BAC-WT - Bank of America Warrants

[ERICOPOLY]

The Buffett deal was very expensive and unnecessary;

 

Which was worse though.  Do you think it was worse than selling common at $6 last December?

 

There might have been something going on.  Perhaps they had to beef up collateral for derivatives due to the Europe scare last Fall? 

 

It's puzzling to me that they claim to have been so liquid, yet they go and sell common at $6 in order to retire TRUPS.  Are they trying to say that the TRUPS were more valuable than the common at $6?  What a message.

[PlanMaestro]

That conference call was great. Moynihan and Thompson shined through out, showing how engaged they are in the day to day business. Exactly what this bank needs after decades of dealmakers that integrated nothing.

 

http://seekingalpha.com/article/286691-bank-of-america-corporation-special-call

 

2)  Brian Moynihan is terrible at prepared remarks.  Real snoozer.  Surprisingly, I thought portions of the Bruce Berkowitz Q&A made him really shine when he was asked about credit card defaults.  He started spouting off numbers off the cuff, current and historical, that made me realize he's got the numbers down.  I liked that answer a lot, because it encapsulated what happened, what's changed, and how things are much better now - with numbers.  In fact Jamie Dimon is really fun to listen to, but recently I've felt that Moynihan has more substance when he talks (even though he mumbles and has the worst delivery in the business). 

[xazp]

Which was worse though.  Do you think it was worse than selling common at $6 last December?  >>

 

I'd prefer a $6 rights offering to existing shareholders, over a deal with Buffett.  I would have loved a public offering with the same deal that Buffett received.  I object both to the private nature of the deal, and the terms of the deal. 

 

But I disagree with the premise of your question.  If you look at their December results, they did not need to raise capital.  Their Tier 1 common equity ended up at 10%, which was (IIRC) their highest capital level ever.  They made $2Bn that quarter - mostly due to selling CCB (which IMO is the correct way to raise capital).  And they'd already said they weren't going to ask for a capital return in 2012.  They would have passed CCAR with or without Buffett.  Shrinking RWA, positive earnings, record high capital ratios - I don't see the argument for a capital raise.  History has borne this out I believe. 

 

The TRUPS I understand.

 

1)  They bought the TRUPS at a fairly large discount to face.  Because of this, they recorded a profit on the deal & have recurring interest expense savings.  Absent this deal, it would have been difficult to remove those TRUPS at a discount (you can buy at face, of course, but they were trading well below at that point). 

 

2)  The TRUPS are higher in the capital structure than the equity.  So you buy $1Bn in TRUPS (or debt) with $800MM in equity.  Well the equity class now "owns" $1Bn more of the capital structure, but it's diluted.  Roughly the two offset.  It's just a capital structure move. 

 

Conceptually, if they had issued $1Bn of equity, and used it to buy $1Bn of equity, it would have exactly offset.  This is just swapping one part of the capital structure with an adjacent part of the capital structure, it's nearly going to offset. 

 

Actually what's irritating is they've been paying bonuses in equity.  They should pay in cash and people who want to use that to buy equity may do so. 

 

 

 

The Buffett deal was very expensive and unnecessary;

 

Which was worse though.  Do you think it was worse than selling common at $6 last December?

 

There might have been something going on.  Perhaps they had to beef up collateral for derivatives due to the Europe scare last Fall? 

 

It's puzzling to me that they claim to have been so liquid, yet they go and sell common at $6 in order to retire TRUPS.  Are they trying to say that the TRUPS were more valuable than the common at $6?  What a message.

[ERICOPOLY]

 

The TRUPS I understand.

 

 

Your explanation that their ratios were really strong and they made a big profit that quarter are the reason why I'm wondering why they couldn't retire the TRUPS without selling stock.

 

You say the TRUPS were a good deal.  I agree.  You say they had all the ratios and made a big profit.  I agree.

 

So, they were a FORTRESS if you look at the ratios, yet they couldn't handle the retirement of the TRUPS unless they sold equity.

 

That's what really confuses me.

[ERICOPOLY]

 

1)  They bought the TRUPS at a fairly large discount to face. 

 

They are going to buy back the common they sold at a huge premium to the price they sold it for.

 

[ERICOPOLY]

Come to think of it, that could be construed as cooking the numbers.

 

Raise common and buy TRUPS at a discount (book earnings gain on the discount paid)

Later buy the common back for twice as much at a huge economic loss (no loss ever reported in EPS).

 

[MrB]

 

The TRUPS I understand.

 

 

Your explanation that their ratios were really strong and they made a big profit that quarter are the reason why I'm wondering why they couldn't retire the TRUPS without selling stock.

 

You say the TRUPS were a good deal.  I agree.  You say they had all the ratios and made a big profit.  I agree.

 

So, they were a FORTRESS if you look at the ratios, yet they couldn't handle the retirement of the TRUPS unless they sold equity.

 

That's what really confuses me.

 

Eric, I'm with you on this one.

Xazp, your facts back up your argument and for me it's just a case of not being able to put two and two together.

The only thing that comes close to making sense is that in the financial industry, trust is hard won and easily lost. I've seen it up close and it is tangible and really concerning when you're in an organisation and credibility is on the line. I think at that point you could argue credibility was at stake and Buffett's deal provided the necessary stamp of approval. Could be a bit of a stretch though; don't really get it.

[Kraven]

First to your question; I picked it up after a rec on this board. Only into the 4th chapter and glad I got it. It also makes you realize again that its a people business and you have to understand the culture of banks in general and the one your invested in, in particular. The signs can be read from the outside and an investor needs to pay attention. These guys do not luck into the job at the top. They get there with the support of a lot of "friends" in the company and on the board. Then the first thing they do is surround them with the people they want. So as the CEO goes, so does the top team and as the top team goes, so does the rest of the bank.

For me at least, Pandit, was the reason I was not prepared to even look at Citi. Maybe I was overemphasizing one piece of information, but I just felt Moynihan was a guy I'm prepared to open a book on. Jamie is investable and so is Stumpf. The book underscores that you do need to put a lot of weight on the CEO, because he dictates the culture.

 

The following from the mentioned Fortune article shouts out dealmaker. So let's see if he sticks to his plan. So far, so good.

http://finance.fortune.cnn.com/2011/07/07/can-brian-moynihan-fix-americas-biggest-bank/

 

 

Thanks for the info on the book.  Sounds good.  I think though in terms of Moynihan there is a big difference between being a deal guy/deal lawyer and being a dealmaker.  Moynihan did what he was told.  I think that at some level many of these guys have a love for "action".  They want to be doing something.  However, so far he has shown he is the man for the job.  He's made some mistakes, but nothing that's a killer and he's growing into the job.  Thanks again.

[Kraven]

By the way, how is Crash of the Titans?  It's been on my list, but haven't ordered it yet.  Worth reading?

 

 

I just finished reading Crash of the Titans (nothing like a power outage to catch up on reading, and tomorrow will be my 13^th day without power). It gives a good background on Moynihan. 

 

Moynihan is described as almost militaristic in his ability to take orders, and that was the reason for him being the only executive from Fleet to survive at BAC.  Lewis was merciless and punished anyone who fell even the slightest bit out of line.  At the time of the 2004 acquisition of Boston-based Fleet, Barney Frank as head of the House Banking Committee pressured Lewis to retain two board members of Fleet on the BAC board.  This would turn out to be very important for Moynihan. 

 

In early 2007, after several successful special assignments, Moynihan was made head of Global Wealth Management at BOA.  This didn’t last long.  When in mid-2007, BAC suffered a loss of $1.5bln in CDO positions in the mediocre Investment Bank, Moynihan was put in charge with a mandate to shrink it.  He cut costs, reduced staff and fired research analysts (some of which outraged important clients and Moynihan was forced to hire them back).  He determined, with Lewis’s approval of course, that they needed to sell the $400mm annual profit prime brokerage business.  Moynihan had a deal with JPM for $2bln but when Bear blew up JPM backed out.  Moynihan, having no success with other buyers, announced he was going to shut down the business.  A few days after, BNP Paribas came back to the table and bought the business for $1bln. 

 

in 2008, Moynihan was moved aside when ML’s bigger, better investment bank then run by Thains team was integrated into BAC, and there was no natural spot for him.  Lewis offered him a job in Wilmington to run the retail CC business but Moynihan said he didn’t want to move his family for a lateral career move.  What was Lewis’s response?  He fired Moynihan! 

 

Enter the Fleet directors.  They went crazy and demanded Lewis reverse his decision.  Normally it appears to me that Lewis would have ignored the demand, but because the shaky environment in 2008 Lewis relented and offered Moynihan the job as General Counsel. 

 

When Lewis announced his departure, Moynihan’s relationship with the influential Fleet directors was the reason he was given the CEO job.

 

My take on Moynihan is that he is perfect for the CEO position and the current objective of getting back to basics.  How he will run the business in a healthy economic environment is not clear from his background.  But if the Fortune reporter is correct, then I feel a lot better about the long-term prospects (and my large long position) of BAC.

 

As far as the book is concerned, I enjoyed reading it and recommend others do as well if for no other reason than a background on BAC. I knew or met a few dozen of the people mentioned in the book and the author is pretty accurate in capturing the ‘how does every decision affect my carreer’ mentality of the people at the top of the Wall Street banks in the 90's and 00's.

 

Onyx, thanks for the info.  13 days without power is awful.  I will definitely check out the book.  I love reading these types of books where I've known and met the people as well and realizing how many mistakes are made in the historical record.  Sounds like this one portrays it pretty accurately though.  Hope your power comes on soon.

[Parsad]

 

The TRUPS I understand.

 

 

Your explanation that their ratios were really strong and they made a big profit that quarter are the reason why I'm wondering why they couldn't retire the TRUPS without selling stock.

 

You say the TRUPS were a good deal.  I agree.  You say they had all the ratios and made a big profit.  I agree.

 

So, they were a FORTRESS if you look at the ratios, yet they couldn't handle the retirement of the TRUPS unless they sold equity.

 

That's what really confuses me.

 

They were also in the process of facing and settling multi-billion dollar lawsuits.  I think they just felt that a capital raise was necessary to maintain ratios, retire the TRUPS and still settle litigation.  Cheers!

[ERICOPOLY]

 

The TRUPS I understand.

 

 

Your explanation that their ratios were really strong and they made a big profit that quarter are the reason why I'm wondering why they couldn't retire the TRUPS without selling stock.

 

You say the TRUPS were a good deal.  I agree.  You say they had all the ratios and made a big profit.  I agree.

 

So, they were a FORTRESS if you look at the ratios, yet they couldn't handle the retirement of the TRUPS unless they sold equity.

 

That's what really confuses me.

 

They were also in the process of facing and settling multi-billion dollar lawsuits.  I think they just felt that a capital raise was necessary to maintain ratios, retire the TRUPS and still settle litigation.  Cheers!

 

I maintain that it was a mistake to retire the TRUPS at a discount when the cost comes at $6 per common share.

 

We'll soon see them paying $12+ for those shares, eviscerating whatever "gain" they made on the TRUPS and showing it would have been better to maintain patience and just retire the TRUPS at face value down the road.

[Parsad]

 

The TRUPS I understand.

 

 

Your explanation that their ratios were really strong and they made a big profit that quarter are the reason why I'm wondering why they couldn't retire the TRUPS without selling stock.

 

You say the TRUPS were a good deal.  I agree.  You say they had all the ratios and made a big profit.  I agree.

 

So, they were a FORTRESS if you look at the ratios, yet they couldn't handle the retirement of the TRUPS unless they sold equity.

 

That's what really confuses me.

 

They were also in the process of facing and settling multi-billion dollar lawsuits.  I think they just felt that a capital raise was necessary to maintain ratios, retire the TRUPS and still settle litigation.  Cheers!

 

I maintain that it was a mistake to retire the TRUPS at a discount when the cost comes at $6 per common share.

 

We'll soon see them paying $12+ for those shares, eviscerating whatever "gain" they made on the TRUPS and showing it would have been better to maintain patience and just retire the TRUPS at face value down the road.

 

I don't disagree with you.  But they were making decisions on the fly, while facing daunting tasks in their mortgage business and litigation, as well as shrinking the business and reducing their debt.  You get some right and you get some wrong. 

 

This sort of goes back to Fairfax's capital raise with Cundill, Markel and Southeastern for well under book...yes they could have been patient, but at the same time your stock is facing pressure, regulators could be breathing down your neck, and your reputation is being shred in the media.  It's a cost longer term, but you eat it because you need to continue to bring stability to your business.

 

BAC may be wrong on the TRUPS, but they've been right on a heck of alot more stuff.  As long as they keep doing that, we'll all do very well.  Cheers!

[ERICOPOLY]

 

BAC may be wrong on the TRUPS, but they've been right on a heck of alot more stuff.  As long as they keep doing that, we'll all do very well.  Cheers!

 

That's why I don't have a bearish sentiment on the stock  :D

[xazp]

I should clarify.  "Understanding" the TRUPS doesn't mean I am/was supportive of it.  Particularly because it was done at such a low price, and, they had repeatedly said they didn't need to issue equity it is both an economic problem and a management credibility problem. 

 

I was merely expressing there are tradeoffs (higher earnings, both current and future; capital levels; etc) which are reasons to do it, and these somewhat offset the dilution.  I was just expressing that side of the argument.  And because of those tradeoffs, I "understand" why management did what they did.  And those tradeoffs also mean that it's not really material to my decision to own BAC. 

 

The Buffett deal, however, is costing us earnings today and in the future; it's depressing NIM; it runs contrary to their strategy of lowering their long-term debt foot-print.  And worst of all it's a substantial amount of dilution.  To me, I put it in the "major mistake" column.  He could easily make $5Bn, $10Bn off this - that's money that should be in shareholders' hands.  It's not enough of a mistake to change my opinion of BAC, though it is a big enough mistake that I'm pretty neutral on Moynihan. 

 

 

 

 

 

The TRUPS I understand.

 

 

Your explanation that their ratios were really strong and they made a big profit that quarter are the reason why I'm wondering why they couldn't retire the TRUPS without selling stock.

 

You say the TRUPS were a good deal.  I agree.  You say they had all the ratios and made a big profit.  I agree.

 

So, they were a FORTRESS if you look at the ratios, yet they couldn't handle the retirement of the TRUPS unless they sold equity.

 

That's what really confuses me.

 

They were also in the process of facing and settling multi-billion dollar lawsuits.  I think they just felt that a capital raise was necessary to maintain ratios, retire the TRUPS and still settle litigation.  Cheers!

 

I maintain that it was a mistake to retire the TRUPS at a discount when the cost comes at $6 per common share.

 

We'll soon see them paying $12+ for those shares, eviscerating whatever "gain" they made on the TRUPS and showing it would have been better to maintain patience and just retire the TRUPS at face value down the road.

[ERICOPOLY]

 

The Buffett deal, however, is costing us earnings today and in the future; it's depressing NIM; it runs contrary to their strategy of lowering their long-term debt foot-print.  And worst of all it's a substantial amount of dilution.

 

 

The dilution is the only part that I care about.

 

Money in BAC's hands is fungible.  They recently retired $5b of TRUPS at face value that carried a higher interest rate than what they are paying Buffett.

 

Did that $5b come from Buffett?  Who is to say.  Maybe the Buffett deal is actually accretive to NIM when viewed in this light.

 

Personally, I probably benfefit from the Buffett deal because I allocated heavier in light of Buffett's seal of approval.

[MrB]

I'm playing catchup at the best of times. Stop blowing smoke up my a... and tell me what do you think is going to kill us in this thing over the next decade.

 

Let's see. To tell you the truth, with Moynihan in charge and the current regulatory environment. I don't think derivatives or M&A is an issue. Most probably also we are not going to see another American banking crisis for the next 20 years, and maybe more.

 

From the innovation side, I don't see anything either. The internet is being co-opted by the Big 4 and actually is a challenge for the small banks.

 

I would say the risk is if we get an Idiot in charge, someone from the former Charlotte clique.

 

Thought this was interesting: Retail Renaissance - Economist special report on International Banking

http://media.economist.com/sites/default/files/sponsorships/MM152/20120519_international_banking_HSBC.pdf

 

[Rabbitisrich]

I'm a Moynihan fan as well, but let's remember that he has shown great leadership in the current environment.

 

 

http://www.sec.gov/Archives/edgar/data/70858/000095010900500135/dex992.htm

"As we have told you before, we are changing the basic thrust of the company from an acquisition and thus expense-driven model to a customer-focused, revenue-driven organization." - Ken Lewis, 2000.

http://www.nytimes.com/2005/07/01/business/01lewis.html

 

"Once again, Mr. Lewis shrugged off his critics. "Let me dissuade you of your view that this is a high price," he told reporters yesterday. "Think about it: you are getting a card portfolio and marketing expertise for the price of a card portfolio." - Ken Lewis, 2005.

 

 

[Parsad]

I'm a Moynihan fan as well, but let's remember that he has shown great leadership in the current environment.

 

 

http://www.sec.gov/Archives/edgar/data/70858/000095010900500135/dex992.htm

"As we have told you before, we are changing the basic thrust of the company from an acquisition and thus expense-driven model to a customer-focused, revenue-driven organization." - Ken Lewis, 2000.

http://www.nytimes.com/2005/07/01/business/01lewis.html

 

"Once again, Mr. Lewis shrugged off his critics. "Let me dissuade you of your view that this is a high price," he told reporters yesterday. "Think about it: you are getting a card portfolio and marketing expertise for the price of a card portfolio." - Ken Lewis, 2005.

 

Hi Rabbit,

 

I'm not quite sure what you mean.  Those articles are about Ken Lewis overpaying for Fleet...not Moynihan?  Are you saying that he orchaestrated the deal?  In that case, he did what he was supposed to...maximize the premium Fleet could receive when they were bought out, and then he did what was required of him when he came over to BAC under Lewis. 

 

Other than the premature dividend announcement before Fed approval, I can't really fault him on too many mis-steps...and was that really such a mistake, as some have characterized?  He thought they could pay it out, and the Fed thought different...lesson learned...so going forward he makes BAC the best-capitalized large bank in America and does not say a word about whether they will pay a dividend this year.  Cheers!

[Rabbitisrich]

The first link directs to a conference transcript from 2000 in which Lewis makes all the mouth noises of a sober bank CEO. That's recession bank CEO talk. The second link refers to actions undertaken in 2003 and 2005 that reflected boom bank CEO actions. As the rest of the market appreciates the balance sheet and liquidity story, and we start to hear more about the earnings story, it's important to remember that we've seen Moynihan in a depressed environment.

 

There was another Moynihan who overpromised on dividends and issuances, before copy and pasting TARP warrant terms onto a large private issuance. It's a minor event with respect to the current price. Still, the seeds of failure are sown today, and other figures of speech.

[ERICOPOLY]

The BAC management of boom days seemed to keep loan quality well enough in check to survive the crisis.  Their aquisition record is what killed things for them.

 

I'll bet if we brought back Ken Lewis today things would work out fine for the bank for the foreseeable decade or two.  We might expect more boom time loan standards that are good enough to survive another similar crisis, and nobody these days would let him execute another acquisition-driven growth strategy.

 

Anyways, I sleep very poorly some nights.  Only, it's not for the reasons you might think.  If you have young children, you could replicate this by telling them that Santa is coming... only tell them you don't know which night he's coming.  They'll be up every night waiting.

 

[Parsad]

Anyways, I sleep very poorly some nights.  Only, it's not for the reasons you might think.  If you have young children, you could replicate this by telling them that Santa is coming... only tell them you don't know which night he's coming.  They'll be up every night waiting.

 

Great analogy Eric!  But try and get some sleep, since you know you won't be able to see which night Santa comes anyway...plus it will happen in the day before markets open with a press release.  Cheers!

 

 

[ERICOPOLY]

Anyways, I sleep very poorly some nights.  Only, it's not for the reasons you might think.  If you have young children, you could replicate this by telling them that Santa is coming... only tell them you don't know which night he's coming.  They'll be up every night waiting.

 

Great analogy Eric!  But try and get some sleep, since you know you won't be able to see which night Santa comes anyway...plus it will happen in the day before markets open with a press release.  Cheers!

 

I go to sleep reasonably well but I wake up early and check the pre-market quote.  As Sanjeev knows, on the West coast that comes pretty darn early... at 4:30am which is a fact I didn't even realize until the past few months.

[Parsad]

Anyways, I sleep very poorly some nights.  Only, it's not for the reasons you might think.  If you have young children, you could replicate this by telling them that Santa is coming... only tell them you don't know which night he's coming.  They'll be up every night waiting.

 

Great analogy Eric!  But try and get some sleep, since you know you won't be able to see which night Santa comes anyway...plus it will happen in the day before markets open with a press release.  Cheers!

 

I go to sleep reasonably well but I wake up early and check the pre-market quote.  As Sanjeev knows, on the West coast that comes pretty darn early... at 4:30am which is a fact I didn't even realize until the past few months.

 

I just sleep with Bloomberg or CNBC on all night, so I sleep, but periodically wake up to see if anything is happening...just habit!  In the fall and winter months, I like falling asleep on the great room sofa with the warm glow of the fireplace late at night, and so many nights it's been joined by the neon glow of the television as well.  Cheers!

[PlanMaestro]

One extra to your possible lollapalooza MrB: what if Moynihan has been under-promising New BAC?

 

I'm almost sure that there is a lot of fat in there. Bank of America was never very good integrating at their acquisitions. Not just Merrill and Countrywide, LaSalle was a mess too. They jumped too quickly from one acquisition to the next one, both Ken Lewis and Hugh McColl (Wasserstein, Big Deal good book). Thirty years, dozens of acquisitions.

 

There is no reason that Bank of America should not have the same profitability as Wells Fargo when both have the same cost of funds. And that is higher than the profitability we've been discussing.

 

 

Possible contributors to Lollapalooza Effect at BofA over the long run?

This is not to ignore the risks/downside. Let's assume for a moment it works out beyond our wildest expectations. If we look back in 10 years, what would we say we could have seen now that would have pointed to BofA possibly working out fantastically?

 

• Economic recovery, slowly but surely
  
• Fundamental shift in the business model of BofA. More like Wells Fargo
  
• O'Neal and his predecessor's dream of marrying BofA and Merrill's. Turns out to be a great idea.
  
• Countrywide's contribution once its fixed.
  
• Business wins from European banks as they still have to deleverage massively.
  
• Big banks come out stronger at the expense of smaller banks and end up with a bigger piece of the pie.
  
• Moynihan ends up being an astute capital allocator, even in the good times.
  
• General sentiment changes towards the banks leading to P/BV multiples of 2 and above again.
   
  

 

Agree, disagree? Care to add any?

[mankap]

Does anybody know what BAC is proposing to Fed in terms of dividend or share buyback.

 

Fed will give additional opportunity to banks to reduce capital distribution before rejecting the plan.

 

WASHINGTON—The Federal Reserve kicked off the next round of its annual "stress test" for big banks Friday, releasing instructions on how the process will work.

 

Included is a new opportunity for banks to reduce their planned capital distributions before the Fed decides to approve or reject their capital plans.

 

The Fed did not release the three economic scenarios on which the test is based, saying it would release those by Nov. 15. Banks had asked for the instructions to be released as early as possible. Both pieces of the test will be out earlier than last year,