BAC-WT - Bank of America Warrants

[benchmark]

Bought some common this morning,  and some Jan 14 calls.

[racemize]

Eric and Plan, since the FFH slides are up, would you care to comment re private deleveraging thesis given the 290% private debt?  I feel like we might have been speaking across each other before (I wasn't disagreeing re bank rates).

 

http://www.fairfax.ca/Theme/Fairfax/files/2012%20AGM%20Slide%20Presentation_v001_f4dd72.pdf

[ERICOPOLY]

Eric and Plan, since the FFH slides are up, would you care to comment re private deleveraging thesis given the 290% private debt?  I feel like we might have been speaking across each other before (I wasn't disagreeing re bank rates).

 

http://www.fairfax.ca/Theme/Fairfax/files/2012%20AGM%20Slide%20Presentation_v001_f4dd72.pdf

 

I was referring to the US consumer.  Consumer spending being a large % of GDP and consumer debt service ratio at very healthy level.

 

When you mention the 290% number I immediately can see that you aren't talking about household debt, which is nowhere near that high. 

 

So then, are you worried about household debt?  Or are you worried about corporate debt?  If corporate, then financial or non-financial, or both?

 

Here is an example of my thinking:

Total household debt fell by 0.9% in 2011 even though consumer debt expanded by 3.5%.  The increase in consumer debt was more than offset by the 2.1% decline in mortgage debt.  So there is a real world example from recent history of an increase in consumer debt concurrent with net household deleveraging.

[racemize]

Eric and Plan, since the FFH slides are up, would you care to comment re private deleveraging thesis given the 290% private debt?  I feel like we might have been speaking across each other before (I wasn't disagreeing re bank rates).

 

http://www.fairfax.ca/Theme/Fairfax/files/2012%20AGM%20Slide%20Presentation_v001_f4dd72.pdf

 

I was referring to the US consumer.  Consumer spending being a large % of GDP and consumer debt service ratio at very healthy level.

 

When you mention the 290% number I immediately can see that you aren't talking about household debt, which is nowhere near that high. 

 

So then, are you worried about household debt?  Or are you worried about corporate debt?  If corporate, then financial or non-financial, or both?

 

Here is an example of my thinking:

Total household debt fell by 0.9% in 2011 even though consumer debt expanded by 3.5%.  The increase in consumer debt was more than offset by the 2.1% decline in mortgage debt.  So there is a real world example from recent history of an increase in consumer debt concurrent with net household deleveraging.

 

Sorry, I may not have been clear (and I was recalling from memory at the time)--I simply meant private debt as a whole.  Given it's peakish look on the chart (understanding that debt is cheap now), it seems reasonable that it would regress to a lower level, causing a natural lag on the economy. 

[ERICOPOLY]

I initially bought them last summer, then changed my mind on them and went an unlevered calls route.  Then as the stock began to recover I bought some common, calls, and some warrants to juice the returns.  Then I sold some common and all warrants and bought AIG.  Then (last two days) I sold the AIG and I sit unlevered once again (in the BAC calls).  But I'm fidgety and I'm watching how the warrants behave.

 

Boy that was lucky on the AIG sale.  This really explains why AIG is so cheap -- people know it's cheap but it's painful to get in at $35 only to see it back at $31 two days later.  Might as well wait for the next Treasury sale they figure.

[Uccmal]

I initially bought them last summer, then changed my mind on them and went an unlevered calls route.  Then as the stock began to recover I bought some common, calls, and some warrants to juice the returns.  Then I sold some common and all warrants and bought AIG.  Then (last two days) I sold the AIG and I sit unlevered once again (in the BAC calls).  But I'm fidgety and I'm watching how the warrants behave.

 

Boy that was lucky on the AIG sale.  This really explains why AIG is so cheap -- people know it's cheap but it's painful to get in at $35 only to see it back at $31 two days later.  Might as well wait for the next Treasury sale they figure.

 

 

Sometimes  lucky, sometimes not in the spec game.  I sold a small number of AIG leaps Thursday morning when it was up, and bought twice the number back yesterday, after the plunge. 

 

I doubt the treasury will price their shares below the market value.  Giethner wants to show a small gain, but not too much, on the shares.  My guess would be around 32.

[alertmeipp]

I think the market will soon get used to these offerings and take them as opportunities for AIG to continue increase their book value per share. I have no AIG now - switched to other plays, purely because AIG has performed so well last few days. Judging from previous experience, AIG will experience weakness in next few days UNLESS WB is interested. I give that 30% chance especially if Fed decided to sell larger chunks.

 

 

[enoch01]

 

Sometimes  lucky, sometimes not in the spec game.  I sold a small number of AIG leaps Thursday morning when it was up, and bought twice the number back yesterday, after the plunge. 

 

 

I did almost the same exact thing.  There shouldn't be much more of this if Treasury wants out before the election.  That sets a deadline for the end of this kind of price action.

[Rabbitisrich]

http://www.pimco.com/EN/Insights/Pages/Global-Credit-Perspectives-May-2012.aspx

As a result of lower prices and rising rents, housing today is becoming more attractive than rental property across many areas of the country. Overall, home prices relative to income and relative to rents are currently at or below levels from eight years ago (Figure 3). Housing inventory for both new and existing homes is also declining (Figure 4) while sales activity is picking up. For example, inventories of existing homes on the market are now at 2.37 million units (near seven-year lows) while pending home sales are up 10.8% year-over-year through March 2012, according to the National Association of Realtors. Meanwhile, the inventory of new homes on the market at 144,000 is at a 50-year low as of March 2012, per the U.S. Census Bureau.

 

Even his cautionaries look good. Tight lending standards will become less tight as prices bottom and kids living with their parents represent future households after a few years of balance sheet repair.

 

 

 

 

[Sunrider]

Dear all

 

I've been a lurker here for a while - but have followed both the BAC and AIG discussions with great interest. I'm long both common and warrants on both. I've finally sat down and done some digging to convince myself of the potential and risk/reward in BAC's case. Here is how I see things:

 

1. There's a decent chance BAC may continue to be able to wind down credit reserving, if the economy just sort-of-plots-along (Q1 run rate would indicate under 10bn vs. 13.4bn in 2011. Seeing that we are getting closer to the point where the portfolio will have churned over the stuff from the bad period, this should ultimately be good for another few billion in perhaps 2 - 4 year's time.

2. Allowance for credit losses at 3/share as well as those for R&W at 1.5/share (rough numbers, I know) seem pretty substantial. Whether they are adequate is, of course, the question. However, run rate of R&W provisions is down significantly from last year based on Q1 - which if it continues may free up 10bn or so in costs. Of course, the contingency here is that they (a) win BNY settlement and (b) the put-back volume keeps declining. The recent Q seemed to indicate that they believe a lot of what has come to them this Q was invalid and thus will be contested and not ultimately be payable. So in the absence of really bad news on the legal front it seems that perhaps the reserving run rate from Q1 is not too far off.

3. If I run a bad case scenario with current assets growing by 1%, margin stabilising and increasing to 2.8% by 2016 (find it hard to believe that rates can drop further), NIR at last year's level but with credit reserves running at 13.4bn p.a. and R&W provisions at 4bn p.a. and taxes on FTE basis as per current quarter (conservative), then they would still be generating 3.4bn after pref and common dividends in 2016 (without accounting for further buy-backs of prefs along the way).

4. That number could obviously swing a lot higher to, perhaps, >20bn depending on the above and it is very sensitive to margin assumptions. If one assumes that interest rates will start rising sometime after 2014 and given that BAC's margin should then improve, the results may well be better.

 

So far so good - and most of you here probably reached similar conclusions. If you think I've missed something then please let me know. In summary - clearly BAC will be ok and the contingencies with respect to R&W liabilities and exposure to the economy (credit loss provisions) really only shift (in time) the profit that it will ultimately generate. When it stops there's effectively another 15bn compared to last year's earnings that would come through on R&W alone. (Mis)Using Plan's multiple of 10 for P/E (or more accurately PTPP) would indicate a value of >20/share by that time.

 

What bothers me, however, in deciding how much more money to dump into this now is two things:

 

1. Deterioration in BV, TCE/share, etc. in the last quarter -- how would you guys look at this and what do you think about it?

2. The warrants seem to be the favourite of the day but they are very expensive at 63%ish IV. If BAC goes to 12 by Jan 2014 and IV stays the same the warrants go to >6. If IV goes down to 40% they will trade at 4 only, which clearly won't be a great return from the current level.

- Any views on how the market will treat these going forward?

- Alternatives are obviously (a) DITM 2014 Leaps, which trade at less IV (although still a fair bit above the volatility of the stock) and (b) long stock. The former offers more attractive returns (especially if things go really well) and a smaller potential loss. What do members of this board think/prefer and why?

- The other option would be to buy 2014 calls, say 10 strike currently at about 1.05 - the increased profit potential comes at the cost of a higher break-even and it seems to me this would really only pay of if things go extremely well (say BAC trading at >15 then). What's your feeling on this? How confident are you that BAC will make sufficient progress until then (e.g. no more R&W, much reduced provisions) that the market may recognise the value and get the stock to that level?

 

Thank you very much,

 

C.

 

[alertmeipp]

Silly thought. Merrill Lynch was bot by BAC for 50billions (as I recall) - you think it worth less than 50b now or more?

Anyone here got a sense how integrated BAC and ML has become?

[nkp007]

With European banks weakening (daily) because of their exposure to bad sovereign debt, I am thinking that Bank of America / Citigroup should see some benefit.

 

In fact, I read in the WSJ: "Domestic banks, however, continued to benefit from European troubles. About two-thirds of institutions that compete with European lenders "noted an increase in business as a result of decreased competition from European banks and their affiliates or subsidiaries, a somewhat larger fraction than in January," the Fed said."

 

I wonder if this effect will be substantial and whether it will be a greater benefit to C and BAC than the costs of the European recession.

[Uccmal]

Hi Sunrider,  Long post.  I don't really like to price speculate.  My largest chunk in BAC is the 2014  - $10.00 leaps.  I bought them around an average of about 1.30 (I averaged up).  I see no reason blocking BAC from reaching $13 before next June or July (2013).  That will still leave enough time value to triple my money on the investment.  BAc traded at $13 last May 4th (011).  The economics of the business and the sentiment are all askew right now.  It's a far safer investment than it was a year ago, and may as mentioned by npk007, be able to grow profitable business, in Europe.

 

alert, I would think that ML is worth 50 B still.  Perhaps more.  They will soon be an investment bank sub of a SIFI bank.  so that leaves 30 B for the rest of a worldwide banking franchise, kind of ludicrous when you do a sum of the parts.  Eurozone, & UK banks have had to slow investment banking while they deal with more pressing matters.  ML remains 3rd or 4 th in a deeply depressed IB market if memory serves.  Goldman, JPM, ML/BAC. 

[Kraven]

Silly thought. Merrill Lynch was bot by BAC for 50billions (as I recall) - you think it worth less than 50b now or more?

Anyone here got a sense how integrated BAC and ML has become?

 

No idea what they're worth, but it's pretty integrated.  These types of businesses though always operate in the same way.  When things are going really good the bankers want all the money for themselves and bitch and moan about how other areas of the bank suck cash out.  When banking isn't good, people like the brokers want more money and want it taken from the bankers, while the bankers bitch and moan about how they thought they were all one team and they're shocked at the response from the others.  That's integrated.

[PlanMaestro]

Eric and Plan, since the FFH slides are up, would you care to comment re private deleveraging thesis given the 290% private debt?  I feel like we might have been speaking across each other before (I wasn't disagreeing re bank rates).

 

http://www.fairfax.ca/Theme/Fairfax/files/2012%20AGM%20Slide%20Presentation_v001_f4dd72.pdf

 

 

US consumers flock to borrow

http://www.ft.com/intl/cms/s/0/c4022712-987f-11e1-ad3e-00144feabdc0.html#axzz1u5moAiXL

 

US consumer credit surged in March by the most in more than a decade as Americans borrowed more to pay for education and autos, suggesting growing confidence in the economy. Credit jumped $21.36bn, or 10.2 per cent, to $2.54tn, the Federal Reserve announced on Monday. That was more than twice the $9.8bn increase forecast by economists and was the biggest rise since November 2001.

....

 

“The bullish view is that the positive March surprise is a signal that households simply took some time to pay down the credit card debt that they incurred during the holiday season. With those balances at more manageable levels, consumers are now willing to accumulate additional debt,” he said. “The bearish view, however, is that with income growth anaemic, households needed to use their credit cards to pay for higher gasoline prices in March. It is unclear without further evidence which view is correct.”

 

 

[ERICOPOLY]

It is interesting to see an example of the low hanging fruit:

 

"Customer letters were mailed late last week to give them ample time to become familiar with another location, including two (808 Beacon Street and 235 Needham Street) that are less than one mile away," Bank of America spokesman T.J. Crawford said. "Currently, there are seven full-service banking centers in the city (of Newton), all within two miles of one another. Based on foot traffic and other metrics, we determined that we can continue to efficiently serve our customers with one less location."

 

"The property is in fact owned, and will be marketed," Crawford said.

 

http://www.bizjournals.com/boston/news/2012/05/09/bofa-closing-selling-newton-highlands.html?ana=yfcpc

[Grenville]

Objectors to $8.5 bln BofA settlement to get more info

http://newsandinsight.thomsonreuters.com/Legal/News/2012/05_-_May/Objectors_to_$8_5_bln_BofA_settlement_to_get_more_info/

 

"You can have access to any settlement discussions where the trustee was present," Kathy Patrick, an attorney for investors who support the deal, told counsel for the opponents of the settlement at a court hearing on Tuesday.

[PlanMaestro]

Perfect positive trading record in the first quarter:

 

http://ftalphaville.ft.com/blog/2012/05/04/988981/as-good-as-moynihan/

 

Goldman too:

 

http://ftalphaville.ft.com/blog/2012/05/10/994901/goldman-loses-to-bank-of-america-in-the-least-q1-negative-revenue-trading-days-contest/

[ERICOPOLY]

I was reading yesterday that BAC is forgiving $150,000 in principal on average to 200,000 homeowners -- part of the RoboSigning settlement.  It lowers their monthly payment size on average by 30%.

 

That's $3b dollars.  However, it's only non-performing hard-luck cases that qualify for the loan forgiveness, and I'd expect that a good portion of those loans were  already written down anyhow.

 

In some cases, you could imagine a loan having already been written down in excess of $150,000.  The result would be a loan that returns to performing status and BAC could, ironically, actually mark UP the value of the loan on the books.

 

I have been wondering how they managed to quietly ferret away the 12.5b for the settlement into their legal reserves -- this is perhaps how some of it was reserved... through non-performing loans that have been already marked down.

[ERICOPOLY]

Tomorrow is shaping up to be a real bleeder thanks to JPM's mistake:

 

http://blogs.wsj.com/deals/2012/05/10/j-p-morgan-to-host-surprise-conference-call/

 

Dimon says capital positions under Basel III, the all important future rules, will fall to 8.2% of risk-weighted capital from 8.4%.

 

[biaggio]

Dimon, asked if any other banks will have similar trouble: "Just because we were stupid, doesn't mean anyone else was."

 

 

[Uccmal]

I am wondering who is on the other side? 

 

Dimon did say he would only buy back under 45.  Looks like they have a great opportunity.....

[Grenville]

New article from Frankel. The article 78 trial starts Monday according to her.

 

Can BofA and SocGen undo MBIA's restructuring?

http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=47226&terms=%40ReutersTopicCodes+CONTAINS+'ANV'

 

BofA seems to be convinced that MBIA needs the bank's money more than BofA needs MBIA's.

 

The bank could well be right. MBIA's May 10 filing concedes that the insurer "did not write a meaningful amount of U.S. public finance insurance" in the first quarter of 2012, and does not expect to write new muni bond policies unless and until it resolves the litigation challenging its restructuring. That means MBIA doesn't have a business future as long as the banks keep litigating the propriety of its restructuring.

 

Any comments from the folks following MBIA, has MBIA's Muni business been curtailed by the overhang of this case as implied by Frankel?

[ERICOPOLY]

Strange to see it down 1/2 as much as JPM and WFC on a big "Euro-fears" day.

[Uccmal]

Interesting observation - nothing else to say.

 

Re Euro fears.  I dont get what everyone is excited about.  It strikes me that Eu austerity is toast as a concept.  A whole combination of factors such as Merkel losing an important election, France's new anti- auterity stance, Greeces rebellion, suggest to me that the floodgates will open soon with stimulus programs.  The EU cant help but learn from the US success.