ERICOPOLY

I agree... it's a luxury problem. I was rather trying to express how I haven't lost my sense of the value of 100k. I'm not at the point yet where I shrug it off.

30 cents a share is a six-figure hit to my net worth. It's not like they raised the price of beer 10% at the pub.

The reason why I believe TBV doesn't matter, is that the company won't be liquidated. It will be operated for decades going forward, if not centuries, and the only value here in the stock is the distributable earnings generated by the businesses. That anticipated distribution drops by $4b with this error. Thus, the value of the stock drops by $4b too. I just go ahead and call that a $4b reduction to our perception of intrinsic value (as best as we can estimate it).

It never annoyed me when (in playing Monopoly) I pulled the "bank error in your favor" card. Too bad that isn't the case here.

The 4 billion error is not even within GAAP accounting. It only affects the stress test. It does not have an effect on the TBv of the company. People are over reacting. Not paying out the money to make up the possible capital shortfall, only means that more cash is on the balance sheet. My understanding is that the 4 b shortfall only occurs under the stressed conditions. The TBV isn't what affects payouts to shareholders. That doesn't matter. What matters (I believe) is regulatory capital ratios. And here, it's B3 Tier 1 common ratio that will be what matters. And it drops by 29 basis points. I believe that's about $4b of cash they need to retain from earnings in order to fill the hole. Down the road, that will be after-tax earnings (so I'm treating it as such). It says it right here in the 4th paragraph: http://newsroom.bankofamerica.com/press-releases/corporate-and-financial-news/bank-america-announces-adjustment-estimated-regulatory-c Sorry, copy&paste of the paragraph isn't working for me (tried it). 

I'm not selling at this price. However I am very irritated that 5 months of waiting just went up in smoke (that's how long it takes to earn that money back). It's a bit like getting stuck in unexpected traffic for hours and hours -- you are just impatient, annoyed, and getting hungry.

I agree, it was never there in the first place. I have thought about this too, and chose to be careful whenever I thought of it to keep on saying "perceived" shareholder value.

It hurts just as much as a 65 cent "loss" to my perception of it's value in both scenarios: A) Shares are trading at $15 B) Shares are trading at $7 In both cases, I will miss out on the last 65 cents of eventual gain. In theory, if 65 cents of value is gone and I eventually sell at IV, I've lost the 65 cents no matter what. It makes no difference what the stock trades at today. It's still a 65 cent loss in value. That's what I think anyway -- I don't think it matters if the stock is cheap or expensive. In both scenarios, the loss is just as painful. I'm not sure how you are able to rationalize the loss as being less painful if the stock is lower -- it's some sort of cognitive trick that perhaps I should master if it would make me less pissed off at the management right now. Like for example I could just say to myself "Oh well, 65 cents is gone. Just pocket change since my shares trade at a low value.". I just don't get the argument at all.

The yardstick I'm using is shareholder value. The accounting error wiped out $4billion of Basel 3, fully phased in Tier 1 common capital. That's money that otherwise would have been returned to shareholders. Instead, it won't be. So that's directly a $4billion reduction in shareholder value. They now need to retain $4billion of after-tax earnings down the road, and that's earnings that they can otherwise distribute to shareholders. So it's $4b that we perceived to be included in the intrinsic value of the shares. The key phrase being that intrinsic value is based on what the business generates that is distributable to shareholders. Whenever you reduce distributable earnings... that's what really matters. Whether or not book value changes due to the error is unimportant.

They raised the range of legal liability by $4.9 billion. That's 30 cents per share after-tax that we thought we would be seeing, but now we're pretty sure we'll never see it. Then add the 35 cents from the accounting error. 30+35=

It's a single digit reduction in tangible book. If 5% or whatever is instrumental to your thesis, you're probably not doing this properly. Yeah, silly me. You know, I should really figure out what they proper way to invest is. Will you please help me with some pointers Scott? Based on your recent posts, I think you've figured out that it's not to gamble your entire life's savings on call options and hoping the market agrees with you before you bankrupt yourself. So you've got that going for you. More seriously, it's understandable if you don't trust management after this. If it's just based on the numbers, though, balking at a single digit decrease in tangible book means you weren't giving yourself enough of a margin of safety. That's all I was saying. Okay, so that's why you are talking like a bloody ass. So much clearer now. However, I am leveraged 1x to the downside, so you are not only being an ass, you are also wrong. I don't really have any intention of being an ass. I really am glad for you that you quit going all in on call options before you got burned for doing so. I'm not sure what's hard to understand about that. I just also think that if you're concerned about a single digit drop in tangible book, you probably aren't buying stuff that's cheap enough. It's fine if you don't trust management; that's always a good reason for concern. So the proper way to do things is not to care if 65 cents of perceived share value disappears in a week? It's more comforting when the shares are cheaper? I don't get it. It's the same amount of percieved value destroyed either way. I look at my shares and figure out a range of what they're "worth". This week I dropped 65 cents off that value. Last year it was other reductions. The year before that, more reductions. The year before that... yep, reductions. Berkowitz is still holding his position and it is trading roughly at his cost basis -- he bought it three years ago and touted how Mr Market just didn't get it and etc... etc.... Well, in order for him to get out to the double digits annually in rate of return on the investment, he needs the stock to already be at $20 today. However, the reason why it's not there is all these little single digit hits to book value. They keep coming up and we're well into the double digits hit to book value now. It's completely destroyed his margin of safety. Meaning -- there was no real margin of safety, rather just an underestimation of how bad things really were for the bank in terms of their future liabilities. This latest hit I'm griping about is just what happened this week. I've had the stock since 2011. A married couple fights and fights and fights. Finally it ends in divorce. It's not necessarily that last fight that caused the divorce. It wasn't too long ago that Bruce Thompson was reminding Mike Mayo that there will be tons of shares bought back so that in 2016 the earnings will be over $2 a share. I'm still waiting Bruce. Does Bruce still want to make that argument today? It's only been a few months and he barely asked for much of a buyback anyways (before these hits).

It's a single digit reduction in tangible book. If 5% or whatever is instrumental to your thesis, you're probably not doing this properly. Yeah, silly me. You know, I should really figure out what they proper way to invest is. Will you please help me with some pointers Scott? Based on your recent posts, I think you've figured out that it's not to gamble your entire life's savings on call options and hoping the market agrees with you before you bankrupt yourself. So you've got that going for you. More seriously, it's understandable if you don't trust management after this. If it's just based on the numbers, though, balking at a single digit decrease in tangible book means you weren't giving yourself enough of a margin of safety. That's all I was saying. Okay, so that's why you are talking like a bloody ass. So much clearer now. However, I am leveraged 1x to the downside, so you are not only being an ass, you are also wrong.

It's a single digit reduction in tangible book. If 5% or whatever is instrumental to your thesis, you're probably not doing this properly. Yeah, silly me. You know, I should really figure out what they proper way to invest is. Will you please help me with some pointers Scott?

The accounting error knocked 35 cents off of the value of the shares. Take off another 30 cents for the after-tax impact of the litigation liability increase. Sixty-five cents per share. You can't wave that off by talking about "long run value" or "this is only short-term". It's permanent impairment.

Are you sure they are reserving for expected losses? I mean, then why weren't they reserved for these "expected" losses? What new unexpected losses have popped up in just 3 months? They're just settling things on the same terms as peers -- how is that something they can't reserve for?

The $4.9b is presumably pre-tax, and about $3.43 billion after-tax (at 30% tax rate). So this has been a tough week.... We get a "whoops, where did that $4b of capital go" restatement of capital. Then we get a "sorry, did I say $6.1b? Oh I meant $11b" adjustment to potential unreserved legal expenses. That's like... some serious dough. Just about soaks up the first 5 months of earnings. Do you remember when they wanted to pay a dividend 3 years ago? I kind of feel like the management knows about as much as we do.

No , the range for possible losses over litigation reserves fell to $5.0 billion at end of Q1 from $6.1 billion from the end of 2013 Q4 What do you mean "No"? Recheck the math. $6.1b -$6b (declared in Q1 earnings) That leaves you with just $0.1b left. Oh, but how did we get back up to $5b again??? Must be an increase of $4.9b, right?

So, in other words, their expected unreserved liability range climbed by $4.9 billion over the past 3 months. This despite the revelation of no new lawsuits, and a rumor that the DOJ wants them to settle on the same terms as JPMorgan. So what the fuck!!

I just read the emails. It sounds to me like they really believed that Fairfax was some sort of sinking ship being papered over, and that their short position would profit when the facts came out. You can even see John Hempton's email to the guys at Longleaf asking w.t.f. they had a large long position for. He seems to genuinely believe Fairfax was not going to recover.

That's the golden question.

It always depends on the price of non-recourse leverage. For example, one could ask why anyone would take on the unleveraged downside of SHLD. Just 1x downside exposure. Now, if you find that person, they might be interested in seeing what they can buy for that downside if they write SHLD puts with 2016 expiry. Further, it might be possible to leverage BAC with 4x leverage to the upside using 2016 $15 strike puts to protect against BAC downside risk below $15. I think in order to get all the way out to 4x leverage, you would have to write the $20 strike BAC covered calls in order to afford all those puts while keeping just 1x SHLD downside. So, a 4x leveraged gain on the common to $20 would be 128% gain from BAC over the next 20.5 months. No, you don't need to be leveraged to the downside -- it's just... will SHLD do better given that you are taking on that risk? So, well, that's the world we live in. These trades are there to be thought about, even if you don't want to engage in them. They help put things in perspective for me. Anyways, you had to ask :)

I take it we may get our answer next week. They filed their 2013 Q1 10-Q on Wednesday, May 7th, 2013. Will they have reduced the $6.1b "maximum" to only $0.1b?

The JPMorgan/DOJ global settlement was known at the time that the bank estimated "maximum $6.1b" unreserved legal liability for previously disclosed lawsuits. Less than 2 months later the bank records a $6b charge. So if they are being honest and straightforward, then they are now fully reserved for the DOJ Settlement if they settle on the same terms as JPMorgan. You would have to believe that merely getting the same terms as another peer could not be the "worst case" -- it would hardly be an unforseeable event for them. That recent article pointed out that even the $13b upcoming settlement rumor is merely just the same terms that JP Morgan got. So, therefore, they had better not tell us that they need to take another charge when that DOJ settlement is finalized.

In the first quarter of 2009, Wells Fargo dropped from $30 to $8. I was quite certain in December 2008 that there was nothing wrong with Wells Fargo. But leverage without near-the-money puts would have been fatal.

The 2016 $15 strike puts cost goes like this: Today's closing price $14.97, less $2.15 for the "ask" price on the put leaves you with $12.82. At what annualized rate does $12.82 climb to $15 strike price on the put? Well, it climbs at roughly 8% annually. So that's your annualized cost for the put itself. Then the margin interest currently costs anywhere from 50 bps to 140 bps, depending on the size of your loan (at IB). Oh yeah, and the warrants miss out on the dividend, so they're almost 12.5% annualized costs. Did I forget to mention that the more expensive choice has a $13.30 strike embedded put, versus the $15 strike put? It's totally whacko that the much lower strike put carries the far more expensive leverage.