level.

We'll see what happens... but here is what I think BAC wants to do. 1) Last year the rumors were flying. BAC's managment decides to race to full strength capital levels for a year to make a statement 2) Goal met. Confidence partially restored due to capital levels being ahead of peers. 3) Restore more confidence. Maximize the payout to project strength. I don't think it will be helpful to only get approved for a dividend of just a few pennies. They need to make a splash -- 10 cents a quarter. You're telling everyone about your fortress, you must now walk the walk. Don't limp around acting like you still need to build capital when you don't. That's right about what they can afford at $15b return level if the Fed is limiting the dividend portion of the payout to 30%. Yeah, I know the peers started small and it took several iterations to boost their payouts. They were building capital at the same time. BAC is already there -- skip the building capital part and go straight to full payout.

It will probably be around 5-7 cents a quarter. Big jump, but only about 2-2.5% yield. I would think they would try to buy back $3-5B of stock as well. Cheers! Regarding that chatter from Moynihan today about only maintaining a 50 bps buffer over their Basel III required level.... does it change your assumptions at all? He also said today that the purpose of that 50 bps buffer is so that they could handle a legal settlement without dipping below their required minimums. So I presume from that he is saying that he doesn't first have to wait for the putback settlements to be resolved before he begins opening the spigot. They ended Q3 at 9%. You've mentioned before that you're pretty confident they can generate another 50 bps ($7.5 billion) by end of Q1 if not end of Q4. So if they are at 9.5% at the beginning of April when they pay that first dividend... And if they can generate about $15 billion over the following 12 months (utilizing the DTA )... That leaves about $22.5 billion that they can return over Q2,Q3,Q4,Q1 while still keeping their heads above their 9% mark. Then they have their ongoing asset sales, less whatever they have to burn through for legal settlements. But then, the Fed is what the Fed does. Your capital return estimate is far more generous than what I've seen suggested by the analysts. What do I know? EDIT: 22.5b 6b (subtract worst-case putback liability if that's a planned outcome over the time interval) 16.5b capital return (this still leaves a 7.5b, or 50 bps, buffer above their required minimums to settle other legal issues)

The replay of Brian Moynihan speaking at today's conference is good: http://www.veracast.com/baml/banking2012/main/player.cfm?eventName=1011_bankof He says they only plan to operate at 9% Basel III. Says they only want a 50 bps buffer over the required minimum of 8.5% (he says the buffer is for things like legal settlements). He says it right at the 38 minute mark. So that means from this day forward, everything generated can in theory be returned.