BAC-WT - Bank of America Warrants

[Investmentacct]

Sanjeev,

 

Any estimate on bac-wta year end price.

 

Rgds.

 

Ok, so I was a little early with the tangible book by Christmas prediction!  I've got a new one for 2013.   

 

- Legacy issues slip, sliding away. 

- Bulk of "New BAC" reductions should be in place by mid-year. 

- Servicing costs will drop like a rock through 2013. 

- Housing prices remain firm, or modestly higher, so loan loss reserves will continue to modestly improve. 

- Interest income will not go any lower than it is now.

- Long-term debt costs will also continue to drop. 

 

Here is this year's Christmas gift...BAC hits $17.50 by Christmas 2013.  Cheers!

[Parsad]

Sanjeev,

 

Any estimate on bac-wta year end price.

 

Rough estimate:  $4.50 plus $5.25...so about $9.75-$10.00?  Cheers!

[MrB]

This settlement was approximately $3B accretive to BAC according to my calculations....

 

At of 3Q12, I estimated remaining Agency exposure was $9.7B based on at-risk UPB of $45B and a 21.5% settlement rate (per settlements to-date). However, this FNME settlement provides a much cleaner framework to analyze remaining Agency exposure....

 

The press release says unresolved claims with FNME were $11.2B of UPB at the time of settlement - the $3.6B cash payment plus $2.5B of additional R&W reserve thus implies a settlement rate of 54%.

 

Unresolved claims as of 3Q12 were $12.3B (page 64 of the 10Q) - assuming that figure is still relevant as of the FNME settlement, remaining unresolved claims are then $1.1B ($12.3B - $11.2B). At a 54% settlement rate, remaining Agency exposure is then $599.

 

$3B accretion = $9.7B initial agency exposure estimate - $6.1B FNME settlement - $600MM remaining Agency exposure.

 

Not too shabby.

 

Can the press release not be interpreted differently?

 

The press release states,

As part of the agreement to settle representations and warranties claims, Bank of America will make a cash payment to Fannie Mae of $3.6 billion and also repurchase for $6.75 billion certain residential mortgage loans sold to Fannie Mae, which Bank of America has valued at less than the purchase price. These actions are expected to be covered by existing reserves and an additional $2.5 billion (pretax) in representations and warranties provision recorded in the fourth quarter of 2012.

 

In light of the press release's $11.2Bn UPB number (an aside: the 10Q number is $11.5Bn) and the historical loss severity rate of 55% of loans (page 60 of 10Q - "Historically, for those claims that have been approved for repurchase from the GSEs, our loss severity rate on loans originated between 2004 and 2008 has averaged approximately 55 percent of the claim amount") BofA made FNMA whole on $6.5Bn ($3.6/0.55) of UPB and bought back the rest at face. Note that these are loans that "Bank of America has valued at less than the purchase price", so ($11.2Bn - $6.5Bn = $4.7Bn rather than the value of $6.75 at which BofA is buying it back for. The $2.5Bn increase in the R&W provision will also all but cover the losses for the loans repurchased ($2.5Bn/0.55 = $4.55Bn)

 

To simplify: $3.6Bn cash payment at 55% loss severity = $6.5Bn UPB + $6.75Bn UPB repurchased - the lower value that BofA puts on the latter = $11.5Bn UPB for Fannie balance at Q3 2012

 

Looks like Fannie was the biggest dog on the day.

 

So in effect BofA has taken back 100% of the putback claims.

 

No?

[mankap]

Now that BAC has settled with Fannie, Street is warming to that fact BAC will start increasing its mortgage originations. We could see increase in mortgage income in coming quarters.I think they will soon resume their mortgage business with Fannie.

 

http://www.bloomberg.com/news/2013-01-08/bofa-escaping-countrywide-helps-moynihan-build-mortgages.html

 

Bank of America’s mortgage originations plunged 37 percent to $21.3 billion in the third quarter of 2012 from a year earlier, according to newsletter Inside Mortgage Finance, as the bank slumped to fourth from first when it acquired Countrywide.

The settlement paves the way for the bank to have a “regular relationship” with Fannie Mae, after the government- backed agency last year cut the company off from funding for new loans, Vipul Jain, an analyst at Morgan Stanley (MS), wrote in a report yesterday.

It also sold the rights to service $215 billion of home loans to Nationstar Mortgage Holdings Inc. (NSM) and $93 billion to Walter Investment Management Corp. (WAC) The number of delinquent loans that Bank of America services will drop by 30 percent, according to Jain.

‘Legacy Issues’

“As Bank of America clears out the legacy issues, we expect the focus of the firm to shift back from distressed servicing to traditional servicing and mortgage lending,” he wrote.

The moves should help reduce mortgage rates, which jumped 0.16 percentage point last week to 3.54 percent, by increasing competition, according to Credit Suisse Group AG analysts led by Mahesh Swaminathan.

[bmichaud]

(page 60 of 10Q - "Historically, for those claims that have been approved for repurchase from the GSEs, our loss severity rate on loans originated between 2004 and 2008 has averaged approximately 55 percent of the claim amount")

 

$3.6B payment + $2.5B increase in R&W reserve = $6.1B, which is 54.5% of the $11.2B unresolved claims - almost exactly the above-stated 55%.

[berkshiremystery]

Bank of America to sell service rights on $100 billion of mortgages

2013-01-08 Reuters.com

 

BofA is looking to sell collection rights on at least another $100 billion of mortgages after announcing similar deals for more than $300 billion on Monday, according to two sources familiar with the situation.

 

http://www.reuters.com/article/2013/01/08/us-bankofamerica-mortgages-idUSBRE9070ML20130108

[mankap]

Probably BAC is getting ready to return $5B to Buffett.

Why pay 6% to Buffett when you can sell the bonds for much less.

 

BAC issues $6B bonds for yield from 0.95% to 3.3%.

 

http://www.bloomberg.com/news/2013-01-08/ford-comcast-lead-companies-in-u-s-offering-4-2-billion-bonds.html

[rjstc]

I would guess any and all  borrowing for any long term periods for these rates is like stealing. The rates 10 yrs out are bound to be much higher than they will be able to lock in then I would bet.

[Parsad]

Probably BAC is getting ready to return $5B to Buffett.

Why pay 6% to Buffett when you can sell the bonds for much less.

 

BAC issues $6B bonds for yield from 0.95% to 3.3%.

 

http://www.bloomberg.com/news/2013-01-08/ford-comcast-lead-companies-in-u-s-offering-4-2-billion-bonds.html

 

You could be right.  I suspect that they will pay him out just before or after the stress test results come out.  Cheers!

[Uccmal]

I am very happy to see BAC getting in on the cheap debt game.  JPM, GE, and MSFt were doing this two years ago when BAC couldn't raise a cent.  Ultimately this will flow to the bottom line, especially when the shorter term rates start to rise. 

 

 

[berkshiremystery]

Chart: Bank of America's $45 Billion Legal Fiasco

2013-01-09 Fool.com

 

Sometimes all I want is a simple graph. With this in mind, the figure below breaks down the largest legal settlements that Bank of America (NYSE: BAC  ) has racked up since purchasing Countrywide Financial in 2008.

 

http://g.foolcdn.com/editorial/images/12060/bacsettlements_large.JPG

 

-----

 

source:

http://www.fool.com/investing/general/2013/01/09/chart-bank-of-americas-45-billion-legal-fiasco.aspx

[Cardboard]

Regarding 2013, I would not be surprised at all to see the stock stay flat to only go up even more in 2014. Coil spring being reloaded kind of effect. There are too many believers now and not enough doubters. Of course, it is just a guess. We could also go to $20 in 6 months.

 

I think that Credit Suisse is right and that things like earnings will remain disappointing for a few more quarters. This will dampen interest and I am not so sure that return of capital to shareholders will be as good as expected. IMO, they are very likely to take a measured approach, read very conservative.

 

Cardboard

[racemize]

I am not so sure that return of capital to shareholders will be as good as expected. IMO, they are very likely to take a measured approach, read very conservative.

Cardboard

 

I am getting this feeling as well. 

[PlanMaestro]

A sample of one, Citigroup in the 90s:

 

http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=946674000000&chddm=1007069&chls=IntervalBasedLine&q=NYSE:C&ntsp=0&ei=3pHtUNnZHpuGlgPwygE

 

Could not do it with Wells Fargo, but I imagine is similar.

 

Regarding 2013, I would not be surprised at all to see the stock stay flat to only go up even more in 2014. Coil spring being reloaded kind of effect. There are too many believers now and not enough doubters. Of course, it is just a guess. We could also go to $20 in 6 months.

 

I think that Credit Suisse is right and that things like earnings will remain disappointing for a few more quarters. This will dampen interest and I am not so sure that return of capital to shareholders will be as good as expected. IMO, they are very likely to take a measured approach, read very conservative.

 

Cardboard

[PlanMaestro]

Great chart.

 

Fannie √ , Freddie √, most Private Label √, Robo-signing √, Foreclosures √ , most monolines √. Considering the $8.5 billion private label settlement looks well on track, and all that was "only" $45 billion and they still have large disclosed and undisclosed reserves… MBIA, AGs, AIG: peanuts.

 

Chart: Bank of America's $45 Billion Legal Fiasco

2012-01-09 Fool.com

 

Sometimes all I want is a simple graph. With this in mind, the figure below breaks down the largest legal settlements that Bank of America (NYSE: BAC  ) has racked up since purchasing Countrywide Financial in 2008.

 

http://g.foolcdn.com/editorial/images/12060/bacsettlements_large.JPG

 

-----

 

source:

http://www.fool.com/investing/general/2013/01/09/chart-bank-of-americas-45-billion-legal-fiasco.aspx

[berkshiremystery]

Regarding 2013, I would not be surprised at all to see the stock stay flat to only go up even more in 2014. Coil spring being reloaded kind of effect. There are too many believers now and not enough doubters. Of course, it is just a guess. We could also go to $20 in 6 months.

 

I think that Credit Suisse is right and that things like earnings will remain disappointing for a few more quarters. This will dampen interest and I am not so sure that return of capital to shareholders will be as good as expected. IMO, they are very likely to take a measured approach, read very conservative.

 

Cardboard

 

I might only repost from Sanjeev's other BofA thread my own recent post...

 

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/dumb-money-now-starting-to-flow-into-bac!/msg98799/#msg98799

 

-----

 

Bank of America cut to neutral at Credit Suisse

2013-01-09 MarketWatch.com

 

Current valuation appears to be ahead of the company's near to intermediate-term performance and appears to be discounting significantly faster improvements in efficiency than we would be expecting," Credit Suisse analysts wrote in a note to clients

 

http://www.marketwatch.com/story/bank-of-america-cut-to-neutral-at-credit-suisse-2013-01-09-891212?siteid=yhoof2

[Kraven]

I am not so sure that return of capital to shareholders will be as good as expected. IMO, they are very likely to take a measured approach, read very conservative.

Cardboard

 

I am getting this feeling as well.

 

This was discussed in quite some detail a week or so ago on this thread I believe.

[Parsad]

I am not so sure that return of capital to shareholders will be as good as expected. IMO, they are very likely to take a measured approach, read very conservative.

Cardboard

 

I am getting this feeling as well.

 

This was discussed in quite some detail a week or so ago on this thread I believe.

 

It will be measured of course, but I think people will be pleasantly surprised.  2013 and 2014 are BAC's "show me" years.  We'll get cleaner quarterly results as the year progresses, ramping up of their mortgage & investment businesses, clear view of what "New BAC" reductions were all about, large reductions in loan servicing costs each quarter, and of course dividends and buybacks.  Remarkably different than two years ago...and another one of the best turnarounds I've ever seen, especially of this size and scope...just amazing!  Cheers!

[Kraven]

I am not so sure that return of capital to shareholders will be as good as expected. IMO, they are very likely to take a measured approach, read very conservative.

Cardboard

 

I am getting this feeling as well.

 

This was discussed in quite some detail a week or so ago on this thread I believe.

 

It will be measured of course, but I think people will be pleasantly surprised.  2013 and 2014 are BAC's "show me" years.  We'll get cleaner quarterly results as the year progresses, ramping up of their mortgage & investment businesses, clear view of what "New BAC" reductions were all about, large reductions in loan servicing costs each quarter, and of course dividends and buybacks.  Remarkably different than two years ago...and another one of the best turnarounds I've ever seen, especially of this size and scope...just amazing!  Cheers!

 

I can't disagree with this, but I think the key term is "measured".  I suspect regulators want a clearer picture of what BAC is doing and who they are.  There is still uncertainty there.  I think what people on this board need to differentiate between is "uncertainty" as viewed through the eyes of an investor in common stock vs a regulator.  There is no upside to a regulator being overly permissive.  None whatsoever.  A regulator has one of those jobs where to do everything right is ho hum, it's what's expected.  There are no kudos for that.  But make one mistake and you're villified and your career can be over just like that.  So no upside, but unlimited downside.  So when there are still billions subject to litigation, etc why not err on the side of being cautious?  So I think there will be something, but very measured.  The future is likely very bright though, its just unclear (as it always is) when the "future" begins.

[Parsad]

I am not so sure that return of capital to shareholders will be as good as expected. IMO, they are very likely to take a measured approach, read very conservative.

Cardboard

 

I am getting this feeling as well.

 

This was discussed in quite some detail a week or so ago on this thread I believe.

 

It will be measured of course, but I think people will be pleasantly surprised.  2013 and 2014 are BAC's "show me" years.  We'll get cleaner quarterly results as the year progresses, ramping up of their mortgage & investment businesses, clear view of what "New BAC" reductions were all about, large reductions in loan servicing costs each quarter, and of course dividends and buybacks.  Remarkably different than two years ago...and another one of the best turnarounds I've ever seen, especially of this size and scope...just amazing!  Cheers!

 

I can't disagree with this, but I think the key term is "measured".  I suspect regulators want a clearer picture of what BAC is doing and who they are.  There is still uncertainty there.  I think what people on this board need to differentiate between is "uncertainty" as viewed through the eyes of an investor in common stock vs a regulator.  There is no upside to a regulator being overly permissive.  None whatsoever.  A regulator has one of those jobs where to do everything right is ho hum, it's what's expected.  There are no kudos for that.  But make one mistake and you're villified and your career can be over just like that.  So no upside, but unlimited downside.  So when there are still billions subject to litigation, etc why not err on the side of being cautious?  So I think there will be something, but very measured.  The future is likely very bright though, its just unclear (as it always is) when the "future" begins.

 

I'll make a bet (gentleman's of course) that they return at least $7B of capital...$3.5B in dividends & $3.5B in buybacks. 

 

On another note, it looks like someone or some people are taking some profits as volume is above average and the stock is selling off pretty good.  Cheers!

[Kraven]

I'll make a bet (gentleman's of course) that they return at least $7B of capital...$3.5B in dividends & $3.5B in buybacks. 

 

On another note, it looks like someone or some people are taking some profits as volume is above average and the stock is selling off pretty good.  Cheers!

 

I'll take that bet.  So just to set the terms and be specific, we are talking about $7B returned to common shareholders.  For you to win it must be at least $3.5B in dividends on common stock and $3.5B in buybacks of the common shares.  For our purposes, we will deem there to be no other security or interest of BAC outstanding. 

 

I will be happy to lose this bet.

[Parsad]

I'll make a bet (gentleman's of course) that they return at least $7B of capital...$3.5B in dividends & $3.5B in buybacks. 

 

On another note, it looks like someone or some people are taking some profits as volume is above average and the stock is selling off pretty good.  Cheers!

 

I'll take that bet.  So just to set the terms and be specific, we are talking about $7B returned to common shareholders.  For you to win it must be at least $3.5B in dividends on common stock and $3.5B in buybacks of the common shares.  For our purposes, we will deem there to be no other security or interest of BAC outstanding. 

 

I will be happy to lose this bet.

 

Hi Kraven, yes that is correct.  At least $7B in return of capital through dividends and buybacks...a combination of both, as Moynihan has made it clear that they would like to see a third of earnings go to buybacks if the stock is at, or below, tangible book.  If the stock is up, he may put more into dividends.  So, $7B in capital return to shareholders in 2012 through dividends and buybacks.  Shake?  ;D  Cheers!

[Kraven]

I'll make a bet (gentleman's of course) that they return at least $7B of capital...$3.5B in dividends & $3.5B in buybacks. 

 

On another note, it looks like someone or some people are taking some profits as volume is above average and the stock is selling off pretty good.  Cheers!

 

I'll take that bet.  So just to set the terms and be specific, we are talking about $7B returned to common shareholders.  For you to win it must be at least $3.5B in dividends on common stock and $3.5B in buybacks of the common shares.  For our purposes, we will deem there to be no other security or interest of BAC outstanding. 

 

I will be happy to lose this bet.

 

Hi Kraven, yes that is correct.  At least $7B in return of capital through dividends and buybacks...a combination of both, as Moynihan has made it clear that they would like to see a third of earnings go to buybacks if the stock is at, or below, tangible book.  If the stock is up, he may put more into dividends.  So, $7B in capital return to shareholders in 2012 through dividends and buybacks.  Shake?  ;D  Cheers!

 

I thought you were tying yourself to at least $3.5B in each, but that's illustrative.  It's $7B total in any kind of combination of buybacks and dividends on the common only (no other security).  Winner determined at 5 pm NYC time on Dec 31, 2013.

 

Shake.  If you'd like to make it a more sporting bet, we could go for the Trading Places wager and make it $1.

[xazp]

 

I can't disagree with this, but I think the key term is "measured".  I suspect regulators want a clearer picture of what BAC is doing and who they are.  There is still uncertainty there.  I think what people on this board need to differentiate between is "uncertainty" as viewed through the eyes of an investor in common stock vs a regulator.  There is no upside to a regulator being overly permissive.  None whatsoever.  A regulator has one of those jobs where to do everything right is ho hum, it's what's expected.  There are no kudos for that.  But make one mistake and you're villified and your career can be over just like that.  So no upside, but unlimited downside.  So when there are still billions subject to litigation, etc why not err on the side of being cautious?  So I think there will be something, but very measured.  The future is likely very bright though, its just unclear (as it always is) when the "future" begins.

 

The regulators set out the CCAR framework with the goal of it being an objective, transparent way to measure bank risk and what capital returns would be allowed.  A partial goal is to make various parties believe the Feds are on top of bank risk, and to do this, they have to seem scientific and precise.  Using the CCAR methodology, it's fairly easy to do a back-of-the-napkin calculation from last year's results.  For example, BAC passed the stress test last year, asking for no capital return.  So a simple estimate for this year's stress test is they could ask to return the capital they generated since last year and again pass the stress test.  If you take CCAR at face value and try to triangulate off their capital growth, decline in risk assets (and litigation, etc risk) then you get numbers for BAC that are really impressive. 

 

The question is whether there is a hidden subjective component which is what the regulators "want" them to do.  And that's what I think you are pointing out, both that the regulators are naturally conservative, and the banks want to please regulators.  So that's a real wildcard - is there behind-the-scenes pressure to be more conservative than their own CCAR framework states? And I grant you, based on some leaks from C, that might be the case. 

 

 

 

[Parsad]

Shake.  If you'd like to make it a more sporting bet, we could go for the Trading Places wager and make it $1.

 

One of my favorite movies of all time..."Hey, Nengue Mboko, it's me...Lionel Joseph from the Highly Celestial Africa Pavillion, man!  Lionel Joseph...maboole, maboole, maboole, heh, maboole, maboole, maboole, heh!" 

 

I know all of the lines by heart!  ;D  Yes, let's do the $1 bet.  Cheers!