ERICOPOLY

I thought the split with National did that already...

This latest move I don't think will change Jay Brown's mind about ever doing business with BofA again. Surely that line was already crossed long ago! I think if there is a risk of other people not wanting to work with BAC due to this, then BAC now merely needs to offer the same terms to MBIA that they offered AGO and others. Then it will look like BAC is just wanting to settle with MBIA on the terms that everyone else got. Now if somehow MBIA walks away with a settlement much worse than the others got, well then it would look like dirty dealing by BAC. Just an opinion.

Late last year I sold my MBI to purchase more BAC. When txlaw asked me why, I said it was because Jay Brown looks to be too greedy -- that he won't settle until BAC pays in full. This may be just his public tough talk, negotiating for a settlement, but I think at the end of the day it will come out that he wants settlement terms for MBI far better than what others have settled for (such as the AGO settlement). Jay Brown in those shareholder letters is always talking about getting paid in full. Maybe he's not posturing, and that's why BAC had to break his balls like this.

I think xazp was the one who pointed out before that a non-performing loan is a heavily risk-weighted asset that has absolutely no yield. Meaning, once you get the foreclosure pushed through and retrieve your 400k worth of capital you can then make some very high yield loans with it. It was probably a relatively high yield part of the portfolio (sub prime) to begin with before it went sour. But perhaps you are considering all of that and still wondering how it can possibly explain the difference. I too wonder.

By the way, I do understand your point about the tail risk. It's just that (from what I understand) that tail risk didn't show up in the real estate portfolios during the 2002-2006 period for WFC that Plan is using for his model. So if the tail risk didn't rear it's ugly head during the model years, then we could draw invalid assumptions for BAC's lollapalloa ROA if BAC's model indeed takes less tail risk than WFC. However, to that I have a question... Does BAC's portfolio really have less tail risk as implied by the yield? Or is the yield low because their model had more tail risk and right now the yield is depressed by all of the people not making their interest payments (non-performing loans). I believe I read that the yield reported on the portfolio of loans is calculated by the actual interest collected. Then another question: Does WFC's funding model (heavier reliance on deposits) allow it to make more Jumbo loans that carry with it higher yield? I mean, if you rely more on wholesale funding, you may be stuck with making loans that you know you can more easily unload (like conforming loans). Conforming loans carry lower interest yield. The Jumbo loan may not actually be riskier though from a tail risk standpoint (many times the wealthier clients with the Jumbo loans are less risk).

Plan pretty much said that he also didn't expect improvement on the yield side. However that was when I was mixing all of the business models together for BAC and comparing that yield to WFC. Thus, I started down this road of showing that the yield on the WFC retail bank seems to blow the doors off the yield on the BAC retail bank. To this you say there is probably not much room for improvement vs WFC. If that's the case (and it may be), then there is something wrong with Plan's assumption that we can merely look at the cost of funding between the two banks and assume it will lead to equivalent levels of ROA in the Lollapallooza case where both banks execute operationally on the same level. In other words, either: A) BAC's retail bank assets can yield the same as WFC's and thus we can merely look at cost of funding to reach conclusions or B) We can't look merely at cost of funding to reach conclusions

I am not sure if we can extrapolate WFC yields to BAC for couple of reasons 1. Loan mix is not the same. BAC in fact has higher proportion of credit card loans for example, which would boost its consumer loan yields but also increase its loan losses. If BAC has changed the loan mix to 50% credit cards, its yield on consumer loans would shoot past WFC but so would loan losses. 2. Even with the same type of loan there are differences in underwriting approach which translates into different yields and losses - although one would assume that higher yields would translate into higher losses. Maybe WFC underwriting/culture/incentives are better than BAC. Due to above it would be very difficult to make apples to apples comparison. I would think due to the differences in loan mix/loan quality there would always be some difference in yield. Vinod I've seen the loan mix and I'm aware of the difference in yields, but what I'm saying is WFC's yield is higher in every category. Plus, when BAC is the one with the HIGHER mix of high interest credit cards, the last thing I'd expect is for their overall loan yield to be lower. Consumer Credit cards: WFC: 12% BAC: 10.04% (yes, you're right, they have a much higher mix of credit cards). Consumer Real Estate Loans: WFC: 4.51% First lien WFC: 4.26% Second lien BAC: 3.7% residential mortgage (presumably this is "first lien") BAC: 3.77% home equity

You don't need one as there are two trunks ! Christmas tree in the "frunk" Surfboard in the "trunk".

There is something impractical about their next car, the Model X. The gullwing doors sort of make it impossible to have a roof rack.

WFC does however have higher yields than BAC does on what would seem to be retail-bank funded assets (so I'm not mixing apples-to-oranges I hope). There are other asset categories that WFC dominates in yield (I think in all of them actually), but I'm not confident how much of BAC's equivalent assets are attributed to the retail bank. So just for the consumer and commercial lending... Getting all this info from latest 10-Qs: Commercial loans (56 bps higher yield WFC vs BAC): WFC 3.91% $352 billion BAC 3.35% $319 billion Consumer loans (34 bps higher yield WFC vs BAC): WFC 5.23% $424 billion BAC 4.89% $569 billion Perhaps BAC could be earning an additional: $1.78 billion from it's commerical loans if it had the same yield as WFC gets. $1.93 billion from it's consumer loans if it had the same yield as WFC gets. Put together that's $3.71 billion annually, or about 22 cents per share after 35% tax.

You just gave a thirsty man a drink of water, thanks. That explains that they are transferring loans underwritten by Merrill into BANA, and that they got an exemption under rule 23A allowing them to do so without eating into the additional 20% limit that rule 23A normally holds them to. They have been granted this exemption because they successfully argued that they can better serve their clients who have relationships with both BANA and Merrill, and can significantly reduce costs by having a single team and technology platform to carry out the underwriting.

Plan, What do you make of this in light of your "fungible" statement? see slide 11: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9NDc5MjE2fENoaWxkSUQ9NTEyNTcyfFR5cGU9MQ==&t=1 The greatest opportunity to reduce funding costs is continued reduction in long-term debt as this expense is approximately 5X the cost of deposits and long-term debt is one-third the amount of deposit funding My take of this is that the bank is planning to significantly shrink their LT debt using deposit funding. You seem very dismissive of the possibility. Is managment off their rocker?

Here is an article (however accurate) about that: http://www.bloomberg.com/news/2011-10-18/bofa-said-to-split-regulators-over-moving-merrill-derivatives-to-bank-unit.html As a general rule, as long as transactions involve high- quality assets and don’t exceed certain quantitative limitations, they should be allowed under the Federal Reserve Act, Omarova said.

Plan just explained to me that deposits aren't fungible between the retail bank subsidiary / parent co / and merrill. Well, I sort of did already understand that bit about the fungibility, except that they do in fact keep talking about this as a big opportunity. And remember those guys squealing about moving derivative liabilities into the retail bank? Was that some sort of a scheme to use low cost deposits to fund liabilities, thus freeing up cash at Merrill or parent co to retire high cost debt? Or, maybe I completely misunderstand what all the squealing was about when William Black was pounding the table about this last Fall 2011. So... even if I'm wrong about that, are they just planning on moving some assets from the parent (or merrill) over to the retail bank (to be funded by low cost deposits), and that swap is essentially the deposit moving upstream to the parent (or over to merrill) and the asset in turn is brought down/across to the retail bank? Help me out here, please. There's some sort of scheme of fungibility here because Moynihan keeps talking about the great opportunity to replace high cost LT debt funding with cheap deposits, yet the retail bank itself only has something like $9.5b total in LT debt funding -- and most of it matures way out in the future.

The difference in cost of funds is just 4bps. What we are talking about with the lollapalooza of catching up with Wells is the difference between a 1.3% ROA bank and a 1.6% ROA bank. That's a potential of $7 billion of extra profit, or around $0.6 of extra EPS. Did you calculate "$7 billion of extra profit" by taking the entire $1,750 billion in average earning assets (as presented in the 10-Q) and multiplying by .004? That's the only way the math works out to $7b. However, the table you presented only mentions $1,414 billion for BAC's average earning assets. So that would be only $5.6 billion pre-tax, or (at 35% tax rate) about $0.33 of extra EPS.

Let me re-emphasize that I succeed with investing by coat-tailing on very competent investors. People who are very competent and do the due diligence. Trust me, it's not false modesty! I'm doing my best and don't be afraid to assume that I'm just an apprentice.

(1) No, I don't know what a call report is. (2) No. (3) Perhaps an impartial observer can point out where I am attacking either you or the bank or the regulators "ad hominem"? Maybe you should just quote the passage because I for one don't see it. For f's sakes, I am saying the total cost of funding as reported by WFC doesn't match the table, and that BAC's total cost of funding is higher than WFC's. I said that perhaps the table is only looking at the cost of deposit funding, but BAC of course relies less on deposit funding than does WFC. Let's start with the ad hominem. I say I am attacking the numbers... you say I am attacking the man. Show me.

Your are taking the same tone you took with me in private mail yesterday. "oh Eric, you must be right. Regulators are such idiots". Why is it that you don't just look in WFC's 10-Q and tell me what the number says for "total funding sources" and then check it against your table?

Wherever that table comes from... Does it reconcile with the 10-Q that comes directly from the horse's mouth? The number in that table is wrong not just for BAC, but for WFC as well. WFC's 10-Q states that their cost is 43 bps, but the table claims it's only 26 bps. Go to page 7 of WFC's 10-Q and look for the line "total funding sources" -- then look over two colums and see the number '43'. So either BAC and WFC are both making errors in the 10-Q, or the table is not accurate. My money is on the table being wrong.

Even if BAC were to keep the LT debt footprint the same, just getting down to WFC's cost of LT debt would save $2 billion a year pre-tax. BAC pays 3.07% on it's LT debt and WFC pays 2.37%.

The difference in cost of funds is just 4bps. What we are talking about with the lollapalooza of catching up with Wells is the difference between a 1.3% ROA bank and a 1.6% ROA bank. That's a potential of $7 billion of extra profit, or around $0.6 of extra EPS. http://farm9.staticflickr.com/8345/8178797953_a9a8e045cd.jpg Right off the bat, I'm going to guess that your chart is only looking at one funding source, that being deposits. Something worth pointing out is this: deposits fund 60% of BAC's average earning assets (1.75t total earning assets) deposits fund 76% of WFC's average earning assets (1.17t total earning assets) BAC's latest quarterly cost of funding those 1.75t of assets was $4.038 billion. that's 92 bps of funding cost see page 28 of BAC's 10-Q Wells Fargo's latest quarterly cost of funding those 1.17t of assets was $1.266 billion that's 43 bps of funding cost see page 7 of WFC's 10-Q: https://www.wellsfargo.com/downloads/pdf/invest_relations/3Q12_10Q.pdf So the difference is 48 bps in funding cost. Actually, my numbers say it's 49 but I think that's a glitch from using round numbers.

At the moment (WFC vs BAC): The difference in funding cost is 48 bps The difference in yield on total earning assets is 87 bps Put it together and it's 135 bps Total opportunity for BAC (in catching WFC): .0135 X $1.75t = $23.62b 64% of the opportunity is to be had in the yield on total earning assets. See page 26 of BAC 10-Q to see the breakdown of yield on those assets. Also see page 7 of WFC 10-Q for their version of the same.

Dang, another round of drinks for you!

Dazel, Your comment on the PIIGS fears and BAC price correllation resonated with me because that's what I've been seeing too. However I figured people are afraid that in a crisis BAC's earnings power isn't up to snuff yet -- if this PIIGS fear were simply a derivates/domino issue then JPM is in the same boat. Thus (because JPM is not quite as discounted) I reasoned it is because BAC's earnings power is being masked by these expenses. And there is some element of risk in that -- I mean, JPM is probably stronger even with lower capital levels because the money is flooding in the front door. I hadn't considered your point about dividend yield -- maybe that's true. If so, then we'll see soon if the discount lifts a bit when BAC raises in March/April Regarding that PIIGS related volatility again... Back in March, George Soros pointed out that given the progress the Eurozone banks have made since 2010, the window for banking crisis (at that time) was two more years into the future. After that two year period he thought a breakup of the Euro would be possible without a banking crisis. So that gives us (based on his estimate), a bit more than one more year. Thus (again by his estimate), that discount will be lifted by 2015. Soros doesn't know everything but he has some good thoughts on these matters.

Of course the forecast for the next three days are 70, 75, and 74. Taxes or not, the standard of living here is higher.