BAC-WT - Bank of America Warrants

[Parsad]

bac b warrant pricing continues to confound me. it is at .65, the same price when the stock was at $7 in July. but the stock is now at $9 and the warrants are still stuck at .65. anyone know whats up with that?

 

b warrants are too much leverage for me--maybe there's just not enough people interested in them?

 

I agree with hardincap: most likely not enough volume for the prices to be liquid.

 

You also have the time arbitrage involved in the valuation, so it is not going to move as much since the exercise price is very, very high and the length of time to exercise is decreasing.  Cheers!

[matjone]

what do you type into on sec to pull up the prospectus for these warrants?

[kevin4u2]

bac b warrant pricing continues to confound me. it is at .65, the same price when the stock was at $7 in July. but the stock is now at $9 and the warrants are still stuck at .65. anyone know whats up with that?

 

You cannot value these as regular warrants or as options.  There are a number of variables at play, most importantly when and how much dividends will be.  You have to create your own DCF model to accurately value.  Other inputs include growth rates, returns on capital, and what the stock price will be in 2019.  Today people believe interest rates will be lower for a longer time, which have an impact.  The assumptions of investors have likely changed.  The comments about liquidity are also valid. 

[Parsad]

Another article that gets the information wrong:

 

http://www.bloomberg.com/news/2012-09-26/u-s-banks-leverage-should-be-halved-to-cut-risks-bair-says.html?cmpid=yhoo

 

Using Basel’s narrower capital definition, the two largest U.S. banks would have to raise about $100 billion of capital to comply with Bair’s leverage recommendation. JPMorgan Chase & Co. (JPM) would have a leverage ratio of 5.8 percent under the new capital definition, and No. 2 Bank of America Corp.’s would be 5.9 percent. Neither bank has yet reported what their ratios would be under the new Basel method of calculating assets.

 

I can't speak for JPM, but BAC in their 2nd Q earnings release said:

 

http://newsroom.bankofamerica.com/press-release/corporate-and-financial-news/bank-america-reports-second-quarter-2012-net-income-25-bi

 

Tier 1 Common Capital Ratio Under Basel 3 Estimated at 8.10 Percent at June 30, 2012

 

Cheers!

[LC]

what do you type into on sec to pull up the prospectus for these warrants?

 

not sure, but my google-fu got me here:

http://www.sec.gov/Archives/edgar/data/70858/000119312510044940/d424b7.htm#toc

[matjone]

yeah every time I go to look them up I have to google it and sift through the results. I used to have all the important stuff highlighted on a kindle document if I wanted to reference it.  Then my kindle quit charging so I can't access it anymore.

[fareastwarriors]

http://www.bloomberg.com/news/2012-09-25/fed-helps-lenders-profit-more-than-homebuyers-mortgages.html

 

 

[Mephistopheles]

what do you type into on sec to pull up the prospectus for these warrants?

 

Type in '424B7'. It works for some of the other bank warrants too; at least WFC and JPM.

[Rabbitisrich]

Another article that gets the information wrong:

 

http://www.bloomberg.com/news/2012-09-26/u-s-banks-leverage-should-be-halved-to-cut-risks-bair-says.html?cmpid=yhoo

 

Using Basel’s narrower capital definition, the two largest U.S. banks would have to raise about $100 billion of capital to comply with Bair’s leverage recommendation. JPMorgan Chase & Co. (JPM) would have a leverage ratio of 5.8 percent under the new capital definition, and No. 2 Bank of America Corp.’s would be 5.9 percent. Neither bank has yet reported what their ratios would be under the new Basel method of calculating assets.

 

 

Unbelievable!

[ERICOPOLY]

Another article that gets the information wrong:

 

http://www.bloomberg.com/news/2012-09-26/u-s-banks-leverage-should-be-halved-to-cut-risks-bair-says.html?cmpid=yhoo

 

Using Basel’s narrower capital definition, the two largest U.S. banks would have to raise about $100 billion of capital to comply with Bair’s leverage recommendation. JPMorgan Chase & Co. (JPM) would have a leverage ratio of 5.8 percent under the new capital definition, and No. 2 Bank of America Corp.’s would be 5.9 percent. Neither bank has yet reported what their ratios would be under the new Basel method of calculating assets.

 

 

Unbelievable!

 

They weren't very clear, but perhaps they meant it in the context of another line in the preceeding paragraph:

 

The new method would increase the balance sheets of U.S. banks because of differences in how derivatives are treated.

[MrB]

Another article that gets the information wrong:

 

http://www.bloomberg.com/news/2012-09-26/u-s-banks-leverage-should-be-halved-to-cut-risks-bair-says.html?cmpid=yhoo

 

Using Basel’s narrower capital definition, the two largest U.S. banks would have to raise about $100 billion of capital to comply with Bair’s leverage recommendation. JPMorgan Chase & Co. (JPM) would have a leverage ratio of 5.8 percent under the new capital definition, and No. 2 Bank of America Corp.’s would be 5.9 percent. Neither bank has yet reported what their ratios would be under the new Basel method of calculating assets.

 

 

Unbelievable!

 

They weren't very clear, but perhaps they meant it in the context of another line in the preceeding paragraph:

 

The new method would increase the balance sheets of U.S. banks because of differences in how derivatives are treated.

 

The sentiment is interesting and I'm all for upping the equity component. However, I just do not see it fly in the face of a Fed that is hell bent on getting lending moving again.

As for Europe; they just don't have da money

 

Either way I see it as a win-win for BAC and the other large banks that are close or at Basel lll

Raising the bar will rid them of competition and if not then capital will be returned sooner.

[ERICOPOLY]

Here is an article that tries to explain it:

 

http://www.nakedcapitalism.com/2012/06/simon-johnson-jp-morgan-at-risk-if-euro-breaks-up.html

 

JPMorgan’s total balance sheet is valued, under U.S. accounting standards, at about $2.3 trillion. But U.S. rules allow a more generous netting of derivatives — offsetting long with short positions between the same counterparties — than European banks are allowed. The problem is that the netting effect can be overstated because derivatives contracts often don’t offset each other precisely.

 

...

 

According to my calculations with John Parsons, a senior lecturer at MIT and a derivatives expert, JPMorgan’s balance sheet using the European method isn’t $2.3 trillion but closer to $4 trillion. That would make it the largest bank in the world.

[Parsad]

Another article that gets the information wrong:

 

http://www.bloomberg.com/news/2012-09-26/u-s-banks-leverage-should-be-halved-to-cut-risks-bair-says.html?cmpid=yhoo

 

Using Basel’s narrower capital definition, the two largest U.S. banks would have to raise about $100 billion of capital to comply with Bair’s leverage recommendation. JPMorgan Chase & Co. (JPM) would have a leverage ratio of 5.8 percent under the new capital definition, and No. 2 Bank of America Corp.’s would be 5.9 percent. Neither bank has yet reported what their ratios would be under the new Basel method of calculating assets.

 

 

Unbelievable!

 

They weren't very clear, but perhaps they meant it in the context of another line in the preceeding paragraph:

 

The new method would increase the balance sheets of U.S. banks because of differences in how derivatives are treated.

 

Perhaps, but the U.S. has not passed any tighter restrictions yet...so for all intents and purposes, calculations should be based on existing U.S. & Basel III standards.  If and when they do, that may require additional capital, but I think the article is misleading at this point.  Banks have until 2019 to complete fully-phased in Basel III requirements, including the 2.5% buffer for large institutions.  It's friggin' 2012!  Cheers!

[ERICOPOLY]

Another article that gets the information wrong:

 

http://www.bloomberg.com/news/2012-09-26/u-s-banks-leverage-should-be-halved-to-cut-risks-bair-says.html?cmpid=yhoo

 

Using Basel’s narrower capital definition, the two largest U.S. banks would have to raise about $100 billion of capital to comply with Bair’s leverage recommendation. JPMorgan Chase & Co. (JPM) would have a leverage ratio of 5.8 percent under the new capital definition, and No. 2 Bank of America Corp.’s would be 5.9 percent. Neither bank has yet reported what their ratios would be under the new Basel method of calculating assets.

 

 

Unbelievable!

 

They weren't very clear, but perhaps they meant it in the context of another line in the preceeding paragraph:

 

The new method would increase the balance sheets of U.S. banks because of differences in how derivatives are treated.

 

Perhaps, but the U.S. has not passed any tighter restrictions yet...so for all intents and purposes, calculations should be based on existing U.S. & Basel III standards.  If and when they do, that may require additional capital, but I think the article is misleading at this point.  Banks have until 2019 to complete fully-phased in Basel III requirements, including the 2.5% buffer for large institutions.  It's friggin' 2012!  Cheers!

 

5.8% and 5.9% is also getting very precise if they were talking about new rules on derivatives -- the authors would have absolutely no idea what the numbers would be.

 

They don't use qualifiers like "roughly" or "we guess".  Where did they get the numbers from?  Both JPM and BAC readily posted the Basel III estimate.  And the banks used the term "estimate", unlike the authors of this article who are more certain.

 

[Rabbitisrich]

Rereading the article, Ericopoly is likely right. In the last conference call, Moynihan or Thompson estimated that the Basel III npr would have a negative 0.15% effect on the Tier 1 common ratio, but he didn't want to commit to a number before the finalized rulings come out.

[onyx1]

BAC settles ML shareholder lawsuit, but for an amount exceeding existing litigation reserves for this case.

 

http://newsroom.bankofamerica.com/press-release/corporate-and-financial-news/bank-america-reaches-settlement-merrill-lynch-acquisition

 

"The amount to be paid under the proposed settlement will be covered by a combination of Bank of America’s existing litigation reserves and incremental litigation expense to be recorded in the third quarter of 2012. The company estimates total litigation expense will be approximately $1.6 billion for the three months ended September 30, 2012, which includes the incremental costs of the related settlement above previous accruals and other litigation-related items.

 

Litigation expense, improvements in the company’s credit spreads and the U.K. tax charge are expected to negatively impact reported third-quarter EPS by approximately $0.28

 

In addition to the litigation expense, the company expects that its third-quarter 2012 financial results will be adversely impacted by approximately $1.9 billion (pretax) in negative fair value option (FVO) adjustments and debit valuation adjustments (DVA) related to the improvement in the company’s credit spreads, and the previously reported charge of approximately $800 million to income tax expense for changes in the U.K. corporate tax rate and the related effect on the deferred tax asset valuation."

[nkp007]

What the hell...I thought this was going to be settled for something in the realm of $20 million.

 

http://www.huffingtonpost.com/2012/04/21/bank-america-settlement-too-small_n_1442952.html

 

http://www.bloomberg.com/news/2012-04-27/bofa-s-merrill-lynch-settlement-inadequate-lawyers-contend-1-.html

[xazp]

What you are referencing is the lawsuit against the board of directors - what was settled today was the lawsuit against the company itself. 

 

What the hell...I thought this was going to be settled for something in the realm of $20 million.

 

http://www.huffingtonpost.com/2012/04/21/bank-america-settlement-too-small_n_1442952.html

 

http://www.bloomberg.com/news/2012-04-27/bofa-s-merrill-lynch-settlement-inadequate-lawyers-contend-1-.html

[enoch01]

What you are referencing is the lawsuit against the board of directors - what was settled today was the lawsuit against the company itself. 

 

What the hell...I thought this was going to be settled for something in the realm of $20 million.

 

http://www.huffingtonpost.com/2012/04/21/bank-america-settlement-too-small_n_1442952.html

 

http://www.bloomberg.com/news/2012-04-27/bofa-s-merrill-lynch-settlement-inadequate-lawyers-contend-1-.html

 

So now we know they don't have to worry about paying $50 Billion.  Here's a blast from the past:

 

http://dealbook.nytimes.com/2011/09/27/for-bank-of-america-a-looming-50-billion-claim-of-havoc/

 

[meiroy]

What you are referencing is the lawsuit against the board of directors - what was settled today was the lawsuit against the company itself. 

 

What the hell...I thought this was going to be settled for something in the realm of $20 million.

 

http://www.huffingtonpost.com/2012/04/21/bank-america-settlement-too-small_n_1442952.html

 

http://www.bloomberg.com/news/2012-04-27/bofa-s-merrill-lynch-settlement-inadequate-lawyers-contend-1-.html

 

So now we know they don't have to worry about paying $50 Billion.  Here's a blast from the past:

 

http://dealbook.nytimes.com/2011/09/27/for-bank-of-america-a-looming-50-billion-claim-of-havoc/

 

"BAC settles ML shareholder lawsuit, but for an amount exceeding existing litigation reserves for this case."

 

I'd worry about that.

[enoch01]

 

So now we know they don't have to worry about paying $50 Billion.  Here's a blast from the past:

 

http://dealbook.nytimes.com/2011/09/27/for-bank-of-america-a-looming-50-billion-claim-of-havoc/

 

"BAC settles ML shareholder lawsuit, but for an amount exceeding existing litigation reserves for this case."

 

I'd worry about that.

 

I understand the potential implications, I was just saying that this particular uncertainty has been removed.

[nkp007]

What you are referencing is the lawsuit against the board of directors - what was settled today was the lawsuit against the company itself. 

 

What the hell...I thought this was going to be settled for something in the realm of $20 million.

 

http://www.huffingtonpost.com/2012/04/21/bank-america-settlement-too-small_n_1442952.html

 

http://www.bloomberg.com/news/2012-04-27/bofa-s-merrill-lynch-settlement-inadequate-lawyers-contend-1-.html

 

Ah, I didn't understand that nuance. Yikes.

 

Here we go: http://dealbook.nytimes.com/2012/09/28/the-cost-of-putting-the-merrill-lynch-merger-behind-it/?nl=business&emc=edit_dlbkpm_20120928

[finetrader]

"BAC settles ML shareholder lawsuit, but for an amount exceeding existing litigation reserves for this case."

 

I'd worry about that.

 

When buying BAC, I add (in my mind) a 1$/share ~10B$ on the price I pay for ligitation settlement above what has been reserved for.

[xazp]

Me too.

 

Also remember, every settlement has a corresponding decrease in future litigation costs.  So BAC is averaging, say, $1Bn/quarter on lawyers.  As they finish settling the chunk of financial-crisis lawsuits, that litigation price tag should trend down to a more normalized level.  I don't know where it will settle out, but if the normalized rate is $250Mn/quarter, then you've got $3Bn/year in lower operating costs coming ...

 

"BAC settles ML shareholder lawsuit, but for an amount exceeding existing litigation reserves for this case."

 

I'd worry about that.

 

When buying BAC, I add (in my mind) a 1$/share ~10B$ on the price I pay for ligitation settlement above what has been reserved for.

[ERICOPOLY]

BAC is trading at a discount of roughly 173 billion pre-tax dollars below book value (using 28% tax rate).

 

So is there room for negative surprises?