BAC-WT - Bank of America Warrants

[SharperDingaan]

A few things to consider.

 

Under the global central bank framework, all major banks are tightly connected; GSIB, DSIB, etc. While commendable, it has just made the banks more strongly correlate with each other – and the banking tides stronger. BAC simply rises and falls with the tide, & that tide is now reflecting storm surges.

 

Traditionally one either went inland to ride out a major storm (exit banking), or found a bigger boat & rode it out on the ocean (GSIBs). Those in the middle tied their boats up in protected harbours (DSIBs), battened hatches, & relied upon insurance (central bank) to make good any losses. If you didn’t have to be on the coast, you generally moved.

 

Most people take on debt early in their lives & pay it off prior to entering retirement. Where there are surges of population through either birth, or mortality reduction, we get extended debt cycles (Dalio). Over time; the banker either finds new pockets of population to lend to, or makes increasingly risky loans – to avoid a shrinking NIM as the loan book declines. The alternative (agency bias) is endless layoffs as people costs are cut to maintain margin. Banking is a great industry – so long as the age of the average retail borrower is young.

 

Money lending is a tough business, requiring extensive scale & technology to compete. If the bank is not a significant EM lender, every year there are fewer new retail prospects in the pipeline, & the NIM must decline a little (assume no risk ‘adjusted’ lending).

 

One has to ask why one would not just buy the preferred shares of the GSIB - or exit entirely.

Take the 8%+ cash yield, & simply let the distressed market, and the banking apparatus serve you…

 

SD

 

[John Hjorth]

A few things to consider.

 

Under the global central bank framework, all major banks are tightly connected; GSIB, DSIB, etc. While commendable, it has just made the banks more strongly correlate with each other – and the banking tides stronger. BAC simply rises and falls with the tide, & that tide is now reflecting storm surges.

 

Traditionally one either went inland to ride out a major storm (exit banking), or found a bigger boat & rode it out on the ocean (GSIBs). Those in the middle tied their boats up in protected harbours (DSIBs), battened hatches, & relied upon insurance (central bank) to make good any losses. If you didn’t have to be on the coast, you generally moved.

 

Most people take on debt early in their lives & pay it off prior to entering retirement. Where there are surges of population through either birth, or mortality reduction, we get extended debt cycles (Dalio). Over time; the banker either finds new pockets of population to lend to, or makes increasingly risky loans – to avoid a shrinking NIM as the loan book declines. The alternative (agency bias) is endless layoffs as people costs are cut to maintain margin. Banking is a great industry – so long as the age of the average retail borrower is young.

 

Money lending is a tough business, requiring extensive scale & technology to compete. If the bank is not a significant EM lender, every year there are fewer new retail prospects in the pipeline, & the NIM must decline a little (assume no risk ‘adjusted’ lending).

 

One has to ask why one would not just buy the preferred shares of the GSIB - or exit entirely.

Take the 8%+ cash yield, & simply let the distressed market, and the banking apparatus serve you…

 

SD

 

 

Thanks for your post, SharperDingaan,

 

Certainly food for thought.

[fareastwarriors]

A few things to consider.

 

Under the global central bank framework, all major banks are tightly connected; GSIB, DSIB, etc. While commendable, it has just made the banks more strongly correlate with each other – and the banking tides stronger. BAC simply rises and falls with the tide, & that tide is now reflecting storm surges.

 

Traditionally one either went inland to ride out a major storm (exit banking), or found a bigger boat & rode it out on the ocean (GSIBs). Those in the middle tied their boats up in protected harbours (DSIBs), battened hatches, & relied upon insurance (central bank) to make good any losses. If you didn’t have to be on the coast, you generally moved.

 

Most people take on debt early in their lives & pay it off prior to entering retirement. Where there are surges of population through either birth, or mortality reduction, we get extended debt cycles (Dalio). Over time; the banker either finds new pockets of population to lend to, or makes increasingly risky loans – to avoid a shrinking NIM as the loan book declines. The alternative (agency bias) is endless layoffs as people costs are cut to maintain margin. Banking is a great industry – so long as the age of the average retail borrower is young.

 

Money lending is a tough business, requiring extensive scale & technology to compete. If the bank is not a significant EM lender, every year there are fewer new retail prospects in the pipeline, & the NIM must decline a little (assume no risk ‘adjusted’ lending).

 

One has to ask why one would not just buy the preferred shares of the GSIB - or exit entirely.

Take the 8%+ cash yield, & simply let the distressed market, and the banking apparatus serve you…

 

SD

 

 

Thanks for your post, SharperDingaan,

 

Certainly food for thought.

 

 

just saw this in the journal

 

 

http://www.wsj.com/articles/new-york-fed-finds-large-increase-in-debts-held-by-those-over-age-50-1455289257

 

 

People Over 50 Carrying More Debt Than in the Past

 

The average 65-year-old borrower has 47% more mortgage debt than those in 2003

[Guest qanary]

If I refinanced my mortgage from 2003 to today's rates, all things being equal, I could take on 27.5% more debt.

 

Of course, that nets against my assets, which are much greater than 2003, on an inflation-adjusted basis (as they adjusted the debt in the article).

 

A few things to consider.

 

Under the global central bank framework, all major banks are tightly connected; GSIB, DSIB, etc. While commendable, it has just made the banks more strongly correlate with each other – and the banking tides stronger. BAC simply rises and falls with the tide, & that tide is now reflecting storm surges.

 

Traditionally one either went inland to ride out a major storm (exit banking), or found a bigger boat & rode it out on the ocean (GSIBs). Those in the middle tied their boats up in protected harbours (DSIBs), battened hatches, & relied upon insurance (central bank) to make good any losses. If you didn’t have to be on the coast, you generally moved.

 

Most people take on debt early in their lives & pay it off prior to entering retirement. Where there are surges of population through either birth, or mortality reduction, we get extended debt cycles (Dalio). Over time; the banker either finds new pockets of population to lend to, or makes increasingly risky loans – to avoid a shrinking NIM as the loan book declines. The alternative (agency bias) is endless layoffs as people costs are cut to maintain margin. Banking is a great industry – so long as the age of the average retail borrower is young.

 

Money lending is a tough business, requiring extensive scale & technology to compete. If the bank is not a significant EM lender, every year there are fewer new retail prospects in the pipeline, & the NIM must decline a little (assume no risk ‘adjusted’ lending).

 

One has to ask why one would not just buy the preferred shares of the GSIB - or exit entirely.

Take the 8%+ cash yield, & simply let the distressed market, and the banking apparatus serve you…

 

SD

 

 

Thanks for your post, SharperDingaan,

 

Certainly food for thought.

 

 

just saw this in the journal

 

 

http://www.wsj.com/articles/new-york-fed-finds-large-increase-in-debts-held-by-those-over-age-50-1455289257

 

 

People Over 50 Carrying More Debt Than in the Past

 

The average 65-year-old borrower has 47% more mortgage debt than those in 2003

[SharperDingaan]

http://news.buzzbuzzhome.com/2015/08/bmo-canadian-debt-2015-good-debt.html

“Given the angst about high debt burdens, it’s somewhat comforting to know that Canadians are generally accumulating good debt to finance investments in their homes and educations, as opposed to bad debt such as discretionary spending on vacations and entertainment,”

 

We put it to you that for most folks in their 50’s; the education debt is primarily the cost of putting the kids through university/college, & the housing debt is renovation preparing the house for sale. As soon as the last kid graduates; the house is sold, mom/dad downsize, & the loan is paid off. A banker’s nightmare.

 

A shrinking loan bank RELEASES REGULATORY CAPITAL, & drives the capital ratios up. BUT it also means that the bank will not earn enough to buy back its T2 and T3 capital instruments; & that the price of those instruments will rise as the prospects of a capital event fade. To avoid paying, the bank is strongly incentivized to do a partial default - & wipe them out through forced conversion. Common share dilution.

 

A preferred share can only be bought back at a premium to par, & is not subject to dilution. A preferred also ranks ahead of almost all T1 capital, & no bank can afford to not pay the full dividend on time – every time. It's pretty hard to argue against owning them.

 

SD

 

 

[Guest qanary]

Who is the house sold to and why won't they take out a mortgage?

 

As soon as the last kid graduates; the house is sold, mom/dad downsize, & the loan is paid off. A banker’s nightmare.

[CorpRaider]

Aren't there more millennials than boomers now with a buttload still too come and young people pouring over the southern border everyday?  Sounds like a Japanese problem...

 

http://money.cnn.com/interactive/economy/diversity-millennials-boomers/

[SharperDingaan]

Who is the house sold to and why won't they take out a mortgage?

 

As soon as the last kid graduates; the house is sold, mom/dad downsize, & the loan is paid off. A banker’s nightmare.

 

The next person moving up the property ladder who just sold their old place at a healthy gain. Agreed there may well be a new mortgage, but it may not be as big as the old parental one, &/or it may be paying down at a more rapid rate. Individual cases will of course vary, but the aggregate over all borrowers is a total loan reduction. The banker may be able to slow the pace a little, but cannot  stop the glacier itself.

 

SD

 

[SharperDingaan]

Aren't there more millennials than boomers now with a buttload still too come and young people pouring over the southern border everyday?  Sounds like a Japanese problem...

 

http://money.cnn.com/interactive/economy/diversity-millennials-boomers/

 

The southern border folks are 'illegal' & cannot borrow. Young folks rent, or live with the parents; they don't buy houses. The good news is that when they dominate the property market, the cycle (in NA) will probably reverse; but until then - not so much.

 

SD

[CorpRaider]

Ok, but even without the undocumented, they are the largest population group and that only counting kids born in 1980 and later, not even including generation Z.  It won't take long for those folks to assimilate.

[Guest qanary]

But if the new buyer is buying the house at a greater price than presumably what the parents paid for it, why would the mortgage be smaller?  In fact, the parents will have paid down some of their mortgage over the years, so I'd expect the new mortgage to be higher because of the higher house price *and* because of a reset of the mortgage to being a greater percentage of the home value.  (You could argue the last point if you wanted to say that home equity kept the percentage of debt stable, but have all home owners maxed out their home equity?)

 

And with low interest rates, what is the incentive to pay down more rapidly or pay a larger downpayment?

 

Who is the house sold to and why won't they take out a mortgage?

 

As soon as the last kid graduates; the house is sold, mom/dad downsize, & the loan is paid off. A banker’s nightmare.

 

Agreed there may well be a new mortgage, but it may not be as big as the old parental one, &/or it may be paying down at a more rapid rate.

[SharperDingaan]

A house is an asset that appreciates at the rate of inflation + rate of GNP growth + rate of local area growth. If you live in a house built 50 years ago, kept paying the mortgage, & never moved; you’ve benefitted from 50 years of growth – and the improvement in your neighbourhood since the day it was built. The 50K house in a major city, built in the early 50’s to house returning soldiers, worth 1M+ today. Sell in your dotage, live with your family, & use some of the cash to pay off their mortgage.

 

If the home buyer has rotated through many properties prior to buying this one, they have also benefited from the rate of local area growth on MANY properties, not ONE. If the property market has been strong over the intervening years, every time they moved up the property ladder, they have made more & more money. If this is their last property before downsizing, or a downsize purchase, that 1M property was bought for cash.

 

The objective is to retire with the house fully paid off; both mechanisms produce the same result. The longer the owners stay in the property ladder – the more certain the outcome; and the older they get, the smaller the mortgage. Obviously results differ between individuals, but the aggregate is net mortgage reduction.

 

As long as the banker can lend to new folks in greater numbers this isn’t a problem; as total new mortgages should exceed total retirements. But make those new folks renters for an extended period (priced out of the market), & total mortgages - will start to rapidly decline, reducing NIM. Reduced rates & looser lending will help for a while, but it helps those at the top of the ladder (the 1%) escape at an inflated price – much more than those at the bottom. Eventually rates will also rise, triggering defaults & more renting.

 

If you’re smart you accept as many refugees as you can, and make them all legal as soon as you can – so that they get on the property ladder. Alternatively, produce as many babies as possible.

 

SD

 

 

[LC]

Stealing this from another thread:

 

Saw this Munger quote from recent Daily Journal meeting - thought it was wise:

 

No one should buy a bank without a feeling for how shrewd management is. It is easy to delude yourself into thinking things, as it is very easy to hide the real numbers. Don’t invest in banks without real knowledge.

 

So fellow COBF'ers who are decently invested in BAC, what do you think of this?

 

I frankly fail the test. I have no idea how shrewd the banksters at BAC are. Moynihan gets the reputation of being a straightforward, button-up new england lawyer tasked with streamlining the bank. But thats about as far as I know.

[karthikpm]

Stealing this from another thread:

 

Saw this Munger quote from recent Daily Journal meeting - thought it was wise:

 

No one should buy a bank without a feeling for how shrewd management is. It is easy to delude yourself into thinking things, as it is very easy to hide the real numbers. Don’t invest in banks without real knowledge.

 

So fellow COBF'ers who are decently invested in BAC, what do you think of this?

 

I frankly fail the test. I have no idea how shrewd the banksters at BAC are. Moynihan gets the reputation of being a straightforward, button-up new england lawyer tasked with streamlining the bank. But thats about as far as I know.

 

The daily Journal has a 30% position in BAC. Berkshire has significant exposure to BAC as well.. My guess is Munger and Buffet are comfortable with how shrewd management is..

[plato1976]

Does DJCO recently buy more financial or it's their old holdings from years ago?

 

Stealing this from another thread:

 

Saw this Munger quote from recent Daily Journal meeting - thought it was wise:

 

No one should buy a bank without a feeling for how shrewd management is. It is easy to delude yourself into thinking things, as it is very easy to hide the real numbers. Don’t invest in banks without real knowledge.

 

So fellow COBF'ers who are decently invested in BAC, what do you think of this?

 

I frankly fail the test. I have no idea how shrewd the banksters at BAC are. Moynihan gets the reputation of being a straightforward, button-up new england lawyer tasked with streamlining the bank. But thats about as far as I know.

 

The daily Journal has a 30% position in BAC. Berkshire has significant exposure to BAC as well.. My guess is Munger and Buffet are comfortable with how shrewd management is..

[LC]

Stealing this from another thread:

 

Saw this Munger quote from recent Daily Journal meeting - thought it was wise:

 

No one should buy a bank without a feeling for how shrewd management is. It is easy to delude yourself into thinking things, as it is very easy to hide the real numbers. Don’t invest in banks without real knowledge.

 

So fellow COBF'ers who are decently invested in BAC, what do you think of this?

 

I frankly fail the test. I have no idea how shrewd the banksters at BAC are. Moynihan gets the reputation of being a straightforward, button-up new england lawyer tasked with streamlining the bank. But thats about as far as I know.

 

The daily Journal has a 30% position in BAC. Berkshire has significant exposure to BAC as well.. My guess is Munger and Buffet are comfortable with how shrewd management is..

 

Not to be so blunt, but so what? Pabrai was comfortable with Horsehead.

[CorpRaider]

So you take his meaning to be that he wants a "shrewd" management by noting the business is very opaque with easily slanted/manipulated financials?

 

 

[karthikpm]

Stealing this from another thread:

 

Saw this Munger quote from recent Daily Journal meeting - thought it was wise:

 

No one should buy a bank without a feeling for how shrewd management is. It is easy to delude yourself into thinking things, as it is very easy to hide the real numbers. Don’t invest in banks without real knowledge.

 

So fellow COBF'ers who are decently invested in BAC, what do you think of this?

 

I frankly fail the test. I have no idea how shrewd the banksters at BAC are. Moynihan gets the reputation of being a straightforward, button-up new england lawyer tasked with streamlining the bank. But thats about as far as I know.

 

The daily Journal has a 30% position in BAC. Berkshire has significant exposure to BAC as well.. My guess is Munger and Buffet are comfortable with how shrewd management is..

 

Not to be so blunt, but so what? Pabrai was comfortable with Horsehead.

 

Fair point, my statement was that Munger/ Buffet  thought the management was shrewd- Does not mean you or I should think that .

Horsehead destroyed the " cloning" mantra Pabrai has been using, but it was the one position he did not clone ..

[LC]

True but a lot of people cloned him, saying "well mohnish/guy obviously think value exists here". Which is essentially what you are saying, that "Charlie obviously thinks value exists here". I'm just asking for the actual evidence of managements shrewdness. All I know of is moynihan's reputation, I have no insight into the underlying culture of making loans. How cynical are they? Does anyone know? Can we even tell, or is the discount to tbv and the large franchise/distribution network enough to validate an investment nonetheless?

[karthikpm]

True but a lot of people cloned him, saying "well mohnish/guy obviously think value exists here". Which is essentially what you are saying, that "Charlie obviously thinks value exists here". I'm just asking for the actual evidence of managements shrewdness. All I know of is moynihan's reputation, I have no insight into the underlying culture of making loans. How cynical are they? Does anyone know? Can we even tell, or is the discount to tbv and the large franchise/distribution network enough to validate an investment nonetheless?

 

I'm just going to paraphrase you "I frankly fail the test. I have no idea how shrewd the banksters at BAC are."  and add " Caveat Emptor"  !

[LC]

True but a lot of people cloned him, saying "well mohnish/guy obviously think value exists here". Which is essentially what you are saying, that "Charlie obviously thinks value exists here". I'm just asking for the actual evidence of managements shrewdness. All I know of is moynihan's reputation, I have no insight into the underlying culture of making loans. How cynical are they? Does anyone know? Can we even tell, or is the discount to tbv and the large franchise/distribution network enough to validate an investment nonetheless?

 

I'm just going to paraphrase you "I frankly fail the test. I have no idea how shrewd the banksters at BAC are."  and add " Caveat Emptor"  !

That's fair. My question is, for all of us who are invested in BAC without knowing how shrewd the bankers at BAC are, what is the rationale? In my case I figure there is solid discount to TBV combined with a CEO who is charged with simplifying the business, and a large franchise/distribution network.

[Spekulatius]

Stealing this from another thread:

 

Saw this Munger quote from recent Daily Journal meeting - thought it was wise:

 

No one should buy a bank without a feeling for how shrewd management is. It is easy to delude yourself into thinking things, as it is very easy to hide the real numbers. Don’t invest in banks without real knowledge.

 

So fellow COBF'ers who are decently invested in BAC, what do you think of this?

 

I frankly fail the test. I have no idea how shrewd the banksters at BAC are. Moynihan gets the reputation of being a straightforward, button-up new england lawyer tasked with streamlining the bank. But thats about as far as I know.

 

The daily Journal has a 30% position in BAC. Berkshire has significant exposure to BAC as well.. My guess is Munger and Buffet are comfortable with how shrewd management is..

 

Not to be so blunt, but so what? Pabrai was comfortable with Horsehead.

 

Pabrai is not Munger and Buffett

[LC]

Stealing this from another thread:

 

Saw this Munger quote from recent Daily Journal meeting - thought it was wise:

 

No one should buy a bank without a feeling for how shrewd management is. It is easy to delude yourself into thinking things, as it is very easy to hide the real numbers. Don’t invest in banks without real knowledge.

 

So fellow COBF'ers who are decently invested in BAC, what do you think of this?

 

I frankly fail the test. I have no idea how shrewd the banksters at BAC are. Moynihan gets the reputation of being a straightforward, button-up new england lawyer tasked with streamlining the bank. But thats about as far as I know.

 

The daily Journal has a 30% position in BAC. Berkshire has significant exposure to BAC as well.. My guess is Munger and Buffet are comfortable with how shrewd management is..

 

Not to be so blunt, but so what? Pabrai was comfortable with Horsehead.

 

Pabrai is not Munger and Buffett

 

I don't care if the ghost of Ben Graham came back with a 35 year old Warren Buffett on his arm and personally told me to buy BAC stock hand over fist.

 

I'm asking if anyone has insight into the level of shrewdness at BAC, and if not, what makes you comfortable buying/holding in light of what Munger said.

 

It's fine not to have an answer, I admittedly do not myself and tried to give my reasoning for owning the stock in spite of this lack of knowledge.

[CorpRaider]

Shrewd?  No.  Literate?  Maybe.

[TheAiGuy]

Stealing this from another thread:

 

Saw this Munger quote from recent Daily Journal meeting - thought it was wise:

 

No one should buy a bank without a feeling for how shrewd management is. It is easy to delude yourself into thinking things, as it is very easy to hide the real numbers. Don’t invest in banks without real knowledge.

 

So fellow COBF'ers who are decently invested in BAC, what do you think of this?

 

I frankly fail the test. I have no idea how shrewd the banksters at BAC are. Moynihan gets the reputation of being a straightforward, button-up new england lawyer tasked with streamlining the bank. But thats about as far as I know.

 

The daily Journal has a 30% position in BAC. Berkshire has significant exposure to BAC as well.. My guess is Munger and Buffet are comfortable with how shrewd management is..

 

Not to be so blunt, but so what? Pabrai was comfortable with Horsehead.

 

Pabrai is not Munger and Buffett

 

I don't care if the ghost of Ben Graham came back with a 35 year old Warren Buffett on his arm and personally told me to buy BAC stock hand over fist.

 

I'm asking if anyone has insight into the level of shrewdness at BAC, and if not, what makes you comfortable buying/holding in light of what Munger said.

 

It's fine not to have an answer, I admittedly do not myself and tried to give my reasoning for owning the stock in spite of this lack of knowledge.

 

Because I disagree with what Munger said, at least in this case. I think incentives, right now, are more important than "shrewdness" and that the incentives for management are to make the bank safer (and more profitable by cutting costs). Management isn't trying to concur the world here, so their knack for banking is less important. "Shrewdness" matters more when the bank is growing as a bad banker will take on richly priced, but unlikely, risks which can lead to large losses later. That's less likely for BofA now -- when the bank starts talking about growing market share (or whatever) then it's probably time to leave.