BAC-WT - Bank of America Warrants

[benchmark]

One thing remains a constant, Buffett's genius blows me away.

I still don't know how he got a 6% dividend and 10 year warrants at half of TBV for a decade from a guy that swore he didn't need any more capital.

Michael Corleone couldn't have gotten those terms.

+1.

 

I also agree that BAC is being singled-out, but I still am curious why -- they had the strongest result from last Thursday's result. Does BAC need a good PR person?

[Viking]

Looking at dividend or stock buyback, my read is the company wants the focus of capital return to be stock buyback given how cheap the the shares currently are trading. This also allows for larger dividend increases in the future. Also, looking at the medium term, capital not returned this year that is not needed will be returned in future years. Perhaps this is why Citi's return is so large this year.

 

Bottom line, looking out 3-5 years there is lots to like with the big US banks. Lot's of tailwinds. most importantly I am really liking how the narrative with the talking heads on TV is now about HOW MUCH capital will be returned. This is a sea change from 24 months ago and is under appreciated by Mr. Market. I hope BAC sells off over the next couple of weeks as I would love to add to my position and take advantage of Mr. Markets short term thinking.

[oddballstocks]

One thing remains a constant, Buffett's genius blows me away.

I still don't know how he got a 6% dividend and 10 year warrants at half of TBV for a decade from a guy that swore he didn't need any more capital.

Michael Corleone couldn't have gotten those terms.

+1.

 

I also agree that BAC is being singled-out, but I still am curious why -- they had the strongest result from last Thursday's result. Does BAC need a good PR person?

 

Curious why?  Maybe they are being punished for the financial crisis.  I don't think there's anything they could do to get around that.  Regulation isn't fair, it's very political.

[benchmark]

One thing remains a constant, Buffett's genius blows me away.

I still don't know how he got a 6% dividend and 10 year warrants at half of TBV for a decade from a guy that swore he didn't need any more capital.

Michael Corleone couldn't have gotten those terms.

+1.

 

I also agree that BAC is being singled-out, but I still am curious why -- they had the strongest result from last Thursday's result. Does BAC need a good PR person?

 

Curious why?  Maybe they are being punished for the financial crisis.  I don't think there's anything they could do to get around that.  Regulation isn't fair, it's very political.

 

If this were the case, they shouldn't have been approved for the same buy back amount last year. Maybe I'm too logical, and politics is illogical :)

[ERICOPOLY]

The Fed said it identified "weaknesses in certain aspects of Bank of America's loss and revenue modeling practices and in some aspects of... internal controls."

 

 

Well, it was barely over a year ago that Bruce Thompson sounded amazed that Mike Mayo didn't think BAC would be earning $2 a share a year from today. 

 

So maybe there's some teeth to the criticism that BAC struggles to model it's loss/revenues.

 

[Munger_Disciple]

It's true they are the only large bank not to ask for a dividend increase but they did ask for a buyback although I read they could have been approved for $10-12 billion buyback based on they had the strongest quantitative results from Thurs stress test.

 

BAC's 2014 original buyback plan (that was approved by the fed in March 2014) was 4B, but it was suspended along with the original 2014 dividend increase after the stress test error was discovered. So the 4B buyback approved in 2015 is not an increase relative to the original 2014 buyback number even though it was an increase over 2014 re-submitted capital plan after the error was fixed.

[Rainforesthiker]

One thing remains a constant, Buffett's genius blows me away.

I still don't know how he got a 6% dividend and 10 year warrants at half of TBV for a decade from a guy that swore he didn't need any more capital.

Michael Corleone couldn't have gotten those terms.

+1.

 

I also agree that BAC is being singled-out, but I still am curious why -- they had the strongest result from last Thursday's result. Does BAC need a good PR person?

 

My take on this comes from a Mungerish view of where the incentives lie, and my somewhat cynical (but I think realistic) view of human nature.  Think about all of the government employees hired at the Fed to administer these stress tests.  If all of the banks pass the test with flying colors, after a few years some in Congress and elsewhere will start questioning if we need all of these expensive stress tests, and if the Fed needs all of these employees to administer them.  The workers at the Fed know this, they know their jobs are at stake, and generally otherwise want to feel important, and they also have the very strong human need to throw their authority around.  So every year some bank has to either fail or be called into question somehow.  Last year Citi was the easiest target for them, i.e., it was easiest for them to say that Citi did not have the proper controls in place, etc., etc.  But Citi has undoubtedly improved on those metrics.  So this year for the failing banks you pick out a few foreign ones (which perhaps deserved to fail, who really knows) and you toss in BofA to call into question, so that a) it does not look like you are singling out foreign banks; b) it will keep the US banks from becoming complacent; and c) you can assert your authority and have a better argument that your job is important and relevant.  Another incentive-based dynamic here is that I would bet some of these guys at the Fed are angling for more lucrative jobs in the banks being paid to beat these same stress tests they are currently administering.  That option only remains available as long as the banks are at some risk of failing these tests. 

 

Overall, I tend to think the current people inside BofA, with the benefit of lessons learned from the financial crisis, know better how to protect the bank's capital than Fed employees do.  I am somewhat surprised that everyone in the media views the government stress tests as gospel coming down from on high.  Like teachers in school, you just don't want to create a test that everyone easily passes.  It will be interesting to see how the Fed deals with this in future years - do they keep moving the goalposts to the point of absurdity?  Or do the stress tests fade into oblivion.  I guess now the stress test process is being integrated into year round supervision of the banks, so the stress tests in their current form will fade away.

 

http://www.wsj.com/articles/fed-broadens-scope-of-stress-tests-1425940072

 

[wescobrk]

I agree about looking for incentives.

They are defending themselves right now about regulatory capture.

They want to defend their sinecure.

BAC has been doing the stress tests for 6 years and they had the best quant results and still can't pass.

I guess another angle is Moynihan is too arrogance around the stress tests if the Fed is being fair with them.

At least Corbat had the balls to put his job on the line if they didn't get a clean pass.

BAC has failed three times now (2011, last year and this year I guess is half a pass).

[CorpRaider]

It's true they are the only large bank not to ask for a dividend increase but they did ask for a buyback although I read they could have been approved for $10-12 billion buyback based on they had the strongest quantitative results from Thurs stress test.

 

BAC's 2014 original buyback plan (that was approved by the fed in March 2014) was 4B, but it was suspended along with the original 2014 dividend increase after the stress test error was discovered. So the 4B buyback approved in 2015 is not an increase relative to the original 2014 buyback number even though it was an increase over 2014 re-submitted capital plan after the error was fixed.

 

Yeah, clearly they've got some issues.

[tylerdurden]

Hi Folks - I have a tax related question to the warrant holders. Any of you paying taxes this year on the dividend adjustments on the exercise price / warrant share numbers from 2014? If so, how did you come up with the amount? My 1099-DIV does not include these adjustments. I think these dividend adjustments are taxable but not sure how the warrant holders are supposed to pay these taxes. I do my own taxes so unfortunately have no tax advisor therefore I wanted to ask the question here; perhaps someone knows the right approach...

[Mephistopheles]

Hi Folks - I have a tax related question to the warrant holders. Any of you paying taxes this year on the dividend adjustments on the exercise price / warrant share numbers from 2014? If so, how did you come up with the amount? My 1099-DIV does not include these adjustments. I think these dividend adjustments are taxable but not sure how the warrant holders are supposed to pay these taxes. I do my own taxes so unfortunately have no tax advisor therefore I wanted to ask the question here; perhaps someone knows the right approach...

 

I think you just pay on everything over $.01/quarter, so $.04/quarter in this case. Make sure to add this amount to your cost basis to avoid double taxation when you sell.

[tylerdurden]

Hi Folks - I have a tax related question to the warrant holders. Any of you paying taxes this year on the dividend adjustments on the exercise price / warrant share numbers from 2014? If so, how did you come up with the amount? My 1099-DIV does not include these adjustments. I think these dividend adjustments are taxable but not sure how the warrant holders are supposed to pay these taxes. I do my own taxes so unfortunately have no tax advisor therefore I wanted to ask the question here; perhaps someone knows the right approach...

 

I think you just pay on everything over $.01/quarter, so $.04/quarter in this case. Make sure to add this amount to your cost basis to avoid double taxation when you sell.

 

Thanks. Any need to do anything separate for the adjustment on the warrant share number?

[Mephistopheles]

Hi Folks - I have a tax related question to the warrant holders. Any of you paying taxes this year on the dividend adjustments on the exercise price / warrant share numbers from 2014? If so, how did you come up with the amount? My 1099-DIV does not include these adjustments. I think these dividend adjustments are taxable but not sure how the warrant holders are supposed to pay these taxes. I do my own taxes so unfortunately have no tax advisor therefore I wanted to ask the question here; perhaps someone knows the right approach...

 

I think you just pay on everything over $.01/quarter, so $.04/quarter in this case. Make sure to add this amount to your cost basis to avoid double taxation when you sell.

 

Thanks. Any need to do anything separate for the adjustment on the warrant share number?

 

No problem. And no separate adjustment needed, because this is just like a DRIP.

[tylerdurden]

Hi Folks - I have a tax related question to the warrant holders. Any of you paying taxes this year on the dividend adjustments on the exercise price / warrant share numbers from 2014? If so, how did you come up with the amount? My 1099-DIV does not include these adjustments. I think these dividend adjustments are taxable but not sure how the warrant holders are supposed to pay these taxes. I do my own taxes so unfortunately have no tax advisor therefore I wanted to ask the question here; perhaps someone knows the right approach...

 

I think you just pay on everything over $.01/quarter, so $.04/quarter in this case. Make sure to add this amount to your cost basis to avoid double taxation when you sell.

 

Thanks. Any need to do anything separate for the adjustment on the warrant share number?

 

No problem. And no separate adjustment needed, because this is just like a DRIP.

 

Thanks very much. It makes sense. Though to adjust to the fact that I will have to pay taxes on something which I have not received as cash but this is not supposed to be easy right :-)

[karthikpm]

Hi Folks - I have a tax related question to the warrant holders. Any of you paying taxes this year on the dividend adjustments on the exercise price / warrant share numbers from 2014? If so, how did you come up with the amount? My 1099-DIV does not include these adjustments. I think these dividend adjustments are taxable but not sure how the warrant holders are supposed to pay these taxes. I do my own taxes so unfortunately have no tax advisor therefore I wanted to ask the question here; perhaps someone knows the right approach...

 

I think you just pay on everything over $.01/quarter, so $.04/quarter in this case. Make sure to add this amount to your cost basis to avoid double taxation when you sell.

 

Does the brokerage not have to do this? Not sure how I will calculate these since I have bought these warrants at various points

 

[ourkid8]

Are Canadian investors also required to report it this way? I would assume my brokerage would send me a statement.

 

Tks,

S

 

Hi Folks - I have a tax related question to the warrant holders. Any of you paying taxes this year on the dividend adjustments on the exercise price / warrant share numbers from 2014? If so, how did you come up with the amount? My 1099-DIV does not include these adjustments. I think these dividend adjustments are taxable but not sure how the warrant holders are supposed to pay these taxes. I do my own taxes so unfortunately have no tax advisor therefore I wanted to ask the question here; perhaps someone knows the right approach...

 

I think you just pay on everything over $.01/quarter, so $.04/quarter in this case. Make sure to add this amount to your cost basis to avoid double taxation when you sell.

 

Does the brokerage not have to do this? Not sure how I will calculate these since I have bought these warrants at various points

[abcd]

One thing remains a constant, Buffett's genius blows me away.

I still don't know how he got a 6% dividend and 10 year warrants at half of TBV for a decade from a guy that swore he didn't need any more capital.

Michael Corleone couldn't have gotten those terms.

 

Some of it may have been paid for the 'Approved By Buffet' stamp, especially given the time that this deal was put in place.

[redskin]

I'm surprised BAC wasn't more aggressive with their buyback request considering their ratios were so far in excess of the minimums.  Makes me think the Fed may have urged a more modest request considering last years mistake?  Hopefully we'll hear more from management on why the buyback is so modest. 

 

Is it too early to talk about next years CCAR?  The amount of capital BAC will be retaining should be huge.  They earned $4.5b pre tax in Q4.  I believe most of 2015 earnings will be added to regulatory capital pre tax.  Will this increase their tangible common equity by $15b+?  With their current excess capital, the additional 2015 earnings and the continued improvement of risk due to legacy assets rolling off, how much will BAC be able to request next year?  $15-20 billion?

[wescobrk]

I'm surprised BAC wasn't more aggressive with their buyback request considering their ratios were so far in excess of the minimums.  Makes me think the Fed may have urged a more modest request considering last years mistake?  Hopefully we'll hear more from management on why the buyback is so modest. 

 

Is it too early to talk about next years CCAR?  The amount of capital BAC will be retaining should be huge.  They earned $4.5b pre tax in Q4.  I believe most of 2015 earnings will be added to regulatory capital pre tax.  Will this increase their tangible common equity by $15b+?  With their current excess capital, the additional 2015 earnings and the continued improvement of risk due to legacy assets rolling off, how much will BAC be able to request next year?  $15-20 billion?

They could if the Fed doesn't change the rules again, but they probably will so maybe half that request, if they are lucky.

[redskin]

If BAC had requested an amount that would've taken their Tier 1 ratio to the level of JPM they would have requested an additional $16 billion capital return.

[morningstar]

I'm surprised BAC wasn't more aggressive with their buyback request considering their ratios were so far in excess of the minimums.  Makes me think the Fed may have urged a more modest request considering last years mistake?  Hopefully we'll hear more from management on why the buyback is so modest. 

 

Is it too early to talk about next years CCAR?  The amount of capital BAC will be retaining should be huge.  They earned $4.5b pre tax in Q4.  I believe most of 2015 earnings will be added to regulatory capital pre tax.  Will this increase their tangible common equity by $15b+?  With their current excess capital, the additional 2015 earnings and the continued improvement of risk due to legacy assets rolling off, how much will BAC be able to request next year?  $15-20 billion?

 

I think the prospects are pretty good on the quantitative side, though if the Fed includes the G-SIFI buffer in the minimums for the severely adverse scenario that would be a big hit to the apparent cushions at the largest banks.

 

However, I think the distribution requests are constrained by earnings as much as the actual capital levels. They are going to need to show much better earnings before they are distributing $15+ billion in a year.

 

$10-11 billion total request seems like a good starting point for the next CCAR round - capital return in the area of 65% of earnings, which is around what the best banks in their peer group are currently doing.

[redskin]

I'm surprised BAC wasn't more aggressive with their buyback request considering their ratios were so far in excess of the minimums.  Makes me think the Fed may have urged a more modest request considering last years mistake?  Hopefully we'll hear more from management on why the buyback is so modest. 

 

Is it too early to talk about next years CCAR?  The amount of capital BAC will be retaining should be huge.  They earned $4.5b pre tax in Q4.  I believe most of 2015 earnings will be added to regulatory capital pre tax.  Will this increase their tangible common equity by $15b+?  With their current excess capital, the additional 2015 earnings and the continued improvement of risk due to legacy assets rolling off, how much will BAC be able to request next year?  $15-20 billion?

 

I think the prospects are pretty good on the quantitative side, though if the Fed includes the G-SIFI buffer in the minimums for the severely adverse scenario that would be a big hit to the apparent cushions at the largest banks.

 

However, I think the distribution requests are constrained by earnings as much as the actual capital levels. They are going to need to show much better earnings before they are distributing $15+ billion in a year.

 

$10-11 billion total request seems like a good starting point for the next CCAR round - capital return in the area of 65% of earnings, which is around what the best banks in their peer group are currently doing.

 

It's encouraging that Citigroup was allowed to distribute over 100% of 2014 earnings.

 

[morningstar]

I'm surprised BAC wasn't more aggressive with their buyback request considering their ratios were so far in excess of the minimums.  Makes me think the Fed may have urged a more modest request considering last years mistake?  Hopefully we'll hear more from management on why the buyback is so modest. 

 

Is it too early to talk about next years CCAR?  The amount of capital BAC will be retaining should be huge.  They earned $4.5b pre tax in Q4.  I believe most of 2015 earnings will be added to regulatory capital pre tax.  Will this increase their tangible common equity by $15b+?  With their current excess capital, the additional 2015 earnings and the continued improvement of risk due to legacy assets rolling off, how much will BAC be able to request next year?  $15-20 billion?

 

I think the prospects are pretty good on the quantitative side, though if the Fed includes the G-SIFI buffer in the minimums for the severely adverse scenario that would be a big hit to the apparent cushions at the largest banks.

 

However, I think the distribution requests are constrained by earnings as much as the actual capital levels. They are going to need to show much better earnings before they are distributing $15+ billion in a year.

 

$10-11 billion total request seems like a good starting point for the next CCAR round - capital return in the area of 65% of earnings, which is around what the best banks in their peer group are currently doing.

 

It's encouraging that Citigroup was allowed to distribute over 100% of 2014 earnings.

 

I think the Citi result was encouraging overall in that it indicates with some attention these management issues are able to be cleaned up to the Fed's satisfaction in a fairly rapid time period. On an annualized basis Citi will return $6.8bn in the 2015 cycle following a $1.3bn figure in 2014.

 

To me this indicates that increases in capital return don't have to be merely incremental, and if BAC gets its act together, then doubling from the current $5.4bn run-rate in this cycle to $10-11bn in the next cycle seems very possible.

[redskin]

I'm surprised BAC wasn't more aggressive with their buyback request considering their ratios were so far in excess of the minimums.  Makes me think the Fed may have urged a more modest request considering last years mistake?  Hopefully we'll hear more from management on why the buyback is so modest. 

 

Is it too early to talk about next years CCAR?  The amount of capital BAC will be retaining should be huge.  They earned $4.5b pre tax in Q4.  I believe most of 2015 earnings will be added to regulatory capital pre tax.  Will this increase their tangible common equity by $15b+?  With their current excess capital, the additional 2015 earnings and the continued improvement of risk due to legacy assets rolling off, how much will BAC be able to request next year?  $15-20 billion?

 

I think the prospects are pretty good on the quantitative side, though if the Fed includes the G-SIFI buffer in the minimums for the severely adverse scenario that would be a big hit to the apparent cushions at the largest banks.

 

However, I think the distribution requests are constrained by earnings as much as the actual capital levels. They are going to need to show much better earnings before they are distributing $15+ billion in a year.

 

$10-11 billion total request seems like a good starting point for the next CCAR round - capital return in the area of 65% of earnings, which is around what the best banks in their peer group are currently doing.

 

It's encouraging that Citigroup was allowed to distribute over 100% of 2014 earnings.

 

I think the Citi result was encouraging overall in that it indicates with some attention these management issues are able to be cleaned up to the Fed's satisfaction in a fairly rapid time period. On an annualized basis Citi will return $6.8bn in the 2015 cycle following a $1.3bn figure in 2014.

 

To me this indicates that increases in capital return don't have to be merely incremental, and if BAC gets its act together, then doubling from the current $5.4bn run-rate in this cycle to $10-11bn in the next cycle seems very possible.

 

How do you figure C returned $1.3B in 2014?

[morningstar]

[....]

 

How do you figure C returned $1.3B in 2014?

 

They had a buyback just under $1.2bn and their little dividend amounts to $100m or so - this isn't for 2014 FY but rather for the 2014 CCAR cycle, i.e. 2Q14-1Q15, but the 2014 figures are pretty much the same deal.