BAC-WT - Bank of America Warrants

[rkbabang]

http://www.nytimes.com/2013/01/20/business/a-fed-voice-asking-to-cut-megabanks-down-to-size.html

 

 

What is your opinion of this?  Have you factored in the possibility of the government doing something drastic, completely changing the company and its potential, into your BAC investment thesis?  I haven't.  That article makes me a bit nervous.

 

There are roughly 5,600 commercial banking institutions in the country, Mr. Fisher noted. Some 5,500 of them are community banks. While these organizations account for 98.6 percent of all banks, they hold only 12 percent of total industry assets. They are routinely allowed to fail if they get into trouble. Few of them did during the crisis.

 

Contrast these figures with those of the nation’s 12 largest banks, whose assets range from $250 billion to $2.3 trillion. They account for 0.2 percent of all banks but hold 69 percent of industry assets. These are the banks that enjoy all the perquisites of the federal safety net: significantly lower borrowing costs and a taxpayer backstop, for example.

 

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Every industry has it's own type of 80/20 principle, or maybe even odder like 90/10, 99/5, or this extreme 69/0.2 like mentioned in the article. I have no opinion if lawmakers might be able to change rules against the lobbying powers, but certainly it might be good. But in the end capitalism depends on the gravity of these 80/20 principles, and one way or another there will be big banks or other companies able to do something stupid. Lawmakers would only change a small needle in a haystack, maybe get it from 69/0.2 to about 50/0.9 But it's silly to assume that we ever get to a 100/100 principle, where 1% banks have 1% of the assets, i.e. 10/10 and so on. I guaranty it, it will never, never ever happen, because not even the universe and it's galaxies are evenly spread, and such a world economc order would have no incentives. I bet even in China are mega banks.

 

I'm not saying the government can do anything useful, but they can do a lot of harm while trying.  If they decide to break up BAC they can do so as easily as passing a bill to do it.

[Uccmal]

http://www.nytimes.com/2013/01/20/business/a-fed-voice-asking-to-cut-megabanks-down-to-size.html

 

 

What is your opinion of this?  Have you factored in the possibility of the government doing something drastic, completely changing the company and its potential, into your BAC investment thesis?  I haven't.  That article makes me a bit nervous.

 

There are roughly 5,600 commercial banking institutions in the country, Mr. Fisher noted. Some 5,500 of them are community banks. While these organizations account for 98.6 percent of all banks, they hold only 12 percent of total industry assets. They are routinely allowed to fail if they get into trouble. Few of them did during the crisis.

 

Contrast these figures with those of the nation’s 12 largest banks, whose assets range from $250 billion to $2.3 trillion. They account for 0.2 percent of all banks but hold 69 percent of industry assets. These are the banks that enjoy all the perquisites of the federal safety net: significantly lower borrowing costs and a taxpayer backstop, for example.

 

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Every industry has it's own type of 80/20 principle, or maybe even odder like 90/10, 99/5, or this extreme 69/0.2 like mentioned in the article. I have no opinion if lawmakers might be able to change rules against the lobbying powers, but certainly it might be good. But in the end capitalism depends on the gravity of these 80/20 principles, and one way or another there will be big banks or other companies able to do something stupid. Lawmakers would only change a small needle in a haystack, maybe get it from 69/0.2 to about 50/0.9 But it's silly to assume that we ever get to a 100/100 principle, where 1% banks have 1% of the assets, i.e. 10/10 and so on. I guaranty it, it will never, never ever happen, because not even the universe and it's galaxies are evenly spread, and such a world economc order would have no incentives. I bet even in China are mega banks.

 

I'm not saying the government can do anything useful, but they can do a lot of harm while trying.  If they decide to break up BAC they can do so as easily as passing a bill to do it.

 

I guess this is where a sum of the parts comes in.  If BAC is forced to break up what do we as shareholders get.  Right now the market cap os 120 B.  I put ML at 100 B.  BAc would monetize the assets either by distributing them directly to shareholders, or holding an IPO.  Either way we win. 

 

If they required the big banks to split their less distinct units then we would be holders of smaller consumer banks, not regulated by SIFI, and not required to hold as much capital.  That would release a big dividend.

[Liberty]

I guess this is where a sum of the parts comes in.  If BAC is forced to break up what do we as shareholders get.  Right now the market cap os 120 B.  I put ML at 100 B.  BAc would monetize the assets either by distributing them directly to shareholders, or holding an IPO.  Either way we win. 

 

If they required the big banks to split their less distinct units then we would be holders of smaller consumer banks, not regulated by SIFI, and not required to hold as much capital.  That would release a big dividend.

 

How would it work for those who hold tARP warrants, though?

[rkbabang]

I'm not saying the government can do anything useful, but they can do a lot of harm while trying.  If they decide to break up BAC they can do so as easily as passing a bill to do it.

I guess this is where a sum of the parts comes in.  If BAC is forced to break up what do we as shareholders get.  Right now the market cap os 120 B.  I put ML at 100 B.  BAc would monetize the assets either by distributing them directly to shareholders, or holding an IPO.  Either way we win. 

 

If they required the big banks to split their less distinct units then we would be holders of smaller consumer banks, not regulated by SIFI, and not required to hold as much capital.  That would release a big dividend.

 

Thanks, you are probably correct, unless the legislation specifies otherwise the shareholders would end up with the components.    I don't see this as likely, but this is something I hadn't thought through.  I wonder what this would mean specifically for the warrants.

 

[Guest wellmont]

I guess this is where a sum of the parts comes in.  If BAC is forced to break up what do we as shareholders get.  Right now the market cap os 120 B.  I put ML at 100 B.  BAc would monetize the assets either by distributing them directly to shareholders, or holding an IPO.  Either way we win. 

 

If they required the big banks to split their less distinct units then we would be holders of smaller consumer banks, not regulated by SIFI, and not required to hold as much capital.  That would release a big dividend.

 

gov would not break BAC into tiny pieces of community banks. they are not so much worried about size as they are about structure (volker rule). if they forced bac to break up they would split it into two, the basic banking piece, and the capital markets piece. that would be bullish for bac stock imo, because they would have to spin off ML. But it does not appear the government is going to force this on bac. the reason I say this is because it looks like WFC is trying to get bigger in capital markets. so they have sized up the regulatory regime and determined that they will not try to separate TBTF banks in this way.

[ECCO]

I guess this is where a sum of the parts comes in.  If BAC is forced to break up what do we as shareholders get.  Right now the market cap os 120 B.  I put ML at 100 B.  BAc would monetize the assets either by distributing them directly to shareholders, or holding an IPO.  Either way we win. 

 

If they required the big banks to split their less distinct units then we would be holders of smaller consumer banks, not regulated by SIFI, and not required to hold as much capital.  That would release a big dividend.

 

How would it work for those who hold tARP warrants, though?

 

There is plenty of clauses that protect TARP warrants in this case. Dont worry about that. Just read the prospectus.

[xazp]

My opinion -  the risk of such an action was greatest in 2008/2009.  5 years later, I think the risk is pretty small.  There isn't the political will to do it.  The people don't care, the politicians don't care - there are one or two people in the Fed (but not the chairman) who keep talking about it.  This Fed guy incidentally has been talking about breaking up the banks for years. 

 

The global way for fixing the big banks has been to force them to raise tons of capital, to have stricter rules on assets.  The banks haven't enjoyed this process, but I largely think the regulators have done a reasonable job balancing the need for lower risk and the need for economic growth.  I think the response was sensible.

 

If one country alone decides to break up the big banks, that country will be at a permanent competitive disadvantage versus the rest of the world that keeps them.  I don't see it in the cards. 

 

One last point: from the Fed's point of view the best thing they can do is let the banks return capital to shareholders (and/or pay down debt).  When banks start having too much capital, they do stupid things, like forcing loan growth into ever-riskier assets, acquiring awful companies, etc.  IMO if they want banks to shrink they are doing the right thing - upping the capital requirements and allowing the return of capital above that level. 

 

 

 

 

 

What is your opinion of this?  Have you factored in the possibility of the government doing something drastic, completely changing the company and its potential, into your BAC investment thesis?  I haven't.  That article makes me a bit nervous.

 

[Uccmal]

My opinion -  the risk of such an action was greatest in 2008/2009.  5 years later, I think the risk is pretty small.  There isn't the political will to do it.  The people don't care, the politicians don't care - there are one or two people in the Fed (but not the chairman) who keep talking about it.  This Fed guy incidentally has been talking about breaking up the banks for years. 

 

The global way for fixing the big banks has been to force them to raise tons of capital, to have stricter rules on assets.  The banks haven't enjoyed this process, but I largely think the regulators have done a reasonable job balancing the need for lower risk and the need for economic growth.  I think the response was sensible.

 

If one country alone decides to break up the big banks, that country will be at a permanent competitive disadvantage versus the rest of the world that keeps them.  I don't see it in the cards. 

 

One last point: from the Fed's point of view the best thing they can do is let the banks return capital to shareholders (and/or pay down debt).  When banks start having too much capital, they do stupid things, like forcing loan growth into ever-riskier assets, acquiring awful companies, etc.  IMO if they want banks to shrink they are doing the right thing - upping the capital requirements and allowing the return of capital above that level.

 

 

Good points.  Do you force Canada to break up RBC, and the UK to break up RBS, as well?

 

There is also the very real economic benefit of allowing the big banks to return cash to shareholders.  The extra taxes alone should also have most politcos salivating.

[ERICOPOLY]

DC politicians must benefit from having a branch they can walk into pretty much anywhere when they are travelling the country.  Most of them surely keep two homes -- one in DC and one back in the state they represent.

 

 

[Parsad]

Under the current administration, there is almost zero chance that they will break up the big banks.  They have curtailed much of the proprietary and CDS business, while capital levels are as high as they've ever been.  It is not in the United States best interest, or Canada's for that matter, to break up the large banks.  What they should do is make sure that as they get bigger, their capital ratios remain at high levels and that banks stick to banking, lending and investments.  Cheers!

[berkshiremystery]

Some interesting article on BofA by SeekingAlpha contributor Alex Cho. Even if some parts are more technically, he has some interesting graphics of EPS estimates. Alex Cho has done a similar article on AIG a month ago.

 

Bank Of America Is The Best Bank Stock On The Dow

2013-01-22 SeekingAlpha.com

 

http://seekingalpha.com/article/1123661-bank-of-america-is-the-best-bank-stock-on-the-dow

 

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http://static.cdn-seekingalpha.com/uploads/2013/1/22/1062195-13588343443489935-Alex-Cho_origin.png

 

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http://static.cdn-seekingalpha.com/uploads/2013/1/1062195_13588340380068_0.png

 

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http://static.cdn-seekingalpha.com/uploads/2013/1/1062195_13588340380068_2.png

 

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http://static.cdn-seekingalpha.com/uploads/2013/1/22/1062195-13588343957193108-Alex-Cho_origin.png

 

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http://static.cdn-seekingalpha.com/uploads/2013/1/1062195_13588340380068_3.png

 

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http://static.cdn-seekingalpha.com/uploads/2013/1/1062195_13588340380068_4.png

 

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Here's his article on AIG from last month:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/aig-american-international-group/msg97154/#msg97154

 

 

 

 

 

 

 

 

 

[Parsad]

Why is it that investors, and analysts in particular, always expect such linear growth?  That's probably why surprises send the markets in a panic.  Cheers!

[obtuse_investor]

Why is it that investors, and analysts in particular, always expect such linear growth?  That's probably why surprises send the markets in a panic.  Cheers!

 

It is a perverse human tendency to simply linearly project the recent past-- or in the case of analysts, pull random favourable numbers out of a hat, and linearly project into the distant future.

[racemize]

Why is it that investors, and analysts in particular, always expect such linear growth?  That's probably why surprises send the markets in a panic.  Cheers!

 

It is a perverse human tendency to simply linearly project the recent past-- or in the case of analysts, pull random favourable numbers out of a hat, and linearly project into the distant future.

 

Perhaps they just use linear growth since the randomness in between the two endpoints can't be predicted?  We all have thoughts about where it will end up, but don't bother with the middle portion, but if you were forced to make some prediction about the middle, linear might be the best of a lot of bad options.

[obtuse_investor]

Why is it that investors, and analysts in particular, always expect such linear growth?  That's probably why surprises send the markets in a panic.  Cheers!

 

It is a perverse human tendency to simply linearly project the recent past-- or in the case of analysts, pull random favourable numbers out of a hat, and linearly project into the distant future.

 

Perhaps they just use linear growth since the randomness in between the two endpoints can't be predicted?  We all have thoughts about where it will end up, but don't bother with the middle portion, but if you were forced to make some prediction about the middle, linear might be the best of a lot of bad options.

 

I think you just hit the nail on the head (highlighted above). We, the value oriented crowd, aren't forced to fill the middle and can stomach whatever market throws at us during that period.

 

[hyten1]

some interesting stats on bac http://www.bankprobe.com/bank/BANK_OF_AMERICA_CORPORATION/h1073757

[berkshiremystery]

Former Bank of America CEO Tom Clausen dies

2013-01-22

 

http://www.bizjournals.com/sanfrancisco/blog/2013/01/bank-of-america-tom-clausen-death.html?ana=yfcpc

[value-is-what-you-get]

Why is it that investors, and analysts in particular, always expect such linear growth?  That's probably why surprises send the markets in a panic.  Cheers!

 

Beware of geeks bearing spreadsheets - WEB.

 

No offence intended to the author of the report - just reminded me of that quote.

[berkshiremystery]

Why is it that investors, and analysts in particular, always expect such linear growth?  That's probably why surprises send the markets in a panic.  Cheers!

 

Beware of geeks bearing spreadsheets - WEB.

 

No offemce intended to the author of the report - just reminded me of that quote.

 

... we should rather wonder why the author, Alex hasn't put his money where his mouth is. It seems rather peculiar that he even hasn't followed his own linear thoughts. Anyway,... the best time to place a bet is opposite the crowd, because there's usually the highest margin of safety, and the deepest discount from intrinsic value. Only nonlinear behavior leads to superior results, because the growth is steepest. I didn't even had precise numbers in my head last year, and in Dec 2011 for the following years (near term) estimates, only some vague sense of a far distance generalized number in what direction the pulling force field would move, this applies also to my current view of numbers. There is always a nonlinear, type of fuzzy/blurry band range, almost comparable to a Nat'l Hurricane Center, NOAA hurricane chart. But one should remember, the safest place in a hurricane, is to fly into the eye of an hurricane. The safest point to buy a share is at the moment of the steepest pessimism,... or better said average in and average out the nonlinear way.

 

http://www.nhc.noaa.gov/archive/2012/graphics/al18/loop_S.shtml

 

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http://www.safalniveshak.com/wp-content/uploads/2011/12/intrinsic_value.png

[ERICOPOLY]

Why is it that investors, and analysts in particular, always expect such linear growth?  That's probably why surprises send the markets in a panic.  Cheers!

 

Beware of geeks bearing spreadsheets - WEB.

 

No offemce intended to the author of the report - just reminded me of that quote.

 

Well just look at his picture.  Geek.

 

More:  About, "I am currently enrolled as a student of finance and mathematics.".

 

Again, Geek.

 

[berkshiremystery]

Why is it that investors, and analysts in particular, always expect such linear growth?  That's probably why surprises send the markets in a panic.  Cheers!

 

Beware of geeks bearing spreadsheets - WEB.

 

No offemce intended to the author of the report - just reminded me of that quote.

 

Well just look at his picture.  Geek.

 

More:  About, "I am currently enrolled as a student of finance and mathematics.".

 

Again, Geek.

 

 

 

If math becomes beyond the elementary school level I rather shut down my brain before I think too much.

 

 

http://www.fitrade.com/about-us/

[MYDemaray]

I've spent the last few days trying to better understand the claims of those who say that BAC could be on the hook for "hundreds of billions" via RMBS putback cases and security litigation (rather than simply dismissing them).  Until Friday, I didn't see a possible path to those claims.  I think I better understand them now, but certainly not as well as some of you here.  I was hoping some of you could weigh in.

 

Path #1: BAC is found liable for Countrywide's debts.  As such, the $8.5b Gibbs & Bruns settlement is now endangered.  Why? Because the expert opinions of RMMS and Capstone relied upon in the Gibbs & Bruns settlement were predicated on the inability to pierce the corporate veil.  In light of this new information, the settlement can no longer meet the "reasonable" test for Article 77.  As such it is rejected.

 

What next? Likely, BNYM renegotiates the settlement with BAC to a number that it can demonstrate as "reasonable" and pass under Article 77.  To figure out what this number is, we need to look at other settlements to see where they ended up relative to UPB or face value of securities.

 

Path #2: This is the more tenuous path -- a derivative action brought on behalf of the trust, where the trustee does not object.  This seems very tenuous, but there is an example of this happening: http://newsandinsight.thomsonreuters.com/Legal/News/2012/12_-_December/New_MBS_suits_raise_question__Who_s_filing_put-back_claims_/

 

 

Path #3: Use of obscure provisions to circumvent the Pooling and Servicing Agreements. (Does anyone know the status of this case?): http://newsandinsight.thomsonreuters.com/Legal/News/2012/04_-_April/Does_Pauley_s_BNYM_ruling_spell_new_liability_for_MBS_trustees_/

 

 

Thoughts anyone?

[xazp]

BAC is found liable for Countrywide's debts.  As such, the $8.5b Gibbs & Bruns settlement is now endangered.  >>

 

Please read the following case,  start page 7 "successor liability."  This is a case of Allstate vs. Countrywide/BAC on private mortgage claims.  Allstate would be a party to the Gibbs/Brun deal; MBIA would not.  This is the more relevant case for the $8.5Bn settlement, and, the ruling came out after the settlement. 

http://crapstocks.com/files/BAC/legal/allstate.pdf

 

For whatever reason people keep ignoring this case.  For every decision against successor liability you can find, I will give you one that has already been decided that says BAC doesn't owe on successor liability.

 

But, please, read the case.  In fact read the whole thing.  The even more important part is the statute of limitations and statute of repose. 

 

I've spent the last few days trying to better understand the claims of those who say that BAC could be on the hook for "hundreds of billions" via RMBS putback cases and security litigation (rather than simply dismissing them).  Until Friday, I didn't see a possible path to those claims.  I think I better understand them now, but certainly not as well as some of you here.  I was hoping some of you could weigh in.

 

Path #1: BAC is found liable for Countrywide's debts.  As such, the $8.5b Gibbs & Bruns settlement is now endangered.  Why? Because the expert opinions of RMMS and Capstone relied upon in the Gibbs & Bruns settlement were predicated on the inability to pierce the corporate veil.  In light of this new information, the settlement can no longer meet the "reasonable" test for Article 77.  As such it is rejected.

 

What next? Likely, BNYM renegotiates the settlement with BAC to a number that it can demonstrate as "reasonable" and pass under Article 77.  To figure out what this number is, we need to look at other settlements to see where they ended up relative to UPB or face value of securities.

 

Path #2: This is the more tenuous path -- a derivative action brought on behalf of the trust, where the trustee does not object.  This seems very tenuous, but there is an example of this happening: http://newsandinsight.thomsonreuters.com/Legal/News/2012/12_-_December/New_MBS_suits_raise_question__Who_s_filing_put-back_claims_/

 

 

Path #3: Use of obscure provisions to circumvent the Pooling and Servicing Agreements. (Does anyone know the status of this case?): http://newsandinsight.thomsonreuters.com/Legal/News/2012/04_-_April/Does_Pauley_s_BNYM_ruling_spell_new_liability_for_MBS_trustees_/

 

 

Thoughts anyone?

[enoch01]

I've spent the last few days trying to better understand the claims of those who say that BAC could be on the hook for "hundreds of billions" via RMBS putback cases and security litigation (rather than simply dismissing them).  Until Friday, I didn't see a possible path to those claims.  I think I better understand them now, but certainly not as well as some of you here.  I was hoping some of you could weigh in.

 

Path #1: BAC is found liable for Countrywide's debts.  As such, the $8.5b Gibbs & Bruns settlement is now endangered.  Why? Because the expert opinions of RMMS and Capstone relied upon in the Gibbs & Bruns settlement were predicated on the inability to pierce the corporate veil.  In light of this new information, the settlement can no longer meet the "reasonable" test for Article 77.  As such it is rejected.

 

Thoughts anyone?

 

The expert opinion was not entirely predicated on the inability to pierce the corporate veil - yes?  Even if it was, that is only part of the Trustee's opinion as to why the settlement is "reasonable".

[MYDemaray]

XAZP -- thank you for that case, I will read it

 

Enoch01 -- from bottom of page 2: "In my opinion the calculation and utilization of these particular haircuts is logical since BofA's willingness and legal obligation to repurchase certain loans represents the largest hurdle from Investors Group's perspective"

 

http://www.cwrmbssettlement.com/docs/Opinion%20Concerning%20Contemplated%20Settlement%20Amount%20For%20530%20Trusts.pdf

 

I read that to indicate that haircuts would have been less severe and settlement amount larger if BofA were liable.