BAC-WT - Bank of America Warrants

[xazp]

How much capital gains tax has Buffett paid on his coke shares?  Buffett/Coke is a poor example because the capital gains in this case are compounding over a long time tax-deferred.  For his purposes, I'm guessing it's better to defer taxes for 40 years, even if the capital gains rate is higher than the dividend rate. 

 

With BAC and GS, his warrants seem to be deliberately designed to defer/convert dividend taxes into capital gains taxes. 

 

Buybacks are useful when you have shrewd and opportunistic capital allocators like John Malone or Henry Singleton doing the work for you. Dividends are actually after-taxed cash (corporate tax on retained earnings whether via realized profits of stock sale or net profit of the operating businesses) dollars, hence the saying double-taxation (taxed first via corporate tax then income tax), so Buffett doesn't feel better getting dividends than buybacks(taxed once only).  Also, he is donating 95-99% of his share to Bill Gates though, so not a penny of the money will be be taxed for 50 years of capital gains at all. He hasn't sold a single share and probably never will.

 

It doesn't really matter if you have Harry Singleton or Forrest Gump at the helm when it comes to how they return cash to shareholders.  Returning cash is returning cash.

 

The double-taxation issue happens with buybacks as well.  However, for a taxpayer like you and me it's usually worse to get taxed as a dividend (except for Buffett it is usually worse to be taxed as a capital gain).

 

I'll now explain that:

 

The key difference is the tax rate and how much is actually taxed (100% of the dividend is taxed at the dividend rate, but the cost basis on the shares is exempted from the capital gains tax rate).

 

Let's say we're talking about Berkshire Hathaway.  They will pay a 35% tax rate on a capital gain.  However they may pay only a 10.5% or 5% tax rate on a dividend (the rate goes lower when they own larger stakes in companies)

 

So let's say a favorite holding like Coca Cola stops paying dividends and instead only buys back shares.  In order to get to that same amount of cash, Buffett then needs to sell down an offsetting amount of Coca Cola stock.

 

Let's say the shares have appreciated 5x since he bought them.  He is thus paying tax on 80% of 35%.  He doesn't pay 100% of 35% because of his cost basis exempts 20% from capital gains taxation.  You of course only pay tax on the gain.

 

So that's it my friend.  You have 35% of 80%, or you have 10.5% of 100%.

 

Now you can see why it's almost always better for Buffett to get dividends instead of buybacks.  Most of his holdings are held within Berkshire, since Berkshire is where he holds 99% of his net worth.

 

But let's instead look at the average Joe that doesn't have most of his money in a holding company.  The typical Joe gets his dividend taxed at the same rate as his capital gains.  So he'll pay more tax because he can't exempt a portion of the distribution from taxation when he gets a dividend.  But when there is a buyback, he'll never pay tax on his cost basis.

 

 

Better for me to always get a buyback.  Better for Buffett to almost always get a dividend -- except when the shares are so cheap that he would be wanting to buy more, in which case he doesn't want to be double-taxed even at his low corporate dividend tax rate.

 

PS:  I believe it may be a 14.5% tax rate for most of his equities' dividends -- this is because of the rate that insurance companies pay on dividends.  I'm not sure he qualifies for the lower 10.5% or 5% rates when held within an insurance sub.  Yet, 14.5% is still better than 35% cap gains rate when we're talking about shares that have appreciated substantially.

 

When Forrest Gump is at the helm and buys shares back only, at both high and low prices and never pays dividends, everybody wins except for those people (like Buffett) who have most of their money tied up in a situation where dividend tax rates are substantially lower than capital gains tax rates.  You just sell off a portion of your holdings to create your own tax-advantaged "dividend" when you prefer cash instead of more shares.  When prices are cheap, you don't sell anything (reinvesting your "dividend").

[xazp]

The $4B or whatever they now have to keep -- while cannot be delivered to the shareholders, it does have value in that it makes the bank safer than it otherwise would have been. And that should count for something.    >>

 

Not really.  With Citigroup, they're being forced to retain capital that they want to return to shareholders.  When they get out of the penalty box, they can return that capital.  So with Citigroup it's deferring the pay-out, but the capital is still there.  With C, you can say, currently they are safer than they otherwise would have been, because the capital is still at Citigroup. 

 

With BAC, this is an accounting error - the capital they thought was there is gone, poof.  They are not "safer than it otherwise had been."  From the capital perspective (but not TBV or GAAP), it's like some ATM error let some dude withdraw $4 billion and he's disappeared. Buffett is being charitable (as he always is, publicly) to BAC's management over the issue. 

 

 

 

Eric

What do you suppose BAC can deliver back to Shareholders over the next 20 years?

The $4B or whatever they now have to keep -- while cannot be delivered to the shareholders, it does have value in that it makes the bank safer than it otherwise would have been. And that should count for something. 

 

So perhaps the way to think about this is before the recession it was a bank delivering X amount to shareholders for 15 years reliably (in terms of risk) ; but it is now able to deliver Y , which is less than X, but more reliably - for 20 or 25 years. 

 

Gary

 

Buybacks are useful when you have shrewd and opportunistic capital allocators like John Malone or Henry Singleton doing the work for you. Dividends are actually after-taxed cash (corporate tax on retained earnings whether via realized profits of stock sale or net profit of the operating businesses) dollars, hence the saying double-taxation (taxed first via corporate tax then income tax), so Buffett doesn't feel better getting dividends than buybacks(taxed once only).  Also, he is donating 95-99% of his share to Bill Gates though, so not a penny of the money will be be taxed for 50 years of capital gains at all. He hasn't sold a single share and probably never will.

 

It doesn't really matter if you have Harry Singleton or Forrest Gump at the helm when it comes to how they return cash to shareholders.  Returning cash is returning cash.

 

The double-taxation issue happens with buybacks as well.  However, for a taxpayer like you and me it's usually worse to get taxed as a dividend (except for Buffett it is usually worse to be taxed as a capital gain).

 

I'll now explain that:

 

The key difference is the tax rate and how much is actually taxed (100% of the dividend is taxed at the dividend rate, but the cost basis on the shares is exempted from the capital gains tax rate).

 

Let's say we're talking about Berkshire Hathaway.  They will pay a 35% tax rate on a capital gain.  However they may pay only a 10.5% or 5% tax rate on a dividend (the rate goes lower when they own larger stakes in companies)

 

So let's say a favorite holding like Coca Cola stops paying dividends and instead only buys back shares.  In order to get to that same amount of cash, Buffett then needs to sell down an offsetting amount of Coca Cola stock.

 

Let's say the shares have appreciated 5x since he bought them.  He is thus paying tax on 80% of 35%.  He doesn't pay 100% of 35% because of his cost basis exempts 20% from capital gains taxation.  You of course only pay tax on the gain.

 

So that's it my friend.  You have 35% of 80%, or you have 10.5% of 100%.

 

Now you can see why it's almost always better for Buffett to get dividends instead of buybacks.  Most of his holdings are held within Berkshire, since Berkshire is where he holds 99% of his net worth.

 

But let's instead look at the average Joe that doesn't have most of his money in a holding company.  The typical Joe gets his dividend taxed at the same rate as his capital gains.  So he'll pay more tax because he can't exempt a portion of the distribution from taxation when he gets a dividend.  But when there is a buyback, he'll never pay tax on his cost basis.

 

 

Better for me to always get a buyback.  Better for Buffett to almost always get a dividend -- except when the shares are so cheap that he would be wanting to buy more, in which case he doesn't want to be double-taxed even at his low corporate dividend tax rate.

 

PS:  I believe it may be a 14.5% tax rate for most of his equities' dividends -- this is because of the rate that insurance companies pay on dividends.  I'm not sure he qualifies for the lower 10.5% or 5% rates when held within an insurance sub.  Yet, 14.5% is still better than 35% cap gains rate when we're talking about shares that have appreciated substantially.

 

When Forrest Gump is at the helm and buys shares back only, at both high and low prices and never pays dividends, everybody wins except for those people (like Buffett) who have most of their money tied up in a situation where dividend tax rates are substantially lower than capital gains tax rates.  You just sell off a portion of your holdings to create your own tax-advantaged "dividend" when you prefer cash instead of more shares.  When prices are cheap, you don't sell anything (reinvesting your "dividend").

[ERICOPOLY]

How much capital gains tax has Buffett paid on his coke shares?  Buffett/Coke is a poor example because the capital gains in this case are compounding over a long time tax-deferred.  For his purposes, I'm guessing it's better to defer taxes for 40 years, even if the capital gains rate is higher than the dividend rate. 

 

With BAC and GS, his warrants seem to be deliberately designed to defer/convert dividend taxes into capital gains taxes. 

 

Buybacks are useful when you have shrewd and opportunistic capital allocators like John Malone or Henry Singleton doing the work for you. Dividends are actually after-taxed cash (corporate tax on retained earnings whether via realized profits of stock sale or net profit of the operating businesses) dollars, hence the saying double-taxation (taxed first via corporate tax then income tax), so Buffett doesn't feel better getting dividends than buybacks(taxed once only).  Also, he is donating 95-99% of his share to Bill Gates though, so not a penny of the money will be be taxed for 50 years of capital gains at all. He hasn't sold a single share and probably never will.

 

It doesn't really matter if you have Harry Singleton or Forrest Gump at the helm when it comes to how they return cash to shareholders.  Returning cash is returning cash.

 

The double-taxation issue happens with buybacks as well.  However, for a taxpayer like you and me it's usually worse to get taxed as a dividend (except for Buffett it is usually worse to be taxed as a capital gain).

 

I'll now explain that:

 

The key difference is the tax rate and how much is actually taxed (100% of the dividend is taxed at the dividend rate, but the cost basis on the shares is exempted from the capital gains tax rate).

 

Let's say we're talking about Berkshire Hathaway.  They will pay a 35% tax rate on a capital gain.  However they may pay only a 10.5% or 5% tax rate on a dividend (the rate goes lower when they own larger stakes in companies)

 

So let's say a favorite holding like Coca Cola stops paying dividends and instead only buys back shares.  In order to get to that same amount of cash, Buffett then needs to sell down an offsetting amount of Coca Cola stock.

 

Let's say the shares have appreciated 5x since he bought them.  He is thus paying tax on 80% of 35%.  He doesn't pay 100% of 35% because of his cost basis exempts 20% from capital gains taxation.  You of course only pay tax on the gain.

 

So that's it my friend.  You have 35% of 80%, or you have 10.5% of 100%.

 

Now you can see why it's almost always better for Buffett to get dividends instead of buybacks.  Most of his holdings are held within Berkshire, since Berkshire is where he holds 99% of his net worth.

 

But let's instead look at the average Joe that doesn't have most of his money in a holding company.  The typical Joe gets his dividend taxed at the same rate as his capital gains.  So he'll pay more tax because he can't exempt a portion of the distribution from taxation when he gets a dividend.  But when there is a buyback, he'll never pay tax on his cost basis.

 

 

Better for me to always get a buyback.  Better for Buffett to almost always get a dividend -- except when the shares are so cheap that he would be wanting to buy more, in which case he doesn't want to be double-taxed even at his low corporate dividend tax rate.

 

PS:  I believe it may be a 14.5% tax rate for most of his equities' dividends -- this is because of the rate that insurance companies pay on dividends.  I'm not sure he qualifies for the lower 10.5% or 5% rates when held within an insurance sub.  Yet, 14.5% is still better than 35% cap gains rate when we're talking about shares that have appreciated substantially.

 

When Forrest Gump is at the helm and buys shares back only, at both high and low prices and never pays dividends, everybody wins except for those people (like Buffett) who have most of their money tied up in a situation where dividend tax rates are substantially lower than capital gains tax rates.  You just sell off a portion of your holdings to create your own tax-advantaged "dividend" when you prefer cash instead of more shares.  When prices are cheap, you don't sell anything (reinvesting your "dividend").

 

First:

The warrants don't work that way.  He (Berkshire) will be paying dividend taxes the moment a dividend is paid that triggers an adjustment to his warrant.  That's how it works with the class "A" warrant.  I believe his warrants are no different.  The cost basis on the warrant is then adjusted to ensure you don't later get taxed a second time as a capital gain (after already having paid the dividend tax).

 

Second:

He tries to buy "forever" holdings.  Coke is a good example of that.  The bulk of his portfolio, in the long run, will benefit from getting the dividend at the drastically lower tax rate.  I mean, the rate is less than 1/2 that of capital gains.  So a holding already benefits once the shares have less than doubled.

[gary17]

Thanks for pointing this out ---

 

I guess it depends on the perspective... may be the way i think of this is wrong...

 

I think of it as it was not there in the first place.... so I think of it as a need to keep the capital there to make the bank sound; if the Basel 3 rule or whatever wasn't there pre-recession, then it would have been paid out....   

 

So just to be clear... let's forget it was available to begin with... and just think now that we know that it's truly needed to comply with the regulation... then just let it be there as it serves the function of making the bank safer than the scenario of paying the $4b out...       

Gary

 

The $4B or whatever they now have to keep -- while cannot be delivered to the shareholders, it does have value in that it makes the bank safer than it otherwise would have been. And that should count for something.    >>

 

Not really.  With Citigroup, they're being forced to retain capital that they want to return to shareholders.  When they get out of the penalty box, they can return that capital.  So with Citigroup it's deferring the pay-out, but the capital is still there.  With C, you can say, currently they are safer than they otherwise would have been, because the capital is still at Citigroup. 

 

With BAC, this is an accounting error - the capital they thought was there is gone, poof.  They are not "safer than it otherwise had been."  From the capital perspective (but not TBV or GAAP), it's like some ATM error let some dude withdraw $4 billion and he's disappeared. Buffett is being charitable (as he always is, publicly) to BAC's management over the issue. 

 

 

 

Eric

What do you suppose BAC can deliver back to Shareholders over the next 20 years?

The $4B or whatever they now have to keep -- while cannot be delivered to the shareholders, it does have value in that it makes the bank safer than it otherwise would have been. And that should count for something. 

 

So perhaps the way to think about this is before the recession it was a bank delivering X amount to shareholders for 15 years reliably (in terms of risk) ; but it is now able to deliver Y , which is less than X, but more reliably - for 20 or 25 years. 

 

Gary

 

Buybacks are useful when you have shrewd and opportunistic capital allocators like John Malone or Henry Singleton doing the work for you. Dividends are actually after-taxed cash (corporate tax on retained earnings whether via realized profits of stock sale or net profit of the operating businesses) dollars, hence the saying double-taxation (taxed first via corporate tax then income tax), so Buffett doesn't feel better getting dividends than buybacks(taxed once only).  Also, he is donating 95-99% of his share to Bill Gates though, so not a penny of the money will be be taxed for 50 years of capital gains at all. He hasn't sold a single share and probably never will.

 

It doesn't really matter if you have Harry Singleton or Forrest Gump at the helm when it comes to how they return cash to shareholders.  Returning cash is returning cash.

 

The double-taxation issue happens with buybacks as well.  However, for a taxpayer like you and me it's usually worse to get taxed as a dividend (except for Buffett it is usually worse to be taxed as a capital gain).

 

I'll now explain that:

 

The key difference is the tax rate and how much is actually taxed (100% of the dividend is taxed at the dividend rate, but the cost basis on the shares is exempted from the capital gains tax rate).

 

Let's say we're talking about Berkshire Hathaway.  They will pay a 35% tax rate on a capital gain.  However they may pay only a 10.5% or 5% tax rate on a dividend (the rate goes lower when they own larger stakes in companies)

 

So let's say a favorite holding like Coca Cola stops paying dividends and instead only buys back shares.  In order to get to that same amount of cash, Buffett then needs to sell down an offsetting amount of Coca Cola stock.

 

Let's say the shares have appreciated 5x since he bought them.  He is thus paying tax on 80% of 35%.  He doesn't pay 100% of 35% because of his cost basis exempts 20% from capital gains taxation.  You of course only pay tax on the gain.

 

So that's it my friend.  You have 35% of 80%, or you have 10.5% of 100%.

 

Now you can see why it's almost always better for Buffett to get dividends instead of buybacks.  Most of his holdings are held within Berkshire, since Berkshire is where he holds 99% of his net worth.

 

But let's instead look at the average Joe that doesn't have most of his money in a holding company.  The typical Joe gets his dividend taxed at the same rate as his capital gains.  So he'll pay more tax because he can't exempt a portion of the distribution from taxation when he gets a dividend.  But when there is a buyback, he'll never pay tax on his cost basis.

 

 

Better for me to always get a buyback.  Better for Buffett to almost always get a dividend -- except when the shares are so cheap that he would be wanting to buy more, in which case he doesn't want to be double-taxed even at his low corporate dividend tax rate.

 

PS:  I believe it may be a 14.5% tax rate for most of his equities' dividends -- this is because of the rate that insurance companies pay on dividends.  I'm not sure he qualifies for the lower 10.5% or 5% rates when held within an insurance sub.  Yet, 14.5% is still better than 35% cap gains rate when we're talking about shares that have appreciated substantially.

 

When Forrest Gump is at the helm and buys shares back only, at both high and low prices and never pays dividends, everybody wins except for those people (like Buffett) who have most of their money tied up in a situation where dividend tax rates are substantially lower than capital gains tax rates.  You just sell off a portion of your holdings to create your own tax-advantaged "dividend" when you prefer cash instead of more shares.  When prices are cheap, you don't sell anything (reinvesting your "dividend").

[yitech]

I misinterpreted your statement and missed the "corporate" in your "corporate" dividend rate. I thought you meant the income tax he'd need to pay if Berkshire eventually pays a dividend. I didn't realize you actually meant to compare corporate tax rates with personal income/capital gains rates.

 

"...except when his shares are so cheap, he would be wanting to buy more.."

This is something I probably don't expect your Forrest Gump character to do on regular basis and it is exactly what Singleton did.

[ERICOPOLY]

"...except when his shares are so cheap, he would be wanting to buy more.."

This is something I probably don't expect your Forrest Gump character to do on regular basis and it is exactly what Singleton did.

 

The qualities of my Forrest Gump as CEO character are such that he always buys shares when the capital allocation decision "to return cash" has already been made.  I'm speaking only to the "should I declare cash dividend or instead retire more shares" decision.  So I'm saying that I would rather have Gump doing that than Singleton, because Gump is working for my best interest here.  Singleton might be tempted to sometimes pay a cash dividend, which works against me due to the fact that my tax rates are the same for both a dividend and a capital gain.  I always want a share buyback.  No exceptions.

 

[xazp]

I have a perspective on the severity of BAC's mistakes. 

 

In terms of the litigation reserves (and max losses), I'm at "mostly pass."  I think it's mostly about the government becoming a lot more aggressive and/or using obscure laws that haven't been used before. 

 

Right now the government using an obscure, rarely used law that BAC might never have seen coming, FIRREA.  FIRREA is weird because for the government to use it, they are arguing that BAC has defrauded ... BAC.  OK, so it's a novel usage of the law and it provides for treble damages.  So there are laws and judgements that BAC may never have seen coming and I think that's part of the reason BAC's numbers are rising. 

 

The government did at one time push some of these mergers on the banks to avoid a bankruptcy from Bear Sterns or Merrill for example.  And I think there was an informal understanding that the government wouldn't sue the banks for doing a favor for the government.  But, here we are, the government is suing BAC for Merrill's prior-to-BAC actions.

 

You'll generally notice in recent times that BAC's analysis about private investors (roughly half of their total exposure) has been pretty much within reserves.  It's the government stuff that keeps climbing and blowing the bank.  That suggests to me they're correctly estimating private liability but not government liability.  We don't know what's going on behind the scenes, but, I think it's most likely a shift in the way the government is behaving - and I don't think that was necessarily predictable ahead of time.  I'll call this a "forced error."

 

---

 

But I view miscalculating $4Bn of capital as an unforced error, and, you can only really invest in a bank if you are confident in their capital calculations.  So that one is an "unforced error" and their job is to make damn sure this doesn't happen again.  $4Bn is about 1.5 quarters of earnings, so, they've just wasted about 5 months of my time. 

 

And for me, the very worst unforced error was the Buffett warrants which is going to transfer billions of dollars of wealth from shareholders to Berkshire.  I basically find this one unforgivable.  Who here wouldn't have taken the same offer from BAC if they had a rights issue under the same terms? 

 

---

 

I view Moynihan's mistakes as large enough that I voted against him, and against his shareholder pay.  I like BAC the company, but find Moynihan mediocre at best ...

 

 

 

Thanks for pointing this out ---

 

I guess it depends on the perspective... may be the way i think of this is wrong...

 

I think of it as it was not there in the first place.... so I think of it as a need to keep the capital there to make the bank sound; if the Basel 3 rule or whatever wasn't there pre-recession, then it would have been paid out....   

 

So just to be clear... let's forget it was available to begin with... and just think now that we know that it's truly needed to comply with the regulation... then just let it be there as it serves the function of making the bank safer than the scenario of paying the $4b out...       

Gary

 

[sswan11]

And for me, the very worst unforced error was the Buffett warrants which is going to transfer billions of dollars of wealth from shareholders to Berkshire.  I basically find this one unforgivable.  Who here wouldn't have taken the same offer from BAC if they had a rights issue under the same terms? 

 

 

I get this, but wasn't there, at the time, a "qualitative" need to increase confidence in BAC that Buffett provided (at a large cost, granted)?

[Uccmal]

And for me, the very worst unforced error was the Buffett warrants which is going to transfer billions of dollars of wealth from shareholders to Berkshire.  I basically find this one unforgivable.  Who here wouldn't have taken the same offer from BAC if they had a rights issue under the same terms? 

 

 

I get this, but wasn't there, at the time, a "qualitative" need to increase confidence in BAC that Buffett provided (at a large cost, granted)?

 

That was kind of what I was going to post. 

 

If I were in Moynihan's shoes and I got a call from Buffett I would make the same decision he did at the time.  That kind of offer only comes once.  I just dont know how one could say no.  Call it political goodwill.  How many times have bloggers, seeking alpha contributors, and board members here referenced Buffett in relation to BAc "I wonder what WEB thinks about this or that?".  Buffett told us yesterday, what he thinks, whether he is sincere or not. 

[xazp]

Look if Buffett proposes a deal to you, your answer should almost always be "no."  He's one of the world's richest people because he knows how to under-pay for assets.  So when you start selling the guy assets, you are being fleeced.  I think he'll make $15 billion on the deal, and I don't think he will deliver value to shareholders even close to that. 

 

Frankly, if Moynihan turned him down, I think there's a decent chance he would have bought on the open market - which would have also had a very good return. 

 

I don't really understand the "qualitative benefits" we get from him.  He's not advising the company, he's not facilitating new business.  All he does is say nice things about it periodically which doesn't change anything about the fundamental value of the business. 

 

 

 

 

And for me, the very worst unforced error was the Buffett warrants which is going to transfer billions of dollars of wealth from shareholders to Berkshire.  I basically find this one unforgivable.  Who here wouldn't have taken the same offer from BAC if they had a rights issue under the same terms? 

 

 

I get this, but wasn't there, at the time, a "qualitative" need to increase confidence in BAC that Buffett provided (at a large cost, granted)?

 

That was kind of what I was going to post. 

 

If I were in Moynihan's shoes and I got a call from Buffett I would make the same decision he did at the time.  That kind of offer only comes once.  I just dont know how one could say no.  Call it political goodwill.  How many times have bloggers, seeking alpha contributors, and board members here referenced Buffett in relation to BAc "I wonder what WEB thinks about this or that?".  Buffett told us yesterday, what he thinks, whether he is sincere or not.

[ERICOPOLY]

This is funny if you've taken the time to listen to Mike Mayo before:

 

http://www.fool.com/investing/general/2014/05/04/analyst-calls-second-largest-bank-too-big-to-manag.aspx

Here are some other headlines I considered for this article:

Analyst Says $2.1 Trillion Bank is Too Big To Manage, Needs to Downsize to $1.8 Trillion

 

Analyst Says Sell BAC Based on Miscalculation of 0.05%, Recommends More Careful Bank That's Failed Stress Tests 2 of 3 years

 

Analyst says B of A is Too Big To Manage, Instead Buy JPMorgan (Even Though JPMorgan is Much Bigger)

 

Analyst Calls B of A Too Big To Manage. Unless You're Jamie Dimon -- In Which Case It's Fine!

 

Analyst Recommends Selling B of A, But Leaves Press Conference Early to Go Have Lunch with Jamie Dimon

 

[Uccmal]

Look if Buffett proposes a deal to you, your answer should almost always be "no."  He's one of the world's richest people because he knows how to under-pay for assets.  So when you start selling the guy assets, you are being fleeced.  I think he'll make $15 billion on the deal, and I don't think he will deliver value to shareholders even close to that. 

 

Frankly, if Moynihan turned him down, I think there's a decent chance he would have bought on the open market - which would have also had a very good return. 

 

I don't really understand the "qualitative benefits" we get from him.  He's not advising the company, he's not facilitating new business.  All he does is say nice things about it periodically which doesn't change anything about the fundamental value of the business. 

 

 

 

 

And for me, the very worst unforced error was the Buffett warrants which is going to transfer billions of dollars of wealth from shareholders to Berkshire.  I basically find this one unforgivable.  Who here wouldn't have taken the same offer from BAC if they had a rights issue under the same terms? 

 

 

I get this, but wasn't there, at the time, a "qualitative" need to increase confidence in BAC that Buffett provided (at a large cost, granted)?

 

That was kind of what I was going to post. 

 

If I were in Moynihan's shoes and I got a call from Buffett I would make the same decision he did at the time.  That kind of offer only comes once.  I just dont know how one could say no.  Call it political goodwill.  How many times have bloggers, seeking alpha contributors, and board members here referenced Buffett in relation to BAc "I wonder what WEB thinks about this or that?".  Buffett told us yesterday, what he thinks, whether he is sincere or not.

 

Xazp, That is really well said.  i dont disagree, and certainly cant imagine what Moynihan was thinking at the time, except he had a better handle on capital conditions at BAc than us.  Maybe he was a bit star struck. 

 

eric, That artcile was great.  Is Mayo the one with the $10 price target?

[sswan11]

Credit Suisse was quoted as having a $10 price target but that seems to be a typo as actual report lists a $16 target.

cs_bac_414.pdf

[ERICOPOLY]

eric, That artcile was great.  Is Mayo the one with the $10 price target?

 

$12 I think.  Let's not forget that 3 years ago he said that BAC had earnings power of greater than $2 per share.  Then 4 months later, put a $7 price target on it.

 

But the best, most classic thing he ever did was complain that Investor Relations had shut him out from the conference call because he asked "tough questions".  Later, after he publicly complained, they let him know that he was dialing the wrong number!  Ha ha  ;D ;D

 

http://beforeitsnews.com/financial-markets/2011/10/fox-business-network-analyst-mike-mayo-dialed-wrong-number-for-bank-of-america-conference-call-1261549.html

 

Mayo had issued a controversial note claiming to be shut out of the conference call, but people at Bank of America are saying Mayo “dialed the wrong telephone number, one that was reserved for the public to listen in but not to ask questions.”

[gary17]

Credit Suisse was quoted as having a $10 price target but that seems to be a typo as actual report lists a $16 target.

 

wow - BAC's historic multiple to TBV is 3....    so 13 x 3 = $39  of course, it needs to be behind all its legal issues

 

 

[mlcglobal]

BAC is worth roughly sustainable ROE divided by ( sustainable earnings growth plus 10%ish ).

 

That is to say 12% ROE divided by ( 10% hurdle + (70% of ROE as retained =8.4%)= 18.4 multiple as a yield of @ 5.5%). So 12 divided by 5.5 = 2.182 BV. At 8% BV growth in 5 years BV is x 1.469 = 30.4. Capitalize in a good market at 2.15x = 65.36. That gives an NPV at 10% discount of 40.58. At market of 15.25 the implied discount to NPV as an excess return above hurdle rate is approx 166% cumulative. I think a 6.5% cap rate is perhaps more cautious though.

 

That is a $0.376 cents for a $1.00!!! Then add in any discounted dividends.

 

If the bank survives... If the bank prospers... If the bank is valued by the market at a reasonable cap rate at some point... this is a no brainer. Even at $20+. You just need to.. "don't just do something, stand there".

 

 

[redskin]

http://video.cnbc.com/gallery/?video=3000272535

 

[redskin]

BAC is worth roughly sustainable ROE divided by ( sustainable earnings growth plus 10%ish ).

 

That is to say 12% ROE divided by ( 10% hurdle + (70% of ROE as retained =8.4%)= 18.4 multiple as a yield of @ 5.5%). So 12 divided by 5.5 = 2.182 BV. At 8% BV growth in 5 years BV is x 1.469 = 30.4. Capitalize in a good market at 2.15x = 65.36. That gives an NPV at 10% discount of 40.58. At market of 15.25 the implied discount to NPV as an excess return above hurdle rate is approx 166% cumulative. I think a 6.5% cap rate is perhaps more cautious though.

 

That is a $0.376 cents for a $1.00!!! Then add in any discounted dividends.

 

If the bank survives... If the bank prospers... If the bank is valued by the market at a reasonable cap rate at some point... this is a no brainer. Even at $20+. You just need to.. "don't just do something, stand there".

 

You should buy the B warrants.

[fareastwarriors]

Credit Suisse was quoted as having a $10 price target but that seems to be a typo as actual report lists a $16 target.

 

Mike Mayo has a $15 target.

Mayo.pdf

[xazp]

So if you watch this from a few weeks ago  http://www.cnbc.com/id/101603062  he says Citigroup is going to double.  I would be very, very surprised if Citigroup simultaneously doubled while BAC fell (absent another reverse-split for C).  Citigroup is even more complicated than BAC, and have screwed up their capital plans more than BAC.  He does seem to have an excellent reason for liking Citigroup - the CEO and Chairman have the same name as him.  He keeps talking about "Mike and Mike" and ... well this seems kind of like a thin reason, I'm not sure what "Mike and Mike" have done for Citigroup shareholders (not much, I'm one of them). 

 

I had to double-check the report you linked wasn't a few years old.  I think he wrote the second page in 2011 and never updated it.  The second page talks about "should the housing market decline further";  about GSE put-back risks (entirely settled), Countrywide and Merrill integration risks (also mostly settled, and certainly not an unknown issue to investors). 

 

 

 

Credit Suisse was quoted as having a $10 price target but that seems to be a typo as actual report lists a $16 target.

 

Mike Mayo has a $15 target.

[ERICOPOLY]

He keeps talking about "Mike and Mike" and ... well this seems kind of like a thin reason, I'm not sure what "Mike and Mike" have done for Citigroup shareholders (not much, I'm one of them). 

 

Give it three months and he'll have a sell rating on C.

[xazp]

IMO Brian Moynihan did it because *he* benefits from it, at incredible expense to shareholders.  Moynihan himself gets better job security because Buffett will go on TV and talk about what a great job Moynihan is doing.  Buffett reflexively supports management and boards, so, whenever times get tough Moynihan bought himself someone to diffuse the situation (see comments re: capital mistakes).  What board is going to fire a CEO that Buffett endorsed? 

 

IMO the benefits go to the CEO and the board, while the cost goes to shareholders - what's not to love about that?  And conversely, Buffett makes a fortune while "paying" with a few kind words.  It's like when Nike pays an athlete to endorse some shoe; except in this case, they are paying $15 billion to endorse a stock. 

 

Look if Buffett proposes a deal to you, your answer should almost always be "no."  He's one of the world's richest people because he knows how to under-pay for assets.  So when you start selling the guy assets, you are being fleeced.  I think he'll make $15 billion on the deal, and I don't think he will deliver value to shareholders even close to that. 

 

Frankly, if Moynihan turned him down, I think there's a decent chance he would have bought on the open market - which would have also had a very good return. 

 

I don't really understand the "qualitative benefits" we get from him.  He's not advising the company, he's not facilitating new business.  All he does is say nice things about it periodically which doesn't change anything about the fundamental value of the business. 

 

 

 

 

And for me, the very worst unforced error was the Buffett warrants which is going to transfer billions of dollars of wealth from shareholders to Berkshire.  I basically find this one unforgivable.  Who here wouldn't have taken the same offer from BAC if they had a rights issue under the same terms? 

 

 

I get this, but wasn't there, at the time, a "qualitative" need to increase confidence in BAC that Buffett provided (at a large cost, granted)?

 

That was kind of what I was going to post. 

 

If I were in Moynihan's shoes and I got a call from Buffett I would make the same decision he did at the time.  That kind of offer only comes once.  I just dont know how one could say no.  Call it political goodwill.  How many times have bloggers, seeking alpha contributors, and board members here referenced Buffett in relation to BAc "I wonder what WEB thinks about this or that?".  Buffett told us yesterday, what he thinks, whether he is sincere or not.

 

Xazp, That is really well said.  i dont disagree, and certainly cant imagine what Moynihan was thinking at the time, except he had a better handle on capital conditions at BAc than us.  Maybe he was a bit star struck. 

 

eric, That artcile was great.  Is Mayo the one with the $10 price target?

[Rabbitisrich]

IMO Brian Moynihan did it because *he* benefits from it, at incredible expense to shareholders.  Moynihan himself gets better job security because Buffett will go on TV and talk about what a great job Moynihan is doing.  Buffett reflexively supports management and boards, so, whenever times get tough Moynihan bought himself someone to diffuse the situation (see comments re: capital mistakes).  What board is going to fire a CEO that Buffett endorsed? 

 

IMO the benefits go to the CEO and the board, while the cost goes to shareholders - what's not to love about that?  And conversely, Buffett makes a fortune while "paying" with a few kind words.  It's like when Nike pays an athlete to endorse some shoe; except in this case, they are paying $15 billion to endorse a stock. 

 

Another story could have to do with whatever negotiations were going on with regulators. A couple big things happened subsequent to the Buffett dilution: a series of ratings downgrades and the closing of the partial sale of CCB. Wholly speculative, but there might be something to the fact that Buffett initiated the deal. Historically, he has gone out of his way to accumulate intelligence.

[xazp]

But that preferred doesn't even count towards Basel 3 capital (which is why we're voting on converting it into Basel 3 capital now).  Why would the regulators insist that BAC strike a deal that didn't benefit Basel 3 capital? 

 

IMO Brian Moynihan did it because *he* benefits from it, at incredible expense to shareholders.  Moynihan himself gets better job security because Buffett will go on TV and talk about what a great job Moynihan is doing.  Buffett reflexively supports management and boards, so, whenever times get tough Moynihan bought himself someone to diffuse the situation (see comments re: capital mistakes).  What board is going to fire a CEO that Buffett endorsed? 

 

IMO the benefits go to the CEO and the board, while the cost goes to shareholders - what's not to love about that?  And conversely, Buffett makes a fortune while "paying" with a few kind words.  It's like when Nike pays an athlete to endorse some shoe; except in this case, they are paying $15 billion to endorse a stock. 

 

Another story could have to do with whatever negotiations were going on with regulators. A couple big things happened subsequent to the Buffett dilution: a series of ratings downgrades and the closing of the partial sale of CCB. Wholly speculative, but there might be something to the fact that Buffett initiated the deal. Historically, he has gone out of his way to accumulate intelligence.

[Kiltacular]

Today's transcript: http://www.cnbc.com/id/101642613

 

BECKY: There has been a lot of stuff that we talked about that has been very serious business, though. One of the things that come up was another one of your holdings, Bank of America.

 

Bank of America very recently had to pull back their plan to increase the dividend and buy back more shares because there was a mess up in the regulatory capital. They were off by a big number. Was it 4 billion?

 

BUFFETT:  Something like that.

 

BECKY: About $4 billion. I just wonder, as a shareholder, as someone who has a big stake in the company, did that concern you?

 

BUFFETT:  No. The answer is no. It did not affect the Gap net worth, the GAP earnings or anything of that sort. And, actually, the change they're making with our preferred adds 5 billion to regulatory capital.

 

BECKY: Really?

 

BUFFETT:  Yes. They are changing our preferred from a cumulative preferred to noncumulative preferred, and that changes that category of capital by 5 billion. I'm not saying that's a good reason for making the 4 billion error.

 

Is this correct?  I didn't realize that the change in the terms of the preferred was going to benefit "regulatory" capital by the full $5 billion.  He is implying that it will affect Basel III as well.  Perhaps he's obfuscating.

 

 

But that preferred doesn't even count towards Basel 3 capital (which is why we're voting on converting it into Basel 3 capital now).  Why would the regulators insist that BAC strike a deal that didn't benefit Basel 3 capital? 

 

IMO Brian Moynihan did it because *he* benefits from it, at incredible expense to shareholders.  Moynihan himself gets better job security because Buffett will go on TV and talk about what a great job Moynihan is doing.  Buffett reflexively supports management and boards, so, whenever times get tough Moynihan bought himself someone to diffuse the situation (see comments re: capital mistakes).  What board is going to fire a CEO that Buffett endorsed? 

 

IMO the benefits go to the CEO and the board, while the cost goes to shareholders - what's not to love about that?  And conversely, Buffett makes a fortune while "paying" with a few kind words.  It's like when Nike pays an athlete to endorse some shoe; except in this case, they are paying $15 billion to endorse a stock. 

 

Another story could have to do with whatever negotiations were going on with regulators. A couple big things happened subsequent to the Buffett dilution: a series of ratings downgrades and the closing of the partial sale of CCB. Wholly speculative, but there might be something to the fact that Buffett initiated the deal. Historically, he has gone out of his way to accumulate intelligence.