BAC-WT - Bank of America Warrants

[ERICOPOLY]

The DTA is very useful.  You have these "unknown" legal hurdles, but the DTA is large enough to offset about $20b pre-tax worth of legal issues.  That covers the $6b potential maximum from the R&W, and this latest $1b lawsuit, and about $13b more on top of that.  That "should" cover it -- so one can look to the after-tax earnings as distributable to shareholders now that the 9% B3 has been met, and "maybe" some of the DTA will eventually get paid out too as it is monetized in excess of these legal hits.

 

But wait, there's more.  The company is also discounted $122b after-tax below book value (about $170b worth of pre-tax earnings).  Part of that is the DTA.

 

Fine, I get it... there will be some unknown charges.  However this discount is ridiculous.  There is no way they are going to under-earn by $170b.

 

Perhaps it's like Berkowitz said and investors just believe that management is fibbing.

[meiroy]

 

Hmm I don't think the MOS is that big as you put it. I mean, if you just look at book, and actually consider it like that, it's more of a cigar butt thing, isn't it? Surely people invest in this for the turn around and future earnings and not just discount to book.  All the liability will have to be paid in cash, so if for example there's a new 20b liability tomorrow which they have to pay for the hit would actually be over 20b. They'd have to sell some assets for it in the current market.  Not to mention if that's not TGB , surely we shouldn't calculate it like that. Anyhow, I think this is how people are looking at it. That CW skeleton is awfully big. I mean, the risk:reward here is worth it, it's just not that clear cut.

 

[Parsad]

 

Hmm I don't think the MOS is that big as you put it. I mean, if you just look at book, and actually consider it like that, it's more of a cigar butt thing, isn't it? Surely people invest in this for the turn around and future earnings and not just discount to book.  All the liability will have to be paid in cash, so if for example there's a new 20b liability tomorrow which they have to pay for the hit would actually be over 20b. They'd have to sell some assets for it in the current market.  Not to mention if that's not TGB , surely we shouldn't calculate it like that. Anyhow, I think this is how people are looking at it. That CW skeleton is awfully big. I mean, the risk:reward here is worth it, it's just not that clear cut.

 

It is actually far more clear cut than the market realizes.  The market is assuming that no new loans or earnings are coming onto the books replacing the legacy assets.  They are viewing BAC as stagnant, not evolving.  Markets are blind to change until the bulk of the transformation is complete.  Cheers!

[StubbleJumper]

Hi Eric

Thanks for the information.

 

No problem.  Actually, the 300 million per quarter that Brian talks about is for their "core" LAS normalized non-interest expense, and doesn't include litigation expenses.

 

The past 4 quarters the total LAS non-interest expense (inclusive of litigation expense) was:

$3.441b in q3 '12  (includes 400m of litigation expense)

$2.8b in q2 '12  (includes 200m of litigation expense)

$3b in q1 '12    (includes 300m of litigation expense)

$3.496b in q4 '11  (includes 1.5b of litigation expense)

 

$12.737b total LAS non-interest expense for trailing twelve months

 

$10.337b "core" LAS non-interest expense (excluding litigation expense)

 

This $10.337b number is the one that will come down to $1.2b a year per the 300m per quarter estimate that Brian gave.

 

The $2.4b annual LAS legal expense will come down to how much?

 

 

So, like, in other words, it's a buck per share.  On a security that trades at ~$9.XX.sh.  Why should we be excited about that?  ::) ::) ::) ::)

[MYDemaray]

So, like, in other words, it's a buck per share.  On a security that trades at ~$9.XX.sh.  Why should we be excited about that?  ::) ::) ::) ::)

 

Put a multiple on it...

[StubbleJumper]

So, like, in other words, it's a buck per share.  On a security that trades at ~$9.XX.sh.  Why should we be excited about that?  ::) ::) ::) ::)

 

Put a multiple on it...

 

 

Sarcasm, my friend.

[vinod1]

Hi Eric

Thanks for the information.

 

No problem.  Actually, the 300 million per quarter that Brian talks about is for their "core" LAS normalized non-interest expense, and doesn't include litigation expenses.

 

The past 4 quarters the total LAS non-interest expense (inclusive of litigation expense) was:

$3.441b in q3 '12  (includes 400m of litigation expense)

$2.8b in q2 '12  (includes 200m of litigation expense)

$3b in q1 '12    (includes 300m of litigation expense)

$3.496b in q4 '11  (includes 1.5b of litigation expense)

 

$12.737b total LAS non-interest expense for trailing twelve months

 

$10.337b "core" LAS non-interest expense (excluding litigation expense)

 

This $10.337b number is the one that will come down to $1.2b a year per the 300m per quarter estimate that Brian gave.

 

The $2.4b annual LAS legal expense will come down to how much?

 

I think with Jan 1, 2012 reorg the numbers need to be adjusted. Previously LAS used to service only legacy part of the servicing portfolio. See page 37 of 2Q, 2012. "Effective January 1, 2012, servicing activities previously recorded in Home Loans were moved to Legacy Assets & Servicing...." It looks like the new combined normalized quarterly run rate  cost is $500 million and savings seem to be about $10 billion. See comments below from 3Q conf call. Minor change but adds a $1 billion to the overall savings :)

 

Matt O'Connor - Deutsche Bank

And maybe I’ll just toss some numbers out there, you are at $12 billion annual run rate right now, I feel like at one point you said $2 billion could be a more sustainable level as you move through all this, so that's a $10 billion decline. Any guess on, does it take two years to get through that, is it five years to get through that?

Bruce Thompson - CFO

I think we would look at it and say ‘13 and into ‘14 it would be through that base, and I think we noted that.

But again, that’s subject to caveat and something change in rules, something change in the rules, but right now as we said, we would expect that as we move through next year, the year end numbers would still be elevated, but as we move into ‘14, you would see them come down to more normalized levels.

 

Vinod

 

[mankap]

I agree that the saving no. for Non interest expense for Legacy assets could be close to $10B in two years.

New BAC will also have savings probably for Legacy Loans also.

Will New BAC programme contribute to additional savings in Legacy Non Interest expense also?

[nkp007]

Not sure if this has been posted before, but Greg Farrell's Crash of the Titans is a fantastic book on Bank of America and the Merrill Lynch growth engine. It's brilliantly written and gives great perspective on the strength of the BAC franchise (underneath the current litigation) and the key players (some of who are running the company today!).

 

[amazonsearch]Crash of the Titans - Merrill Near Collapse America[/amazonsearch]

 

Highly recommended if you have a significant stake in Bank of America.

[ERICOPOLY]

Hmm I don't think the MOS is that big as you put it. I mean, if you just look at book, and actually consider it like that, it's more of a cigar butt thing, isn't it? Surely people invest in this for the turn around and future earnings and not just discount to book.

 

The book value has a very large goodwill item in it.  Therefore, it is implicit in my message that I am valuing it as a going concern when I mention book value.  I think it's probably worth more than that but I'm keeping it simple.

 

All the liability will have to be paid in cash, so if for example there's a new 20b liability tomorrow which they have to pay for the hit would actually be over 20b. They'd have to sell some assets for it in the current market. 

 

There are no liabilities that are to be paid tomorrow for 20b in cash in excess of current reserves.

 

Not to mention if that's not TGB , surely we shouldn't calculate it like that. Anyhow, I think this is how people are looking at it. That CW skeleton is awfully big. I mean, the risk:reward here is worth it, it's just not that clear cut.

 

It's only 6b more in the R&W bucket -- unless management is fibbing.

 

They are fully at 9% B3 today.  Anything earned in excess of this can be dividended up to the parent to pay any legal claims of CW. 

 

A company earning $2 per share with a 10x multiple is worth $20.  Funny, that's what the goodwill says it's worth.  Coincidence?  I think not.

 

[fareastwarriors]

Not sure if this has been posted before, but Greg Farrell's Crash of the Titans is a fantastic book on Bank of America and the Merrill Lynch growth engine. It's brilliantly written and gives great perspective on the strength of the BAC franchise (underneath the current litigation) and the key players (some of who are running the company today!).

 

[amazonsearch]Crash of the Titans - Merrill Near Collapse America[/amazonsearch]

 

Highly recommended if you have a significant stake in Bank of America.

 

just bought it, thanks

[kevin4u2]

Just to clarify also, they DTA is a huge upside not being considered. 

 

Consider the normal scenario where the company earns $1 per share (EBT).  They would pay roughly $0.35/shr in taxes (at 35%), and this would leave $0.65/shr in net income (NI) after tax. 

 

Now with the huge DTA, NI = EBT.  If they earn $1 in EBT and taxes are zero, the NI would be $1.  This is basically an boost of 53% to earnings going forward after these legacy issues are resolved.  ($1/$0.65 => 53% higher than normal ). 

 

So if BAC can earn $2 in a normal earnings environment they will earn $3 due to the DTA. 

 

As a side note:  There are a number of companies with DTA's that are not on the balance sheet due to uncertainties in future earnings.  Some of these are larger than book value for these companies.  If/when the earnings turn positive they will put the DTA back on the balance sheet these companies will be heading higher.   

[MrB]

Any recommendations on the following books?

 

[amazonsearch]Biography of a Bank:  The Story of Bank of America[/amazonsearch]

 

[amazonsearch]The Tumultuous History of Bank of America[/amazonsearch]

 

[amazonsearch]Bank America of Louisiana[/amazonsearch]

 

[amazonsearch]Robot Notary Public at the Bank America[/amazonsearch]

[ERICOPOLY]

Just to clarify also, they DTA is a huge upside not being considered. 

 

Consider the normal scenario where the company earns $1 per share (EBT).  They would pay roughly $0.35/shr in taxes (at 35%), and this would leave $0.65/shr in net income (NI) after tax. 

 

Now with the huge DTA, NI = EBT.  If they earn $1 in EBT and taxes are zero, the NI would be $1.  This is basically an boost of 53% to earnings going forward after these legacy issues are resolved.  ($1/$0.65 => 53% higher than normal ). 

 

So if BAC can earn $2 in a normal earnings environment they will earn $3 due to the DTA. 

 

As a side note:  There are a number of companies with DTA's that are not on the balance sheet due to uncertainties in future earnings.  Some of these are larger than book value for these companies.  If/when the earnings turn positive they will put the DTA back on the balance sheet these companies will be heading higher. 

 

The DTA, when monetized, will boost future pre-tax distributable "earnings" (it won't be called earnings) by a total of $20b-$23b.

 

I believe it was valued at about $15b after-tax in the most recently filed 10-Q, or about $1.30 per share.

 

Enough to pad the numbers for the remaining potential legal reserve increases, temporarily elevated operating expense, and perhaps a little left over.

 

Thus the stock should really already be trading at book value without a discount.

 

 

 

 

[MYDemaray]

So, like, in other words, it's a buck per share.  On a security that trades at ~$9.XX.sh.  Why should we be excited about that?  ::) ::) ::) ::)

 

Put a multiple on it...

 

 

Sarcasm, my friend.

 

Fair enough.  Hard to know sometimes on these message boards.

[hardincap]

My understanding is that stress tests will occur early next year, not this year? I dont see any other catalyst for stock movement. 4th quarter results will be out in mid Jan, not december.

 

I don't expect the price to move all that much. $12 is way too optimistic given how much legal uncertainty still hangs over BAC. It doesnt matter what management says it will cost.. lets see these cases actually get resolved.

 

 

Must say to anyone watching the screen today the outperformance is becoming more noticeable on BAC. A technical break above $9.60 this week sends us to $10 in a jiffy.

 

Moore, you are so smart, why even throw around the technical mumbo-jumbo!  ;D  It's going to $10 regardless, break out or not. 

 

And it will hit $12 by Christmas...again, no technical mumbo-jumbo, just the plain fact that they should have a good stress test, 4th quarter, and there is no reason why it shouldn't be close to TBV. 

 

Speaking of technical analysis, are you going to the Jefferson Conference in New Orleans this week.  My partner Alnesh has to go, as he is CFO on a couple of junior resource companies, but I looked at the list of speakers and just shook my head.  I would be pulling my hair out listening to many of the speakers there.  Cheers!

[benchmark]

My understanding is that stress tests will occur early next year, not this year? I dont see any other catalyst for stock movement. 4th quarter results will be out in mid Jan, not december.

 

I don't expect the price to move all that much. $12 is way too optimistic given how much legal uncertainty still hangs over BAC. It doesnt matter what management says it will cost.. lets see these cases actually get resolved.

 

 

Must say to anyone watching the screen today the outperformance is becoming more noticeable on BAC. A technical break above $9.60 this week sends us to $10 in a jiffy.

 

Moore, you are so smart, why even throw around the technical mumbo-jumbo!  ;D  It's going to $10 regardless, break out or not. 

 

And it will hit $12 by Christmas...again, no technical mumbo-jumbo, just the plain fact that they should have a good stress test, 4th quarter, and there is no reason why it shouldn't be close to TBV. 

 

Speaking of technical analysis, are you going to the Jefferson Conference in New Orleans this week.  My partner Alnesh has to go, as he is CFO on a couple of junior resource companies, but I looked at the list of speakers and just shook my head.  I would be pulling my hair out listening to many of the speakers there.  Cheers!

 

That's what I am afraid as well, which means that I might have to take a loss on those Jan 14 $10 options :(

[ECCO]

My understanding is that stress tests will occur early next year, not this year? I dont see any other catalyst for stock movement. 4th quarter results will be out in mid Jan, not december.

 

I don't expect the price to move all that much. $12 is way too optimistic given how much legal uncertainty still hangs over BAC. It doesnt matter what management says it will cost.. lets see these cases actually get resolved.

 

 

Must say to anyone watching the screen today the outperformance is becoming more noticeable on BAC. A technical break above $9.60 this week sends us to $10 in a jiffy.

 

Moore, you are so smart, why even throw around the technical mumbo-jumbo!  ;D  It's going to $10 regardless, break out or not. 

 

And it will hit $12 by Christmas...again, no technical mumbo-jumbo, just the plain fact that they should have a good stress test, 4th quarter, and there is no reason why it shouldn't be close to TBV. 

 

Speaking of technical analysis, are you going to the Jefferson Conference in New Orleans this week.  My partner Alnesh has to go, as he is CFO on a couple of junior resource companies, but I looked at the list of speakers and just shook my head.  I would be pulling my hair out listening to many of the speakers there.  Cheers!

 

That's what I am afraid as well, which means that I might have to take a loss on those Jan 14 $10 options :(

 

Do you really mean 2014 or 2013?  Dont think JAN14 10$ will be out of money in jan2014.

[benchmark]

Do you really mean 2014 or 2013?  Dont think JAN14 10$ will be out of money in jan2014.

oops, Jan 13 :(

[kevin4u2]

Just to clarify also, they DTA is a huge upside not being considered. 

 

Consider the normal scenario where the company earns $1 per share (EBT).  They would pay roughly $0.35/shr in taxes (at 35%), and this would leave $0.65/shr in net income (NI) after tax. 

 

Now with the huge DTA, NI = EBT.  If they earn $1 in EBT and taxes are zero, the NI would be $1.  This is basically an boost of 53% to earnings going forward after these legacy issues are resolved.  ($1/$0.65 => 53% higher than normal ). 

 

So if BAC can earn $2 in a normal earnings environment they will earn $3 due to the DTA. 

 

As a side note:  There are a number of companies with DTA's that are not on the balance sheet due to uncertainties in future earnings.  Some of these are larger than book value for these companies.  If/when the earnings turn positive they will put the DTA back on the balance sheet these companies will be heading higher. 

 

The DTA, when monetized, will boost future pre-tax distributable "earnings" (it won't be called earnings) by a total of $20b-$23b.

 

I believe it was valued at about $15b after-tax in the most recently filed 10-Q, or about $1.30 per share.

 

Enough to pad the numbers for the remaining potential legal reserve increases, temporarily elevated operating expense, and perhaps a little left over.

 

Thus the stock should really already be trading at book value without a discount.

 

That is exactly right Eric and I didn't explain that well.  When I talk earnings, I talk about earnings I can put in my pocket. 

[ERICOPOLY]

Hi Eric

Thanks for the information.

 

No problem.  Actually, the 300 million per quarter that Brian talks about is for their "core" LAS normalized non-interest expense, and doesn't include litigation expenses.

 

The past 4 quarters the total LAS non-interest expense (inclusive of litigation expense) was:

$3.441b in q3 '12  (includes 400m of litigation expense)

$2.8b in q2 '12  (includes 200m of litigation expense)

$3b in q1 '12    (includes 300m of litigation expense)

$3.496b in q4 '11  (includes 1.5b of litigation expense)

 

$12.737b total LAS non-interest expense for trailing twelve months

 

$10.337b "core" LAS non-interest expense (excluding litigation expense)

 

This $10.337b number is the one that will come down to $1.2b a year per the 300m per quarter estimate that Brian gave.

 

The $2.4b annual LAS legal expense will come down to how much?

 

I think with Jan 1, 2012 reorg the numbers need to be adjusted. Previously LAS used to service only legacy part of the servicing portfolio. See page 37 of 2Q, 2012. "Effective January 1, 2012, servicing activities previously recorded in Home Loans were moved to Legacy Assets & Servicing...." It looks like the new combined normalized quarterly run rate  cost is $500 million and savings seem to be about $10 billion. See comments below from 3Q conf call. Minor change but adds a $1 billion to the overall savings :)

 

Matt O'Connor - Deutsche Bank

And maybe I’ll just toss some numbers out there, you are at $12 billion annual run rate right now, I feel like at one point you said $2 billion could be a more sustainable level as you move through all this, so that's a $10 billion decline. Any guess on, does it take two years to get through that, is it five years to get through that?

Bruce Thompson - CFO

I think we would look at it and say ‘13 and into ‘14 it would be through that base, and I think we noted that.

But again, that’s subject to caveat and something change in rules, something change in the rules, but right now as we said, we would expect that as we move through next year, the year end numbers would still be elevated, but as we move into ‘14, you would see them come down to more normalized levels.

 

Vinod

 

Thanks for explaining what was going on there.

 

Hey, there's $1b annuity that's fallen behind the cushions on my couch.

 

[Uccmal]

I have really enjoyed reading the last few pages of this post.  Very insightful.  Thanks guys.

 

Another insight concerns Merril Lynch.  I have noticed that UBS, and Royal Bank of Scotland, are cutting way down on Investment banking.  There are probably others of which I am not aware.  This may well leave something of a vacuum to be filled.  BAC is clearly aiming to keep ML as strong as possible, as evidenced by the recent pillage from MS. 

[Kraven]

I have really enjoyed reading the last few pages of this post.  Very insightful.  Thanks guys.

 

Another insight concerns Merril Lynch.  I have noticed that UBS, and Royal Bank of Scotland, are cutting way down on Investment banking.  There are probably others of which I am not aware.  This may well leave something of a vacuum to be filled.  BAC is clearly aiming to keep ML as strong as possible, as evidenced by the recent pillage from MS.

 

I believe those moves are all on the brokerage side, not the investment banking side.  Investment banks are like lemmings, they all do what the others do.  If a couple are making cuts, guaranteed they will all be making cuts.  Business is business and typically it's the proverbial rising tide lifts all boats.  Rarely is one investment bank going to do well while others are starved for business.

[xazp]

Good conversation tonight.  A couple comments on various posts:

 

1)  For me, the most important metric for banks is capital levels/generation, because that number feeds into CCAR and governs what a bank can "put in your pocket."  Earnings don't reflect the DTAs, but capital generation gets the +50% multiplier on earnings from those DTAs. 

 

2)  The $6Bn in R&W represents what BAC says is the "worst case."  I view it a little bit like a bid/ask number.  When BAC says the "worst case" is a billion dollars to the GSE, I think that reflects something like what the GSEs have asked to settle their remaining issues.  BAC puts the non-GSEs at $5Bn, and the GSEs at $1Bn.

 

Their current reserves are supposed to reflect the "probable case."  It takes as much art as science to decipher whether their "probable case" is at all realistic; in the past, that number has not proven reliable.  Eventually it will converge as settlements occur and litigation resolved.  So there is a big ? as to what the "actual case" is going to be relative to the "probable case." 

 

3)  Settlement w/ a number of parties.  Just a guess, but I don't actually think BAC settled for anything above their current reserves.  The lawsuits were going poorly for the plaintiffs with all the federal claims tossed on statute of limitations.  Their remaining chance was NY state fraud, which is difficult to prove.  My guess is they simply settled for the same amount they would receive in the $8.5Bn settlement; they just get the amount earlier and with more certainty than other parties.  But, hopefully, everyone's legal costs go down after this. 

 

4)  UBS - whoops.  They picked off one of BAC's rainmakers (Orcel) with promises of growing the investment bank and glory.  Now he's the one laying everyone off. 

 

The general way I think banking proceeds is that most banks exit their least profitable businesses which corresponds to areas that consume lots of capital but don't deliver high profits.  This often has to do with scale, for example.  So you see BAC exiting certain parts of the mortgage sector, you see UBS exiting some of their FICC business, you see European banks exiting some trade financing, Santandar IPO'ing its mexican business, etc.  The remaining banks that aren't exiting those businesses see higher margins/profits in those sectors. 

 

The European banks are in a lot of turmoil for obvious reasons, and I think their governments are pressuring them to look "inward" - to supply credit and jobs to their home country.  This has the impact of having the European banks withdraw from other areas - trade finance, global banking, etc.  I think the U.S. banks are moving in as the European banks necessarily contract in certain areas.

 

 

 

[meiroy]

I have really enjoyed reading the last few pages of this post.  Very insightful.  Thanks guys.

 

Another insight concerns Merril Lynch.  I have noticed that UBS, and Royal Bank of Scotland, are cutting way down on Investment banking.  There are probably others of which I am not aware.  This may well leave something of a vacuum to be filled.  BAC is clearly aiming to keep ML as strong as possible, as evidenced by the recent pillage from MS.

 

I believe those moves are all on the brokerage side, not the investment banking side.  Investment banks are like lemmings, they all do what the others do.  If a couple are making cuts, guaranteed they will all be making cuts.  Business is business and typically it's the proverbial rising tide lifts all boats.  Rarely is one investment bank going to do well while others are starved for business.

 

Kraven, very interesting comment.  Could you please elaborate?