BAC-WT - Bank of America Warrants

[tng]

Moynihan was a lawyer, so he might know how to negotiate a deal with the Justice Department better than how he negotiates business deals (ex: the Buffett warrants).

[gary17]

Agreed, although this is one of the reasons why I like BAC because it's not dependent on the CEO... he can go tomorrow and the business goes on :)

[fareastwarriors]

There are certainly worse CEO's out there than Moynihan, including his predecessor.  But that's not exactly a high bar we're discussing.  "Better than the guy that almost bankrupted one of the largest banks in the world" is not exactly a ringing endorsement. 

 

I view Moynihan as a decent-to-good COO, meaning, he's streamlining the company, refocusing it on profitability and capital return, cutting costs, etc.  That's where I think he should be in the company - COO.  I don't think he's a good at things "external" to the company - meaning, he's a poor/uncharismatic speaker, he's timid on negotiations, and that's why I don't like  him as CEO.  No one is paying much money to meet Moynihan at some charity dinner!  Buffett's deal could well cost shareholders more than the DOJ settlement - and that, in my view, was a totally unforced error. 

 

I think BAC and C have a number of tailwinds coming up - a drop in costs due to (eventually) ending litigation; a rise in income due to higher interest rates; and increased capital returns whenever the Fed gets off their necks.  I think Moynihan will get those big-picture items right.  But I also think any bank CEO will get these right.  So, yes, I am investing because I see macro tailwinds and I don't think Moynihan will screw them up. 

 

 

 

 

xzap - I fully understand your concern, but if you do not trust the CEO, may I ask why you are long BAC? Or is it that you are holding BAC despite Moynihan, thinking he can cause some damage but not enough to offset a basically good bank?

 

Just trying to understand things better!

 

I much prefer a COO type to a moronic deal maker who likes to "think big" like the last guy who ran this thing into the ground.

 

lol

[Andy Dufresne]

IMHO some of you are short-changing Moynihan - he is not walking on water/hitting .400/the second coming, but he has slogged through a massive mess for nearly 5 years now, and I am sure he has learned a great deal about banking - no one is born a banker .... he will make mistakes, but I don't think that he will be easily hoodwinked in a legal matter. About WEB - it's easy to say now that BAC was fleeced, but I would much rather have WEB publicly supporting BAC for the price he charged

[fareastwarriors]

let me know if this was already posted...

 

Bank of America Requests Meeting With Attorney General

 

Bank Seeking to Hammer Out Settlement Related to Alleged Handling of Shoddy Mortgages

 

http://online.wsj.com/articles/bank-of-america-requests-meeting-with-attorney-general-1403272253?mod=WSJ_hp_LEFTWhatsNewsCollection

 

[alertmeipp]

The thing is, in reality, BAC cannot mess with the government. Even if they wins the war in the court, the gov ( at least the current administration) will make them pay somewhere.

[ourkid8]

I agree.  Come to a settlement over this issue and let's move on.  I am dying to see BAC move towards book but these legal settlements are killing us!!!

 

S

 

The thing is, in reality, BAC cannot mess with the government. Even if they wins the war in the court, the gov ( at least the current administration) will make them pay somewhere.

[xazp]

I am dying to see BAC move towards book but these legal settlements are killing us!!!  >>

 

Actually the legal settlements DO help move book value towards book, though probably not in the way you were hoping. 

 

I agree.  Come to a settlement over this issue and let's move on.  I am dying to see BAC move towards book but these legal settlements are killing us!!!

 

S

 

The thing is, in reality, BAC cannot mess with the government. Even if they wins the war in the court, the gov ( at least the current administration) will make them pay somewhere.

[Mephistopheles]

I am dying to see BAC move towards book but these legal settlements are killing us!!!  >>

 

Actually the legal settlements DO help move book value towards book, though probably not in the way you were hoping. 

 

 

hahaha

[Uccmal]

Interesting take on the preferred issue.  It echoed my thinking of getting money while it is cheap.

 

http://seekingalpha.com/article/2280803-did-bank-of-america-mark-the-bottom-in-interest-rates?uprof=45

[xazp]

Speaking of interest rates, Bullard sees the first interest rate hikes in Q1 2015. 

http://www.marketwatch.com/story/bullard-now-sees-first-rate-hike-end-q1-2015-2014-06-26

 

As a reminder BAC projects an additional $2.2Bn in interest income if just the short-end rises by 1%, call it 20c pre-tax. 

 

I think lower costs (LAS, other) + additional interest income gets you to $2/share in earnings.  If NII starts going up early next year, then that's good news to me!

 

 

Interesting take on the preferred issue.  It echoed my thinking of getting money while it is cheap.

 

http://seekingalpha.com/article/2280803-did-bank-of-america-mark-the-bottom-in-interest-rates?uprof=45

[MYDemaray]

I'm sure everyone saw this, but in case not...another sign of progress in winding down LAS: http://online.wsj.com/articles/bank-of-america-lays-off-540-in-charlotte-1403733525?mod=yahoo_hs

 

[xazp]

So I went item by item through JPM's settlement with the DOJ (price tag: $13Bn), and lined it up with BAC's known settlements and reserves.  About 75% of JPM's settlement is either A) already settled by BAC; or B) non-cash (which doesn't really cost BAC much). 

 

http://seekingalpha.com/article/2289723-bank-of-america-government-settlements-cost-less-than-they-appear

 

I calculate that the headline settlement may be $12-$17Bn, but future costs to shareholders will be less than $5Bn.  This is because the biggest items (like the FHFA) will probably be included in the headline number, but this has already been reserved and paid for. 

 

The $5Bn range corresponds to a range of 1x - 2x of what JPM paid for unsettled line items; (BAC's FHFA settlement was roughly 1.5x JPM's, so this seems like a reasonable range).

 

We will see!

[MYDemaray]

This is very helpful -- great work again!

[Liberty]

So I went item by item through JPM's settlement with the DOJ (price tag: $13Bn), and lined it up with BAC's known settlements and reserves.  About 75% of JPM's settlement is either A) already settled by BAC; or B) non-cash (which doesn't really cost BAC much). 

 

http://seekingalpha.com/article/2289723-bank-of-america-government-settlements-cost-less-than-they-appear

 

I calculate that the headline settlement may be $12-$17Bn, but future costs to shareholders will be less than $5Bn.  This is because the biggest items (like the FHFA) will probably be included in the headline number, but this has already been reserved and paid for. 

 

The $5Bn range corresponds to a range of 1x - 2x of what JPM paid for unsettled line items; (BAC's FHFA settlement was roughly 1.5x JPM's, so this seems like a reasonable range).

 

We will see!

 

Very nice work. I certainly hope that you are correct!

[xazp]

Something to remember -

BAC's interests are somewhere at the intersection of "settling soon" and "settling for little cost." 

DOJ's interests are along the lines of "settling soon" and "big headline number."

 

The intersection of these two are, for example, the FHFA settlement which was headlined at $9.3Bn, but which cost the bank in total around $6.3Bn, and which resulted in a Q1 charge of $3.3Bn.  One of the ways they negotiate huge settlement numbers which don't cost the bank much is these "non-cash" deals; including settlements that have already resolved; or (best yet with FHFA) selling them securities worth an equivalent amount!

 

 

 

So I went item by item through JPM's settlement with the DOJ (price tag: $13Bn), and lined it up with BAC's known settlements and reserves.  About 75% of JPM's settlement is either A) already settled by BAC; or B) non-cash (which doesn't really cost BAC much). 

 

http://seekingalpha.com/article/2289723-bank-of-america-government-settlements-cost-less-than-they-appear

 

I calculate that the headline settlement may be $12-$17Bn, but future costs to shareholders will be less than $5Bn.  This is because the biggest items (like the FHFA) will probably be included in the headline number, but this has already been reserved and paid for. 

 

The $5Bn range corresponds to a range of 1x - 2x of what JPM paid for unsettled line items; (BAC's FHFA settlement was roughly 1.5x JPM's, so this seems like a reasonable range).

 

We will see!

 

Very nice work. I certainly hope that you are correct!

[gary17]

okay i know everybody is waiting for the revised capital planning & settlement news - while we wait , I was wondering if someone could help me understand how interest rates could affect the bank's business.  Some of my thoughts / questions:

 

1  When the Fed talks about "interest rate" they mean the rate for which the Federal Reserve charges the banks for the money that the banks are borrowing?  So this is a bank's cost of money.   

 

2  How does QE & interest rate policy have an effect on the cost of money for the banks?  I guess change the rate directly changes the rate.  But does bond purchase (QE) also affect the interest rate? 

 

3  So the banks sell their products and charge the customers another interest rate - so between the rate the banks charge & the rate they borrow from the Fed, this makes up the 'net interest margin' - more or less ? 

 

4  So in a rising interest rate environment, the margin only improves if the banks can quickly pass on the raising costs to their customers...  but it is also likely that as the rates rise, the demand for loans will decrease? And the banks' bond portfolio could also be affected.  Therefore, the rising rate policy could be good for banks if they can (a) pass on the costs to the customers and (b) the increased margin more than offsets for any declines in loans.  Is that a fair statement?

 

I'd say in the end this is all too complex for me to analyze... I just see BAC benefiting from the US economy & more free cash when the legal issues are gone.  But I'd still be interested to get a sense on if the above is more or less right from those who know banks much better than I do!

 

Thanks

Gary

[indirect]

Let me invert and ask you a question.

 

Is rising rate the most important factor in EPS improvement of BAC, once legal issues resolved?

 

The presumption being NIM improves in a rising rate environment.

 

If you write a long mathematical model for EPS, what would the most important variable?

[gary17]

Assuming there's earnings to be distributed to shareholders, then the most important variable would be the shares outstanding.    But I still like to know how interest rates affect NIM just for intellectual sake! 8)

[xazp]

Go look in the 10-K.  There's a section which says how earnings would be impacted with various shifts in interest rates.  Look for "parallel shift" or something like that. 

 

 

Assuming there's earnings to be distributed to shareholders, then the most important variable would be the shares outstanding.    But I still like to know how interest rates affect NIM just for intellectual sake! 8)

[Uccmal]

okay i know everybody is waiting for the revised capital planning & settlement news - while we wait , I was wondering if someone could help me understand how interest rates could affect the bank's business.  Some of my thoughts / questions:

 

1  When the Fed talks about "interest rate" they mean the rate for which the Federal Reserve charges the banks for the money that the banks are borrowing?  So this is a bank's cost of money.   

 

2  How does QE & interest rate policy have an effect on the cost of money for the banks?  I guess change the rate directly changes the rate.  But does bond purchase (QE) also affect the interest rate? 

 

3  So the banks sell their products and charge the customers another interest rate - so between the rate the banks charge & the rate they borrow from the Fed, this makes up the 'net interest margin' - more or less ? 

 

4  So in a rising interest rate environment, the margin only improves if the banks can quickly pass on the raising costs to their customers...  but it is also likely that as the rates rise, the demand for loans will decrease? And the banks' bond portfolio could also be affected.  Therefore, the rising rate policy could be good for banks if they can (a) pass on the costs to the customers and (b) the increased margin more than offsets for any declines in loans.  Is that a fair statement?

 

I'd say in the end this is all too complex for me to analyze... I just see BAC benefiting from the US economy & more free cash when the legal issues are gone.  But I'd still be interested to get a sense on if the above is more or less right from those who know banks much better than I do!

 

 

Thanks

Gary

 

 

Gary, Sure others may elaborate:

 

1) yes & no, Governments charge interest based on an overnight lending rate.  This is how government tries to set interest rates.  The rest of the interest rates flow from these rates. 

 

2) QE creates false demand for longer term bonds.  It is designed to flood the system with liquidity.  My understanding is that they are buying mortgage bonds and longer term treasuries.  This would cause the purchase price on long bonds to drop and interest rates at the long end to rise.  The goal is to stimulate borrowing in general.  I imagine it is more or less neutral in terms of bank profits. 

 

3) More or less: the bulk of the money the banks lend comes from deposits on which interest rates are set and manipulated by the overnight lending rates. 

 

4) In a rising rate environment the net interest margin widens to a point, a sweet spot, before we see a decrease in loans from deliberate squeezing of liquidity from the system.  In general, your statement seems fair to me.

 

5?) All the banks should benefit from an improvement in the overall economy.  BAC has more return to value potential with it, whereas WFC, and JPM, have more of a growth component.  I am looking forward to what Wells Fargo reports this week. 

 

Caveat: I may reread this and see some mistakes.  My mind gets twisted about by all the inverse relationships the government has created with QE.

 

[Uccmal]

Xazp, That was a really nice summary you did on seeking alpha.  Thanks, Al

[Uccmal]

Let me invert and ask you a question.

 

Is rising rate the most important factor in EPS improvement of BAC, once legal issues resolved?

 

The presumption being NIM improves in a rising rate environment.

 

If you write a long mathematical model for EPS, what would the most important variable?

 

Were we too answer this?

 

Net Earnings = Gross earnings - loan losses - legal issues - government fines- taxes - other dumb stuff. 

 

Gross earnings = fee income + interest income - interest expenses. 

 

I would say the most important thing for BAc to get right is the items beyond gross earnings ion the income statement.  That is the area they have the most control over.  This is what Wells has done for years.

 

 

[xazp]

Unfortunately some articles I've read today suggests that my numbers are off. 

 

So the DOJ has long said the JPM settlement would be a "template" for future settlements.  I took that to mean there would be a rough proportionality between JPM and say BAC and C.  So if JPM paid say $1 billion to a given agency, then BAC would pay 1 - 2x for that line item. 

 

The article I read today suggests that DOJ is asking for a disproportionate amount from C and BAC relative to JPM.  C in particular is getting smacked in a way that doesn't make much sense to me  http://blogs.barrons.com/stockstowatchtoday/2014/07/09/citigroup-thats-a-mighty-big-settlement/

 

"Reported $7B DoJ ask is 7.7% of Citigroup’s pre-crisis PLS issuance, higher than JPMorgan’s 2% settlement, despite the fact that losses in Citigroup’s PLS book were in-line with peer group."

 

Once DOJ started deviating from the JPM "template" (their words, not mine!) I really don't know how to predict the outcome for either C or BAC any more.  If they're throwing out that "template" I have no real way of understanding how they will come to a dollar number.  Most people hate litigation, but, I like it.  The court system is transparent and they follow the rule of law.  I prefer that.  Litigate away please!

 

 

 

 

Xazp, That was a really nice summary you did on seeking alpha.  Thanks, Al

[gary17]

Thanks!  ;D

 

Go look in the 10-K.  There's a section which says how earnings would be impacted with various shifts in interest rates.  Look for "parallel shift" or something like that. 

 

 

Assuming there's earnings to be distributed to shareholders, then the most important variable would be the shares outstanding.    But I still like to know how interest rates affect NIM just for intellectual sake! 8)