BAC-WT - Bank of America Warrants

[Guest rimm_never_sleeps]

One of Buffett's biggest "mistakes" (usair) netted him 9.25% a year for about 8 years on a $358m investment, plus his money back. yes he got hit by the crash in junk bonds and the recession of the early 1990s. He likes to say this is a mistake, because he wants to be as humble as possible and also teach lessons. But his biggest mistake was probably paying stock for Dexter Shoe Co.

[Arden]

FYI, regarding the federal lawsuits- the rate of successful appeals in federal courts is pretty low- ~13%. I guess federal judges are not really revolutionary people.

http://www.cafc.uscourts.gov/images/stories/the-court/statistics/Appeals_Filed_Term_Pend_2011.pdf

 

More statistics here:

http://www.cafc.uscourts.gov/the-court/statistics.html

 

About the state litigation and the de facto merger test- isn't the risk here pretty low? It applies only if New York will be the chosen jurisdiction AND they decide to apply the de facto merger test AND they find it applies in BAC's case, which in itself is unlikely. The tests in the de facto merger doctrine are:

 

1. continuity of ownership;

2. the seller ceasing ordinary business operations and dissolving as soon as possible after

the transaction;

3. the buyer assuming liabilities ordinarily necessary to continue the seller’s business

uninterrupted; and

4. the buyer continuing the successor’s management, personnel, physical location, assets

and general business operation

 

And as discussed here: http://www.cwrmbssettlement.com/docs/Opinion%20Regarding%20Corporate%20Separateness.pdf

There doesn't seem to be a very strong case against BAC, even in New York.

 

 

[newbee]

Any one has the court time line for the 8.5B BAC settlement. As per the following bloomberg article in the end, justice barbara will hear the final objections in MAY. Is it  really nine months away?

 

But even if the banks are willing to settle, one holdup could be the objections dissenting investors have raised to Bank of New York Mellon's use of the special trust-law proceeding to win approval of BofA's proposed $8.5 billion MBS settlement. New York State Supreme Court Justice Barbara Kapnick will hear final objections to that settlement in May.

 

http://newsandinsight.thomsonreuters.com/Legal/News/2012/08_-_August/Are_megabucks_MBS_breach-of-contract_settlements_in_the_offing_/

 

Thanks

[xazp]

I remember the settlement ruling wasn't going to be until next year, so, it sounds right. 

 

The article reinforces my belief that time is on the banks' side.  Walnut Place is a good example.  The NY supremes ruled they could not sue why the settlement was being decided.  So, if Walnut wants to re-start litigation, they first have to wait for the settlement to be decided (2013) with the hope that the settlement is denied.  After that, they could re-start the litigation process, which would probably drag on for a few more years.  Baupost would in effect be making a 7-year "investment" in legal costs in the hopes of recovering more money than the settlement provides for.  So instead, they sold and washed their hands of the thing. 

 

Maiden Lane (the old AIG assets) were also part of the Gibbs & Brun group moving for the settlement.  But they've also sold their Countrywide and other bonds off - to banks including BAC which are less likely to support litigation against themselves.  Over time, the MBS are getting scattered in such a way that it's harder and harder to reach the 25% threshold necessary for a R&W claim.  It's even possible that BAC is pursuing a strategy of buying those MBS (they've definitely bought some of the trusts that Countrywide/ML have issued).

 

If you read the lawsuit in the article you sent, the reason it works is because one party holds 25% of the bonds, so they can move unilaterally.  With the big banks, the bonds tended to be dispersed better, and it's hard to get to the 25% threshold necessary to trigger a R&W claim - and I think it's getting harder over time.

 

 

 

Any one has the court time line for the 8.5B BAC settlement. As per the following bloomberg article in the end, justice barbara will hear the final objections in MAY. Is it  really nine months away?

 

But even if the banks are willing to settle, one holdup could be the objections dissenting investors have raised to Bank of New York Mellon's use of the special trust-law proceeding to win approval of BofA's proposed $8.5 billion MBS settlement. New York State Supreme Court Justice Barbara Kapnick will hear final objections to that settlement in May.

 

http://newsandinsight.thomsonreuters.com/Legal/News/2012/08_-_August/Are_megabucks_MBS_breach-of-contract_settlements_in_the_offing_/

 

Thanks

[kevin4u2]

FYI, regarding the federal lawsuits- the rate of successful appeals in federal courts is pretty low- ~13%. I guess federal judges are not really revolutionary people.

http://www.cafc.uscourts.gov/images/stories/the-court/statistics/Appeals_Filed_Term_Pend_2011.pdf

 

More statistics here:

http://www.cafc.uscourts.gov/the-court/statistics.html

 

About the state litigation and the de facto merger test- isn't the risk here pretty low? It applies only if New York will be the chosen jurisdiction AND they decide to apply the de facto merger test AND they find it applies in BAC's case, which in itself is unlikely. The tests in the de facto merger doctrine are:

 

1. continuity of ownership;

2. the seller ceasing ordinary business operations and dissolving as soon as possible after

the transaction;

3. the buyer assuming liabilities ordinarily necessary to continue the seller’s business

uninterrupted; and

4. the buyer continuing the successor’s management, personnel, physical location, assets

and general business operation

 

And as discussed here: http://www.cwrmbssettlement.com/docs/Opinion%20Regarding%20Corporate%20Separateness.pdf

There doesn't seem to be a very strong case against BAC, even in New York.

 

Arden, your absolutely right.  Limited liability laws have existed for a long time and for good reason.  Thus I don't give this lawsuit a very high probablility of success.     

[MrB]

Citigroup to settle MBS suit for $24.9 mln

 

http://in.reuters.com/article/2012/08/27/citigroup-mbs-settlement-idINL1E8JRGGD20120827

[enoch01]

Citigroup to settle MBS suit for $24.9 mln

 

http://in.reuters.com/article/2012/08/27/citigroup-mbs-settlement-idINL1E8JRGGD20120827

 

1.3 cents on the dollar - an interesting data point

[nkp007]

At 1.3 cents on the dollar, I'd be selling these settlements all day long.

[xazp]

I'm trying to track down BAC's progress on the foreclosure settlement.  A number of articles said that BofA was lagging others.  If I'm understanding the settlement provisions (and I may not be), then all the banks are actually making very good progress. 

 

BAC's portion of the settlement is they need to provide $8.6Bn of relief, beyond $3.24Bn of cash they've already disbursed. 

 

http://www.businessweek.com/news/2012-08-29/bofa-says-borrower-relief-under-u-dot-s-dot-deal-reaches-8-dot-1-billion

BAC says as of last week:

$5.8 billion in short sales completed

$596 million in first-lien loan modifications finished

$1.7 billion in forgiveness on home-equity lines of credit

 

What complicates the matter is that the different classes of relief have a different mulitplier towards the total.  I think I read somewhere that short sales only get a 45% credit, so the $5.8Bn = $2.6Bn of credit towards the settlement. 

 

I'm just going to pretend that the multiplier is 50% for what they've done so far, which would give you about $4Bn of the $8.6Bn settlement completed. 

 

The settlement was only approved in April, which means they seem to have gotten about half-way through the provisions in 4 months.  It kind of seems like the banks in general will have completed all the relief provisions within a year from the start date (compared to the three years they were allotted).  I'm not sure why BAC is considered lagging, but they seem ahead of schedule (as do most other banks). 

 

Anyone know the % multipliers on the various classes of relief?  That's help me see exactly where they are in relation to the settlement today. 

[dcollon]

Just a brief comment from a longer NYT article this morning as it relates to BAC's progress.

 

Dan Frahm, a spokesman for Bank of America, said the bank had made significant progress after the period covered by the report, March 1 through June 30. As of Aug. 21, he said, the bank had granted $600 million in principal reduction and had tripled the number of households in the trial period, to 16,000.

 

“We’re confident that we’re going to meet or exceed all of our commitments under this agreement within the first year,” even though the bank has three years to do so, Mr. Frahm said.

 

I attached the full article in case you want to read it.

Homeowners_See_Benefits_in_Bank_Plan_-_NYTimes.pdf

[dcollon]

xazp,

 

There is some data in the attached report related to "scores" or "credit" for each i.e. short sales, principal modifications, etc...

Servicer_Settlement.pdf

[ERICOPOLY]

A number of articles said that BofA was lagging others. 

 

Don't they just mean that they are lagging in terms of what percentage of work still needs to be done by each respective bank?

 

Given that BofA's settlement and related work load is vastly larger than similarly sized peers, wouldn't that be the expected outcome?

[xazp]

Thanks!

 

So multiplying out:

$5.8 billion in short sales completed * .45

$596 million in first-lien loan modifications finished *.6 (guess)

$1.7 billion in forgiveness on home-equity lines of credit *.9

 

= $4.5Bn

 

They're more than half-way through their total 3-year goal.  It sure seems like they'll be done quite early.  I did read these multipliers are higher in the first year after the settlement, so it behooves BAC to really focus on getting everything done within the first year. 

 

I don't think most of this "costs" BAC earnings - I think this is mostly embedded in their loss reserves already.  Like when they "forgive" a HELOC, I think that's just BAC acknowledging they're not going to get repaid because they have no collateral left on the loan. 

 

 

 

 

xazp,

 

There is some data in the attached report related to "scores" or "credit" for each i.e. short sales, principal modifications, etc...

[FCharlie]

Changing the subject slightly, What are the opinions of the board on how low BAC will take their long-term debt?? Currently costing about $2 billion per quarter in interest expense.

 

 

Historical Long-Term Debt:

 

Q3 2010 $479 billion

Q4 2010 $448 billion

Q1 2011 $434 billion

Q2 2011 $427 billion

Q3 2011 $399 billion

Q4 2011 $372 billion

Q1 2012 $355 billion

Q2 2012 $302 billion

[PlanMaestro]

Changing the subject slightly, What are the opinions of the board on how low BAC will take their long-term debt?? Currently costing about $2 billion per quarter in interest expense.

 

With Loans to Deposits around 70 and Loans to Core Deposits around 80, it is more of a question of maturities, call opportunities, and opportunistic open market buys. They have the liquidity and the low funding costs  to retire all the debt they wanted, but also the expensive preferreds and more.

[PlanMaestro]

Trading Assets

 

Institution 2012      Q2 Amount        Q on Q Growth  Perc

Bank of America 77,954,029,000 10,924,220,000 16.30

Citigroup                 170,959,128,000 10,156,453,000 6.32

JPMorgan Chase 287,301,000,000 -39,638,000,000 -12.12

Wells Fargo      42,549,000,000 -7,731,000,000 -15.3

Total                578,763,157,000 -26,288,327,000 -4.34

[Arden]

I find this interesting- analyst predictions for BAC. for comparison, I've added WFC's analyst predictions as well.

I find analysts are pretty good at these things. You should ignore all the "buy,hold sell" BS,- that's just politics, but they're mostly pretty damn close with earning predictions. Think about it- it's pretty shocking if a company you hold's earnings are off by more than 10c from what analysts expected- maybe it's a wisdom of the crowds thing- especially if you have 32 analysts following the company. That said, maybe one should adjust for a slight optimism, but on the other hand, companies do that for us- companies tend to mislead analysts to thinking their earnings will be slightly lower than the truth so they could "beat the estimate".

 

http://www.smartmoney.com/quote/bac/?story=earningsforecast

 

http://www.smartmoney.com/quote/WFC/?story=earningsForecast

[Uccmal]

I would think as per Plan Maestro that BAC will move more toward retiring expensive debt in favour of issuing cheaper debt.  Ay some point there is no sense in reducing overall debt levels. 

 

Either way, interest costs will come down steadily for awhile, which of course generates more cash.  As interest rates rise back up the spreads will increase.  That is when the really obscene profits will start to appear. 

[xazp]

FWIW I like the nasdaq earnings estimates which go out further (though, fewer analysts produce 2014+ estimates). 

http://www.nasdaq.com/symbol/bac/earnings-forecast

http://www.nasdaq.com/symbol/wfc/earnings-forecast

 

BAC:  .55, .93, 1.36

WFC: 3.32, 3.64, 4.02

 

 

I find this interesting- analyst predictions for BAC. for comparison, I've added WFC's analyst predictions as well.

I find analysts are pretty good at these things. You should ignore all the "buy,hold sell" BS,- that's just politics, but they're mostly pretty damn close with earning predictions. Think about it- it's pretty shocking if a company you hold's earnings are off by more than 10c from what analysts expected- maybe it's a wisdom of the crowds thing- especially if you have 32 analysts following the company. That said, maybe one should adjust for a slight optimism, but on the other hand, companies do that for us- companies tend to mislead analysts to thinking their earnings will be slightly lower than the truth so they could "beat the estimate".

 

http://www.smartmoney.com/quote/bac/?story=earningsforecast

 

http://www.smartmoney.com/quote/WFC/?story=earningsForecast

[Arden]

Thanks xazp, looks great.

[vinod1]

I find this interesting- analyst predictions for BAC. for comparison, I've added WFC's analyst predictions as well.

I find analysts are pretty good at these things. You should ignore all the "buy,hold sell" BS,- that's just politics, but they're mostly pretty damn close with earning predictions. Think about it- it's pretty shocking if a company you hold's earnings are off by more than 10c from what analysts expected- maybe it's a wisdom of the crowds thing- especially if you have 32 analysts following the company. That said, maybe one should adjust for a slight optimism, but on the other hand, companies do that for us- companies tend to mislead analysts to thinking their earnings will be slightly lower than the truth so they could "beat the estimate".

 

http://www.smartmoney.com/quote/bac/?story=earningsforecast

 

http://www.smartmoney.com/quote/WFC/?story=earningsForecast

 

Analysts are pretty good at the next 3-6 months and at most for the next year. All the other longer term estimates get very heavily revised as time progresses. So I would not place much faith in their far out projections.

 

Vinod

[Arden]

For how long can the warrants rise less than the stock? this makes no sense to me.

 

I calculate it should rise (and fall) by about 2X the share.

[nkp007]

It's not perfectly liquid so it'll bounce around a bit more irrationally. I think the outstanding float on the $13.30s is probably ~$500 million, so it's not like any major funds can hold a major stake that matters.

 

 

[MYDemaray]

For how long can the warrants rise less than the stock? this makes no sense to me.

 

I calculate it should rise (and fall) by about 2X the share.

 

Really?  The delta of an ATM option is 0.50 (implying $0.50 move for every $1.00 in the underlying).  Delta moves towards 1 as option goes in the money.  Given that these are 1.) out of the money and 2.) warrants, one would expect the delta to be below $0.50.  (of course, I am speaking in dollar terms not percentages...maybe you are talking about percentages?)

[obtuse_investor]

For how long can the warrants rise less than the stock? this makes no sense to me.

 

I calculate it should rise (and fall) by about 2X the share.

 

I think the A warrants are fairly valued, in spite of their low volume. Since the start of the year, the volatility of BAC commons has dropped significantly (see attached BAC volatility over last 52 weeks). This reduces the value of the options/warrants based on the Black Scholes.

 

Hence, much to my discontent, I deduce that BAC warrants are fairly priced considering how misguided Black Scholes is for long dated instruments.