BAC-WT - Bank of America Warrants

[MrB]

PM that guy's intelligence is so beneath you, I honestly don't know why you bother.

 

Proverbs 18:2 "The mouths of fools are their ruin; they trap themselves with their lips."

[enoch01]

"It's all for nothing if you don't have freedom." William Wallace

 

Laughing my socks off ... Yeah right, Bank of America is Longshanks. By itself responsible of the whole crisis.

 

 

It seems to me Whalen is becoming more bullish: no more talk of hundreds of billions of liabilities and restructuring as the most obvious course of action!

[xazp]

Be grateful for Whelan and hope he keeps it up for another year or two.  Absent rumors of BAC's impending demise for the last year, how would you ever be able to buy the stock for single digit prices? 

 

"It's all for nothing if you don't have freedom." William Wallace

 

Laughing my socks off ... Yeah right, Bank of America is Longshanks. By itself responsible of the whole crisis.

 

 

It seems to me Whalen is becoming more bullish: no more talk of hundreds of billions of liabilities and restructuring as the most obvious course of action!

[MYDemaray]

BAC's law firm basically saying "reserve more"?

 

http://www.omm.com/fcwsite/abc.aspx?url=newsroom%2fpenPDF.aspx%3fpub%3d1282

 

So, in summary, this ruling looks like a positive for monolines.  Is the rational expectation that monoline claims will rise, or that a higher % of monoline claims will have to be repurchased/satified, or both?

 

To box this risk, using xasp's presentation, there is $13B of outstanding monoline exposure vs. $3.1B of claims.  Wonder where the claims number goes to?

 

xasp -- does this ruling make you upward revise your $1B downside estimation in the monoline bucket?

 

One other question for you.  On slide 6 of the presentation, you state "double current claims ($8Bn) @ 31% loss rate = $2.5Bn".  So were Fannie claims $4bn at the time you wrote the presentation? I didn't see a breakout of Fannie specific claims in the 10Q.  Otherwise, wouldn't doubling outstanding GSE claims get you to $16B x 31% = ~$5bn?  Thanks.

 

Also - any thoughts on whether there is there any overlap in the monoline bucket and GSE bucket? In other words, are there any mononline insured pools that are getting rejected, which are then getting put back by Fannie (due to insurance recission)?  Does that question even make sense, and if so doesn't it imply there could be an increase in monoline rejections, which will result in higher GSE put-backs?

[xazp]

Hi,

 

  There are some new data points in each of the three buckets:

 

  1)  GSE claims.  So historically (2011 and before), the GSEs limited their repurchase claims to mortgages that had defaulted with less than 24 payments.  Recently, the GSEs started asking for repurchases of loans that defaulted with > 24 payments.  BAC believes that > 24 payments indicates it was the economy that accounted for the R&W loss, and not BAC. 

  BAC in their quarterly essentially said "settle or sue" meaning they are not going to pay these claims.  I think the loss is reasonably bracketed in the presentation - I put the downside case at $2.5Bn + an additional 50% buffer.  But, I think the downside case is more likely than before, because the GSEs don't seem to be backing down on the issue. 

 

  2)  Private mortgage.  With Walnut Place/Baupost giving up, I think the "baseline" case becomes more likely. 

 

  3)  Monolines.  They settled with Synorca and indicated that it was already reserved.  This happened post the case you cited.  So I think they're OK, but this is the hardest one to analyze.  MBIA seems to be under more regulator pressure to settle than BAC is.

 

Net of it all, I put total losses in the downside at $6Bn pre-tax, plus a 50% buffer = $9Bn.  I think that's still a fine estimate (the buckets may move around, but the total seems OK to me).   

 

The ongoing expense reduction of $20Bn per year is, of course, a much bigger deal to me than an additional one-time $0-$9Bn cost.

 

 

BAC's law firm basically saying "reserve more"?

 

http://www.omm.com/fcwsite/abc.aspx?url=newsroom%2fpenPDF.aspx%3fpub%3d1282

 

So, in summary, this ruling looks like a positive for monolines.  Is the rational expectation that monoline claims will rise, or that a higher % of monoline claims will have to be repurchased/satified, or both?

 

To box this risk, using xasp's presentation, there is $13B of outstanding monoline exposure vs. $3.1B of claims.  Wonder where the claims number goes to?

 

xasp -- does this ruling make you upward revise your $1B downside estimation in the monoline bucket?

 

One other question for you.  On slide 6 of the presentation, you state "double current claims ($8Bn) @ 31% loss rate = $2.5Bn".  So were Fannie claims $4bn at the time you wrote the presentation? I didn't see a breakout of Fannie specific claims in the 10Q.  Otherwise, wouldn't doubling outstanding GSE claims get you to $16B x 31% = ~$5bn?  Thanks.

 

Also - any thoughts on whether there is there any overlap in the monoline bucket and GSE bucket? In other words, are there any mononline insured pools that are getting rejected, which are then getting put back by Fannie (due to insurance recission)?  Does that question even make sense, and if so doesn't it imply there could be an increase in monoline rejections, which will result in higher GSE put-backs?

[MYDemaray]

Thanks for that xazp

[mhdousa]

Here are the numbers for the stock vs warrant analysis under Sanjeev's 3 bagger in 5 year scenario.  The stock will go up 3x (7 to 21).  The "B" warrant intrinsic value will be $7.7 with about 2 years to go until expiration.  To estimate the time value I will use the "borrowing rate" of other in the money TARP warrants (which ranges from 3% to 4%).  The "borrowing rate" is calculated as: ((Warrant price - intrinsic value)/Strike Price) ^ (1/years to expiration).  If we use a 3.5% "borrowing rate" then the time value in 5 years will be: $0.95 =  13.30 * ((1 + .035) ^ 2 - 1).  Therefore in 5 years the "B" warrant will be worth $8.65.  With current price of $2.95, the upside is 193% less than the stock with more downside than the stock, therefore the stock is preferable to the warrants in this scenario.

 

Packer

 

Packer, I'm new to trying to understand warrants so correct me if I'm wrong.  You mean the A warrants in the above scenario, right?

[xazp]

http://www.reuters.com/article/2012/08/02/bankofamerica-fannie-idUSL2E8J2AXG20120802

 

http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=53606

 

BAC in settlement talks with Fannie.

 

And, an overview of the litigation and settlement landscape.

Important points -

1)  You can see the range of settlements (I don't think the ML number she cites is correct), but generally I'd approximate it at 10c on face value as an OK approximation.  Why people worry about $22Bn in claims vs $16Bn of reserves is really beyond me.

 

2)  Worthwhile noting that the federal side is beyond the statute of repose - for everyone, not just Countrywide. 

 

3)  She hypothesizes that a bunch of individual companies will file suit on state fraud charges.  This doesn't make sense to me.  I don't see any sense in going for a harder-to-prove, smaller $ lawsuit today, rather than going the higher $, federal lawsuit two years ago. 

 

 

[xazp]

10Q is out.  Synorca settlement details - it's about 2.5c on the dollar for unpaid principal balance.  (I said previously assume about 10c/dollar) This is after Synorca won in court etc.  As mentioned before, the settlement was already reserved. 

I'm wondering if MBIA is as big a deal as people think. 

 

Synorca settlement details:

 

On July 17, 2012, the Corporation, including certain of its affiliates, entered into an agreement with Syncora Guarantee, Inc. and Syncora Holdings Ltd. (Syncora), to resolve all of the monoline insurer's outstanding and potential claims related to alleged representations and warranties breaches involving eight first- and six second-lien RMBS trusts where Syncora provided financial guarantee insurance. The agreement, among other things, also resolves historical loan servicing issues and other potential liabilities to Syncora with respect to these trusts. The agreement covers the five second-lien RMBS trusts that were the subject of litigation and nine other first- and second-lien RMBS trusts, which had an original principal balance of first-lien mortgages of approximately $9.6 billion and second-lien mortgages of approximately $7.7 billion. As of June 30, 2012, $3.0 billion of loans in these first-lien trusts and $1.4 billion of loans in these second-lien trusts have defaulted or are 180 days or more past due (severely delinquent). The agreement provided for a cash payment of $375 million to Syncora. In addition, the parties entered into securities transfers and purchase transactions in connection with the settlement in order to terminate certain other relationships among the parties. The total cost to the Corporation was approximately $400 million and was fully accrued for by the Corporation at June 30, 2012.

[Grenville]

Here's a link to the Q2 10Q

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=quarterlyearnings#fbid=UiiPOE1wJ7p

[leadingusforward]

Can you share why you believe there might be an adjustment to the number of shares?

 

If the repurchase is a tender offer, I am almost sure there is an adjustment. If it is done through open market transactions there is ambiguity in the language as Rabbitisrich explained. That might also explain the  BAC/WFC confusion. I am not counting on repurchase adjustments and the repurchases themselves are a good deal at these prices.

 

Glad the post helped and if you find more about this please share. Welcome to the board.

 

Finally heard back from BAC IR via email, now they have the same view as WFC - no adjustments for open market stock purchases. 

 

"An open market repurchase of stock is not a pro rata purchase, thus it would not trigger any adjustment." - BAC IR

 

As you say, repurchases at these prices will enhance the intrinsic value even without the adjustment.

[moore_capital54]

http://www.reuters.com/article/2012/08/02/bankofamerica-fannie-idUSL2E8J2AXG20120802

 

http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=53606

 

BAC in settlement talks with Fannie.

 

And, an overview of the litigation and settlement landscape.

Important points -

1)  You can see the range of settlements (I don't think the ML number she cites is correct), but generally I'd approximate it at 10c on face value as an OK approximation.  Why people worry about $22Bn in claims vs $16Bn of reserves is really beyond me.

 

2)  Worthwhile noting that the federal side is beyond the statute of repose - for everyone, not just Countrywide. 

 

3)  She hypothesizes that a bunch of individual companies will file suit on state fraud charges.  This doesn't make sense to me.  I don't see any sense in going for a harder-to-prove, smaller $ lawsuit today, rather than going the higher $, federal lawsuit two years ago.

 

XAZP I would appreciate your comments on the Mastercard/Visa Settlements today..

[augustabound]

Slightly off topic.  I'm just curious if there's a site that lists available warrants similar to the way the FP does here in Canada?

 

Like this.

 

I can't seem to find a list for U.S. listed warrants at any of the mainstream websites.

[fareastwarriors]

http://www.bloomberg.com/news/2012-08-08/bactesttest.html

 

 

BofA’s Law Firm Says Lenders May Need More Loan Reserves

 

“In light of a recent federal court ruling, banks may wish to reevaluate litigation risk from plaintiff insurers claiming injury” in bonds they backed, Robert Stern, an O’Melveny partner, said in the note dated July 27. Firms “facing such lawsuits may wish to reevaluate their exposure and possibly adjust reserves set aside to cover such risks.”

 

 

[Kraven]

http://www.bloomberg.com/news/2012-08-08/bactesttest.html

 

 

BofA’s Law Firm Says Lenders May Need More Loan Reserves

 

“In light of a recent federal court ruling, banks may wish to reevaluate litigation risk from plaintiff insurers claiming injury” in bonds they backed, Robert Stern, an O’Melveny partner, said in the note dated July 27. Firms “facing such lawsuits may wish to reevaluate their exposure and possibly adjust reserves set aside to cover such risks.”

 

This has been the general interpretation of the note from the law firm, but it's not really what they say.  They simply say in light of a decision check your reserve status and see if you need to do anything.  That's it.  They may need more, they may not.  Say you live in a dry area and there have been lots of fires in the area.  You are told to check your homeowners insurance and make sure it is sufficient.  The point isn't that you need more, maybe you do, but maybe it's ok as is.  Sometimes a check of something is just a check of something.

[xazp]

http://www.reuters.com/article/2012/08/11/baer-merrill-idUSL6E8JAEAW20120811?feedType=RSS&feedName=financialsSector&rpc=43

 

"A deal could be announced as early as Monday, the sources said. One of the sources said that Baer could pay up to $2 billion for the unit, which manages some $90 billion for clients in Europe, Latin America, the Middle East and Asia."

 

BAC has a total of about $2,200 billion in AUM.  So if you use the same ratio of sales price / AUM for the remaining parts of GWIM, they'd receive $40-$50Bn for all of it.  Versus an $80Bn market cap.  And GWIM is just one of 5 large business segments in BAC. 

 

Really crossing my fingers for big buybacks.  If they can keep selling assets around or above book value, and buying stock at 1/3 of book value, it's a big win. 

[Parsad]

http://www.reuters.com/article/2012/08/11/baer-merrill-idUSL6E8JAEAW20120811?feedType=RSS&feedName=financialsSector&rpc=43

 

"A deal could be announced as early as Monday, the sources said. One of the sources said that Baer could pay up to $2 billion for the unit, which manages some $90 billion for clients in Europe, Latin America, the Middle East and Asia."

 

BAC has a total of about $2,200 billion in AUM.  So if you use the same ratio of sales price / AUM for the remaining parts of GWIM, they'd receive $40-$50Bn for all of it.  Versus an $80Bn market cap.  And GWIM is just one of 5 large business segments in BAC. 

 

Really crossing my fingers for big buybacks.  If they can keep selling assets around or above book value, and buying stock at 1/3 of book value, it's a big win.

 

Chalk up another $2B in Tier 1 Common Capital!  Also, they've barely made a dent in their real estate sale leasebacks...easily another $4-5B there.  Cheers!

[racemize]

starting to sound like AIG!

[Parsad]

Really crossing my fingers for big buybacks.  If they can keep selling assets around or above book value, and buying stock at 1/3 of book value, it's a big win.

 

Problem is the stress tests.  Because they can get approval for buybacks only once a year, they will not get approval till early January.  If the market perceives that they will get approval, and there is no reason to believe they will not at this time, then the stock will move up before they can buy at such cheap prices.  If it wasn't for the stress test approvals, they could already be buying stock based on how solid the balance sheet is now. 

 

That's why I still think they will be close to tangible book by Christmas.  The market will see in the third quarter that BAC will be close to 9% (if not over) under Basel III, and share buybacks or dividends would be 99% certain.  If the stock is at 70% of book or less, they should still buy back some shares, but probably not as much as if it was near or below tangible book.  Cheers!

[ERICOPOLY]

The Fed has been saying that buybacks/dividends cannot be 100% of projected earnings because they want the banks to be consistently building capital ratios.

 

But if you are already at your 2019 projected target ratio of 9%... then why cannot you return 100% of projected earnings?  For what purpose would continued capital retention be necessary if not for satisfying regulatory ratios?

 

[xazp]

I find this confusing as well.  I can understand where the Fed might target a capital ratio (9%).  I don't understand why they'd limit it to earnings.  You can grow capital ratios separately from earnings

 

- by shrinking the company and/or reducing risk-weighted assets

- by selling financial stakes

- by raising capital via preferred/equity sales or swaps. 

- via DTAs or MSR reductions

 

All of which BAC has done.  The Fed uses the phrase "capital" and "earnings" interchangeably, but it's not a good model for a company that is voluntarily shrinking. 

 

I guess we'll have to see.  The Fed should be more scared of a BAC or C with too much capital  - they'll be inclined to make either stupid loans or stupid acquisitions. 

 

The Fed has been saying that buybacks/dividends cannot be 100% of projected earnings because they want the banks to be consistently building capital ratios.

 

But if you are already at your 2019 projected target ratio of 9%... then why cannot you return 100% of projected earnings?  For what purpose would continued capital retention be necessary if not for satisfying regulatory ratios?

[Uccmal]

 

I guess we'll have to see.  The Fed should be more scared of a BAC or C with too much capital  - they'll be inclined to make either stupid loans or stupid acquisitions. 

 

 

LOL...

 

I dont see BAC ever retiring very many shares, mostly because of what Parsad said.  Also, there is an expectation that they pay a healthy dividend.  To keep large stock holders such as pension funds etc. they will need to ramp up the payment to 60-70% of earnings. 

[xazp]

I think they'll shift capital return towards buybacks as long as the stock is below TBV.  Here's the data from 2012. 

 

C's 2012 proposed capital return  (per http://online.wsj.com/article/SB10001424052702304331204577356192509771340.html) - 1c quarterly dividend ($120MM) and $8 billion of buybacks.  Vikram had made comments about preferring buybacks when the stock was below TBV. 

 

JPM's 2012 approved capital return - $4Bn in dividends, $15Bn in buybacks.  So also weighted towards buybacks.  Their dividend payout was roughly 20%, and their buyback payout was roughly 75%. 

 

I think BAC is more similar to C and I think they will send almost all of the capital towards buybacks until they trade at or above TBV.  Of course that's just my opinion.  But I think that is consistent with the way the other banks are operating. 

 

Note that everyone thought (because Pandit said to expect it) that C was going to start returning capital.  But it never went above 75% of TBV this year.  So I still have hope that substantial buybacks will be possible.  But as I said, I'm crossing my fingers because the banks never fail to disappoint me :).

 

 

 

 

I guess we'll have to see.  The Fed should be more scared of a BAC or C with too much capital  - they'll be inclined to make either stupid loans or stupid acquisitions. 

 

 

LOL...

 

I dont see BAC ever retiring very many shares, mostly because of what Parsad said.  Also, there is an expectation that they pay a healthy dividend.  To keep large stock holders such as pension funds etc. they will need to ramp up the payment to 60-70% of earnings.

[ERICOPOLY]

Also, there is an expectation that they pay a healthy dividend.  To keep large stock holders such as pension funds etc. they will need to ramp up the payment to 60-70% of earnings.

 

At some point last year I read a statement from Moynihan on this topic.  He said about 1/3 dividend, 1/3 buyback, and 1/3 retained for organic growth.

 

 

[Parsad]

Note that everyone thought (because Pandit said to expect it) that C was going to start returning capital.  But it never went above 75% of TBV this year.  So I still have hope that substantial buybacks will be possible.  But as I said, I'm crossing my fingers because the banks never fail to disappoint me

 

I think C didn't hit TBV because the Feds stopped them from buying back shares and increasing their dividend.  That won't be a problem for BAC this year.  But I agree with you, hopefully the stock stays below TBV into next year, so they can retire a good chunk of the shares.  Cheers!