BAC-WT - Bank of America Warrants

[ERICOPOLY]

By the way, I do understand your point about the tail risk.

 

It's just that (from what I understand) that tail risk didn't show up in the real estate portfolios during the 2002-2006 period for WFC that Plan is using for his model.

 

So if the tail risk didn't rear it's ugly head during the model years, then we could draw invalid assumptions for BAC's lollapalloa ROA if BAC's model indeed takes less tail risk than WFC.

 

However, to that I have a question...

Does BAC's portfolio really have less tail risk as implied by the yield?  Or is the yield low because their model had more tail risk and right now the yield is depressed by all of the people not making their interest payments (non-performing loans).  I believe I read that the yield reported on the portfolio of loans is calculated by the actual interest collected.

 

Then another question:

Does WFC's funding model (heavier reliance on deposits) allow it to make more Jumbo loans that carry with it higher yield?  I mean, if you rely more on wholesale funding, you may be stuck with making loans that you know you can more easily unload (like conforming loans).  Conforming loans carry lower interest yield.  The Jumbo loan may not actually be riskier though from a tail risk standpoint (many times the wealthier clients with the Jumbo loans are less risk).

[Grenville]

http://newsroom.bankofamerica.com/press-release/corporate-and-financial-news/bank-america-announces-commencement-cash-tender-offer-mbi

 

 

Bank of America Announces Commencement of Cash Tender Offer for MBIA Notes

 

[vinod1]

 

If that's the case (and it may be), then there is something wrong with Plan's assumption that we can merely look at the cost of funding between the two banks and assume it will lead to equivalent levels of ROA in the Lollapallooza case where both banks execute operationally on the same level.

 

In other words, either:

A)  BAC's retail bank assets can yield the same as WFC's and thus we can merely look at cost of funding to reach conclusions

or

B)  We can't look merely at cost of funding to reach conclusions

 

I tend to think of the deposit business as two separate parts

1. Deposit gathering (liability side)

2. Loans (asset side)

We can evaluate the two parts separately. If bank A if able to gather deposits cheaply compared to another bank B, then we can say bank A is more valuable assuming it does not spend more in non-interest expenses to attain its lower cost. Then we can separately evaluate the loan side of the deposit business to determine which is better. Plan might be pointing just to #1 (deposit gathering).

 

So we can reach a conclusion just based on the funding cost but it is not the whole story.

 

Vinod

 

 

[vinod1]

By the way, I do understand your point about the tail risk.

 

It's just that (from what I understand) that tail risk didn't show up in the real estate portfolios during the 2002-2006 period for WFC that Plan is using for his model.

 

So if the tail risk didn't rear it's ugly head during the model years, then we could draw invalid assumptions for BAC's lollapalloa ROA if BAC's model indeed takes less tail risk than WFC.

 

However, to that I have a question...

Does BAC's portfolio really have less tail risk as implied by the yield?  Or is the yield low because their model had more tail risk and right now the yield is depressed by all of the people not making their interest payments (non-performing loans).  I believe I read that the yield reported on the portfolio of loans is calculated by the actual interest collected.

 

Then another question:

Does WFC's funding model (heavier reliance on deposits) allow it to make more Jumbo loans that carry with it higher yield?  I mean, if you rely more on wholesale funding, you may be stuck with making loans that you know you can more easily unload (like conforming loans).  Conforming loans carry lower interest yield.  The Jumbo loan may not actually be riskier though from a tail risk standpoint (many times the wealthier clients with the Jumbo loans are less risk).

 

Good point about the yield calculation. I do not think NPL is high enough to explain such a large variation. (4.51% vs 3.7%).

 

I think the funding model is part of the story. Another is the relationship model (number of products per household) which might allow WFC to either come up with a better risk decisioning model (they have more insight into a customer and thus are better able to judge the risk) or customers might be willing to pay up a bit more for the convienence of one stop shopping. All these might explain why WFC might hold on to a higher NIM compared BAC.

 

Vinod

 

 

[xazp]

So when I first read this, I thought, OK they're just buying back more of their debt. 

 

Then double-take, wait, this isn't MBNA, this is MBIA.  They're buying the debt of the company that is suing them.

 

Something is afoot, I don't quite know what.  I mean if they can take control of MBIA for a few billion, it's probably cheaper than settling :P. 

 

 

http://newsroom.bankofamerica.com/press-release/corporate-and-financial-news/bank-america-announces-commencement-cash-tender-offer-mbi

 

 

Bank of America Announces Commencement of Cash Tender Offer for MBIA Notes

[vinod1]

So when I first read this, I thought, OK they're just buying back more of their debt. 

 

Then double-take, wait, this isn't MBNA, this is MBIA.  They're buying the debt of the company that is suing them.

 

Something is afoot, I don't quite know what.  I mean if they can take control of MBIA for a few billion, it's probably cheaper than settling :P. 

 

 

http://newsroom.bankofamerica.com/press-release/corporate-and-financial-news/bank-america-announces-commencement-cash-tender-offer-mbi

 

 

Bank of America Announces Commencement of Cash Tender Offer for MBIA Notes

 

This has all the makings of a financial thriller... Would make a good movie.

[Parsad]

So when I first read this, I thought, OK they're just buying back more of their debt. 

 

Then double-take, wait, this isn't MBNA, this is MBIA.  They're buying the debt of the company that is suing them.

 

Something is afoot, I don't quite know what.  I mean if they can take control of MBIA for a few billion, it's probably cheaper than settling :P. 

 

 

http://newsroom.bankofamerica.com/press-release/corporate-and-financial-news/bank-america-announces-commencement-cash-tender-offer-mbi

 

 

Bank of America Announces Commencement of Cash Tender Offer for MBIA Notes

 

Read the full press release.  They pretty much say, they want to buy the debt in the open market, so that MBIA could not use bankruptcy or Chapter 11 as any sort of protection.  In other words, we are going to force these guys to settle by becoming their largest creditor.  Cheers!

[Kraven]

So when I first read this, I thought, OK they're just buying back more of their debt. 

 

Then double-take, wait, this isn't MBNA, this is MBIA.  They're buying the debt of the company that is suing them.

 

Something is afoot, I don't quite know what.  I mean if they can take control of MBIA for a few billion, it's probably cheaper than settling :P. 

 

 

http://newsroom.bankofamerica.com/press-release/corporate-and-financial-news/bank-america-announces-commencement-cash-tender-offer-mbi

 

 

Bank of America Announces Commencement of Cash Tender Offer for MBIA Notes

 

Read the full press release.  They pretty much say, they want to buy the debt in the open market, so that MBIA could not use bankruptcy or Chapter 11 as any sort of protection.  In other words, we are going to force these guys to settle by becoming their largest creditor.  Cheers!

 

This was my read on it too.  I don't see this as really changing anything.  I think the consent is a sideshow and is distracting from the real issues.  From MBIA's standpoint that's not to say it wasn't prudent to do, but it doesn't really change anything.  I always thought MBIA threw this out there as a way of bringing the issues to the public if you will.  BAC is simply firing back in the same way.  Unless I am missing something, whatever happens, it doesn't change the fact that there is either a settlement that needs to occur or a decision from the judge.

 

I don't think though BAC necessarily cares about being their largest creditor.  They just want to block the consent so that anything that occurs to MBIC Corp will impact the hold co.  They don't want it orphaned.

[benhacker]

Sweet move by BAC.  Basically minting money here by owning both sides of this transaction.

 

Curious to see what happens next with MBI common holders...

 

Ben

[xazp]

All I know is that MBIA crashed 15% when this PR came out, so equity holders believe they are about to get a whooping.

i.e.

 

http://finance.yahoo.com/q/bc?s=MBI&t=1d&l=on&z=l&q=l&c=

 

So when I first read this, I thought, OK they're just buying back more of their debt. 

 

Then double-take, wait, this isn't MBNA, this is MBIA.  They're buying the debt of the company that is suing them.

 

Something is afoot, I don't quite know what.  I mean if they can take control of MBIA for a few billion, it's probably cheaper than settling :P. 

 

 

http://newsroom.bankofamerica.com/press-release/corporate-and-financial-news/bank-america-announces-commencement-cash-tender-offer-mbi

 

 

Bank of America Announces Commencement of Cash Tender Offer for MBIA Notes

 

Read the full press release.  They pretty much say, they want to buy the debt in the open market, so that MBIA could not use bankruptcy or Chapter 11 as any sort of protection.  In other words, we are going to force these guys to settle by becoming their largest creditor.  Cheers!

 

This was my read on it too.  I don't see this as really changing anything.  I think the consent is a sideshow and is distracting from the real issues.  From MBIA's standpoint that's not to say it wasn't prudent to do, but it doesn't really change anything.  I always thought MBIA threw this out there as a way of bringing the issues to the public if you will.  BAC is simply firing back in the same way.  Unless I am missing something, whatever happens, it doesn't change the fact that there is either a settlement that needs to occur or a decision from the judge.

[Grenville]

 

Read the full press release.  They pretty much say, they want to buy the debt in the open market, so that MBIA could not use bankruptcy or Chapter 11 as any sort of protection.  In other words, we are going to force these guys to settle by becoming their largest creditor.  Cheers!

 

Interesting stuff. It looks like MBIA has gotten a lockup on the consent solicitation for 25.4% of the 1990 Indenture and 3.5% of the notes outstanding under the 2004 Indenture. The 2004 Indenture are the notes BAC is trying to buy up. There is a notional amount of 350mln of them.

 

Also I think the lock up matches what Bruce Berkowitz has at Fairholme. In his annual report for 2011 he has about 11.58mln of the 2034 5.7% (2004 Notes).

 

I guess it will come down to who owns the notes and who owns the common. If you own both you probably have more upside with MBIA and if you just own the notes then you'd rather give up to BAC.

 

I put this together real quick after a quick scan so I would appreciate any other thoughts or corrections. I want this thing between BAC and MBIA settled.

[Parsad]

So when I first read this, I thought, OK they're just buying back more of their debt. 

 

Then double-take, wait, this isn't MBNA, this is MBIA.  They're buying the debt of the company that is suing them.

 

Something is afoot, I don't quite know what.  I mean if they can take control of MBIA for a few billion, it's probably cheaper than settling :P. 

 

 

http://newsroom.bankofamerica.com/press-release/corporate-and-financial-news/bank-america-announces-commencement-cash-tender-offer-mbi

 

 

Bank of America Announces Commencement of Cash Tender Offer for MBIA Notes

 

Read the full press release.  They pretty much say, they want to buy the debt in the open market, so that MBIA could not use bankruptcy or Chapter 11 as any sort of protection.  In other words, we are going to force these guys to settle by becoming their largest creditor.  Cheers!

 

This was my read on it too.  I don't see this as really changing anything.  I think the consent is a sideshow and is distracting from the real issues.  From MBIA's standpoint that's not to say it wasn't prudent to do, but it doesn't really change anything.  I always thought MBIA threw this out there as a way of bringing the issues to the public if you will.  BAC is simply firing back in the same way.  Unless I am missing something, whatever happens, it doesn't change the fact that there is either a settlement that needs to occur or a decision from the judge.

 

What it does is prevent the ring fence around the parent.  MBIA was using the ring fence to prevent insolvency, and then using the putbacks to maintain liquidity.  If BAC buys the debt, they can call the loan directly...you aren't going to get any ring fence, because those assets are ours.  MBIA is forced to settle, as there is nothing else they can do other than litigation to see if there is any way to stop BAC, and they will not have the liquidity to make it through 2013 without some settlement.  Cheers!

[Kraven]

All I know is that MBIA crashed 15% when this PR came out, so equity holders believe they are about to get a whooping.

i.e.

 

http://finance.yahoo.com/q/bc?s=MBI&t=1d&l=on&z=l&q=l&c=

 

 

They certainly do.  I believe it's almost certainly an overreaction unless I'm missing something which is very likely.

[Kraven]

What it does is prevent the ring fence around the parent.  MBIA was using the ring fence to prevent insolvency, and then using the putbacks to maintain liquidity.  If BAC buys the debt, they can call the loan directly...you aren't going to get any ring fence, because those assets are ours.  MBIA is forced to settle, as there is nothing else they can do other than litigation to see if there is any way to stop BAC, and they will not have the liquidity to make it through 2013 without some settlement.  Cheers!

 

Yeah, my point too.  It basically means this issue needs to be resolved via the litigation process and only that.  Settlement would be more on the table, but there could be a decision sooner rather than later (not predicting, just saying).  However, BAC is almost certainly telegraphing that they will appeal until the end of eternity, or as long as they can, and MBIA can't survive that long.  So . . . settlement it likely is. 

[Parsad]

What it does is prevent the ring fence around the parent.  MBIA was using the ring fence to prevent insolvency, and then using the putbacks to maintain liquidity.  If BAC buys the debt, they can call the loan directly...you aren't going to get any ring fence, because those assets are ours.  MBIA is forced to settle, as there is nothing else they can do other than litigation to see if there is any way to stop BAC, and they will not have the liquidity to make it through 2013 without some settlement.  Cheers!

 

Yeah, my point too.  It basically means this issue needs to be resolved via the litigation process and only that.  Settlement would be more on the table, but there could be a decision sooner rather than later (not predicting, just saying).  However, BAC is almost certainly telegraphing that they will appeal until the end of eternity, or as long as they can, and MBIA can't survive that long.  So . . . settlement it likely is.

 

I think Moynihan came up with this one himself.  With his background on structuring deals, etc, this seems like something he came up with.  Cheers!

[ERICOPOLY]

 

Good point about the yield calculation. I do not think NPL is high enough to explain such a large variation. (4.51% vs 3.7%).

 

Vinod

 

I think xazp was the one who pointed out before that a non-performing loan is a heavily risk-weighted asset that has absolutely no yield.

 

Meaning, once you get the foreclosure pushed through and retrieve your 400k worth of capital you can then make some very high yield loans with it.

 

It was probably a relatively high yield part of the portfolio (sub prime) to begin with before it went sour.

 

But perhaps you are considering all of that and still wondering how it can possibly explain the difference.  I too wonder.

[Kraven]

What it does is prevent the ring fence around the parent.  MBIA was using the ring fence to prevent insolvency, and then using the putbacks to maintain liquidity.  If BAC buys the debt, they can call the loan directly...you aren't going to get any ring fence, because those assets are ours.  MBIA is forced to settle, as there is nothing else they can do other than litigation to see if there is any way to stop BAC, and they will not have the liquidity to make it through 2013 without some settlement.  Cheers!

 

Yeah, my point too.  It basically means this issue needs to be resolved via the litigation process and only that.  Settlement would be more on the table, but there could be a decision sooner rather than later (not predicting, just saying).  However, BAC is almost certainly telegraphing that they will appeal until the end of eternity, or as long as they can, and MBIA can't survive that long.  So . . . settlement it likely is.

 

I think Moynihan came up with this one himself.  With his background on structuring deals, etc, this seems like something he came up with.  Cheers!

 

Could be.  It's a very aggressive move and surprising to me.  Usually the big boys don't want to do this kind of thing.  It makes other counterparties wary of working with them.  Like "ok, if we work with you and we have a disagreement, are you going to try and buy up our debt and force us to do something too?"  Granted, this is an incredibly adversarial relationship between BAC and MBIA, but still.  I can almost guarantee that there will be some parties that think well, I can work with BAC or I can work with C, for example.  BAC has shown a lot of aggressiveness, so I'll pass this time around and see how it plays out.  Just my view.

[Grenville]

 

Could be.  It's a very aggressive move and surprising to me.  Usually the big boys don't want to do this kind of thing.  It makes other counterparties wary of working with them.  Like "ok, if we work with you and we have a disagreement, are you going to try and buy up our debt and force us to do something too?"  Granted, this is an incredibly adversarial relationship between BAC and MBIA, but still.  I can almost guarantee that there will be some parties that think well, I can work with BAC or I can work with C, for example.  BAC has shown a lot of aggressiveness, so I'll pass this time around and see how it plays out.  Just my view.

 

Aggressive yes, but remember MBIA was the less sanguine one who raised debt in on sub and then upstreamed the capital to the hold co and led Third Avenue to initiate their lawsuit.

[enoch01]

Pretty aggressive move, but we don't have a good idea of what MBIA has rejected so far, right?

[Parsad]

What it does is prevent the ring fence around the parent.  MBIA was using the ring fence to prevent insolvency, and then using the putbacks to maintain liquidity.  If BAC buys the debt, they can call the loan directly...you aren't going to get any ring fence, because those assets are ours.  MBIA is forced to settle, as there is nothing else they can do other than litigation to see if there is any way to stop BAC, and they will not have the liquidity to make it through 2013 without some settlement.  Cheers!

 

Yeah, my point too.  It basically means this issue needs to be resolved via the litigation process and only that.  Settlement would be more on the table, but there could be a decision sooner rather than later (not predicting, just saying).  However, BAC is almost certainly telegraphing that they will appeal until the end of eternity, or as long as they can, and MBIA can't survive that long.  So . . . settlement it likely is.

 

I think Moynihan came up with this one himself.  With his background on structuring deals, etc, this seems like something he came up with.  Cheers!

 

Could be.  It's a very aggressive move and surprising to me.  Usually the big boys don't want to do this kind of thing.  It makes other counterparties wary of working with them.  Like "ok, if we work with you and we have a disagreement, are you going to try and buy up our debt and force us to do something too?"  Granted, this is an incredibly adversarial relationship between BAC and MBIA, but still.  I can almost guarantee that there will be some parties that think well, I can work with BAC or I can work with C, for example.  BAC has shown a lot of aggressiveness, so I'll pass this time around and see how it plays out.  Just my view.

 

Possibly, but at the same time, I agree with Moynihan that they can't take responsibility for every single transaction that went bad.  So at some point, you draw the line in the sand...if you plan on suing us, we are going to make it very uncomfortable, because we've pretty much paid out every ninnie that has come to our door for the last two years! 

 

They've approached MBIA to settle on several attempts, and they've been brushed aside.  So, I think BAC wants to get more of the litigation settled before the January 13 stress tests.  We've tried to settle, but you're now dragging our name through the mud, so you've left us no choice...settle or we become your largest creditor and drive you into settling through insolvency.  Cheers!

[xazp]

So just looking at the bond issue:  http://cxa.gtm.idmanagedsolutions.com/finra/bondcenter/BondDetail.aspx?ID=NTUyNjJDQUo5

 

It's got $330MM outstanding, and, it was trading at about $65 prior to the tender.  So assuming people tender for $100, they'll pay between $55MM (half tendered) to $110MM (all tendered) above market for the bonds.  Which is kind of pocket change for them. 

 

In return they'll be able to block forever whatever moves MBIA wants to make that require bondholder consent.  Including as Parsad and others have pointed out the entire ring-fencing move. 

 

MBIA recently said they were seeking a settlement with BAC.  But this seems to put BAC in a very strong negotiating position.  Not only can they block any funky moves, but, if MBIA were to go under, BAC would have a strong position in the BK negotiations. 

 

At face value, they will get > $110MM of concessions from this "investment."  Plus a 7% coupon :). 

 

 

 

 

 

Possibly, but at the same time, I agree with Moynihan that they can't take responsibility for every single transaction that went bad.  So at some point, you draw the line in the sand...if you plan on suing us, we are going to make it very uncomfortable, because we've pretty much paid out every ninnie that has come to our door for the last two years! 

 

They've approached MBIA to settle on several attempts, and they've been brushed aside.  So, I think BAC wants to get more of the litigation settled before the January 13 stress tests.  We've tried to settle, but you're now dragging our name through the mud, so you've left us no choice...settle or we become your largest creditor and drive you into settling through insolvency.  Cheers!

[Cardboard]

It may not show in the share prices today, but the company that has the most to lose in all of this is BAC. If MBI is forced into bankruptcy, then payments are stopped and this court process will go on for years. Owning $329 million of their debt won't make a difference since insureds by MBI will be first in line. And if more dirt is uncovered against Countrywide, then BAC will see more litigation from many other parties that will make look like a reasonable  settlement with MBI a joke.

 

I continue to say it is very poor judgement on the part of BAC and Moynihan to keep dragging this issue. Every court proceeding so far has gone MBI's way, the judges are pissed at BAC's delaying attempts and tactics. This maneuver may even be blocked by authorities. Remember that BAC does not have so many friends in the regulatory arena and this includes the NY insurance authorities.

 

MBI says that total losses are $5 billion on these derivatives and this includes the ones from ResCap. Call it $4.5 billion from Countrywide/BAC. MBI has booked $3.2 billion in put back recoverables on their balance sheet for all of it. My guess is that they would settle from anywhere between $3.2 to $5 based on BAC share of these. Is it worth continuing down this path? Based on all evidence, they will have to pay something here and it is the billions.

 

Anyhow, I am hopeful that BAC has offered something decent to MBI and that this will force them to settle, but I am not so sure. BAC seems very dirty here.

 

Cardboard

[Kraven]

What it does is prevent the ring fence around the parent.  MBIA was using the ring fence to prevent insolvency, and then using the putbacks to maintain liquidity.  If BAC buys the debt, they can call the loan directly...you aren't going to get any ring fence, because those assets are ours.  MBIA is forced to settle, as there is nothing else they can do other than litigation to see if there is any way to stop BAC, and they will not have the liquidity to make it through 2013 without some settlement.  Cheers!

 

Yeah, my point too.  It basically means this issue needs to be resolved via the litigation process and only that.  Settlement would be more on the table, but there could be a decision sooner rather than later (not predicting, just saying).  However, BAC is almost certainly telegraphing that they will appeal until the end of eternity, or as long as they can, and MBIA can't survive that long.  So . . . settlement it likely is.

 

I think Moynihan came up with this one himself.  With his background on structuring deals, etc, this seems like something he came up with.  Cheers!

 

Could be.  It's a very aggressive move and surprising to me.  Usually the big boys don't want to do this kind of thing.  It makes other counterparties wary of working with them.  Like "ok, if we work with you and we have a disagreement, are you going to try and buy up our debt and force us to do something too?"  Granted, this is an incredibly adversarial relationship between BAC and MBIA, but still.  I can almost guarantee that there will be some parties that think well, I can work with BAC or I can work with C, for example.  BAC has shown a lot of aggressiveness, so I'll pass this time around and see how it plays out.  Just my view.

 

Possibly, but at the same time, I agree with Moynihan that they can't take responsibility for every single transaction that went bad.  So at some point, you draw the line in the sand...if you plan on suing us, we are going to make it very uncomfortable, because we've pretty much paid out every ninnie that has come to our door for the last two years! 

 

They've approached MBIA to settle on several attempts, and they've been brushed aside.  So, I think BAC wants to get more of the litigation settled before the January 13 stress tests.  We've tried to settle, but you're now dragging our name through the mud, so you've left us no choice...settle or we become your largest creditor and drive you into settling through insolvency.  Cheers!

 

I think you summed it up quite nicely.  This is all about leverage to push for settlement sooner rather than later.  I hadn't thought about the Jan 13 stress tests, but that makes perfect sense.

[ERICOPOLY]

Late last year I sold my MBI to purchase more BAC.  When txlaw asked me why, I said it was because Jay Brown looks to be too greedy -- that he won't settle until BAC pays in full.  This may be just his public tough talk, negotiating for a settlement, but I think at the end of the day it will come out that he wants settlement terms for MBI far better than what others have settled for (such as the AGO settlement).

 

Jay Brown in those shareholder letters is always talking about getting paid in full.  Maybe he's not posturing, and that's why BAC had to break his balls like this.

[Grenville]

Maybe BAC and MBIA should ask Bruce Berkowitz to mediate. He's got interest on both sides of the aisle. He did the call with Moynihan a while ago and it looks like he's part of the MBIA's lock up on the notes submitted in the consent solicitation so far.