BAC-WT - Bank of America Warrants

[fareastwarriors]

http://finance.yahoo.com/news/bank-americas-online-banking-crashes-211558505.html

 

Bank of America's online banking crashes

 

Bank of America's online banking website crashes, leaving customers frustrated

 

 

just wanted to complain....grr

 

 

 

 

 

[Liberty]

http://finance.yahoo.com/news/bank-americas-online-banking-crashes-211558505.html

 

Bank of America's online banking crashes

 

Bank of America's online banking website crashes, leaving customers frustrated

 

 

just wanted to complain....grr

 

It sucks, but it can happen even to the best of them. Amazon.com's frontpage was unavailable for 49 minutes (iirc) yesterday.

 

Update: http://money.cnn.com/2013/01/31/technology/amazon-down/

[lisg]

I have been thinking about a post by blogger Mr. Herzeca regarding BAC successor liability from the Countrywide acquisition. He summarizes a part of the most recent earnings call when analyst Mike Mayo is probing about the risk of losing the ruling.

 

http://mbibaclitigtion.blogspot.com/2013/01/with-bank-of-america-now-on-clock-even.html

 

Bruce Thompson and Brian Moynihan answers to Mayo give me the impression they have a handle on successor liability, of course they could be posturing. Like Mike Mayo, I would like to get an idea of the potential impairment to BAC earnings, if successor liability is ruled.

 

If anyone is willing to discuss their thoughts regarding the probability of an adverse ruling to BAC and the potential impact to earnings, then please do share.

 

Thx in advance,

Tim

[racemize]

I have been thinking about a post by blogger Mr. Herzeca regarding BAC successor liability from the Countrywide acquisition. He summarizes a part of the most recent earnings call when analyst Mike Mayo is probing about the risk of losing the ruling.

 

http://mbibaclitigtion.blogspot.com/2013/01/with-bank-of-america-now-on-clock-even.html

 

Bruce Thompson and Brian Moynihan answers to Mayo give me the impression they have a handle on successor liability, of course they could be posturing. Like Mike Mayo, I would like to get an idea of the potential impairment to BAC earnings, if successor liability is ruled.

 

If anyone is willing to discuss their thoughts regarding the probability of an adverse ruling to BAC and the potential impact to earnings, then please do share.

 

Thx in advance,

Tim

 

There's been a lot of discussion about this several pages back.  I think there's as many answers as we have in there.

[MYDemaray]

Tim,

 

I think Herzeca's logic is as follows:

 

1.) BAC loses successor liability argument

2.) BAC/Gibbs Bruns settlement was premised on inability to pierce Countrywide corporate veil (he refers to Capstone and Lin analysis)

3.) Therefore, given that successor liability has been established, the original settlement is now "unreasonable" and it will be rejected

4.) BNYM will have to renegotiate a much higher amount (remember, the security holders have to direct the trustee -- BNYM -- to bring the suit, under terms of the pooling and servicing agreement)

 

The summary of what has been debated in this logic chain is:

 

#2 & #3.) there are those who do not believe that the settlement was premised on inability to pierce the corporate veil.  In fact, the settlement amount exceeds the total net worth of Countrywide, as determined by Capstone.  Gibbs & Bruns in their argument for approval points out that one of the settlement's advantages is that it reaches into BAC's resources which would otherwise be inaccessible.  (Capstone, judged the worth of Countrywide to be less than $5bn)  However, the counter-argument is that established successor liability gives the trustee greater leverage.

 

In addition, assuming the investor group doesn't abandon the settlement with Gibbs & Bruns -- can it really be deemed unreasonable when the only group organized enough to bring action agrees to the settlement?  (remember, you have to hold > 25% of the securities in the pool to direct the trustee to bring suit.  The investor group only has $26bn worth of securities in pools which equal $205B.)

 

The greatest risk, in my opinion, is that the investor group brings action collectively.  This was a hard fought agreement by Gibbs & Bruns, and unless G&B wants to reach for a greater amount, I think they'll see any dissatisfaction among investor group members as splintering their efforts...in which case the entire settlement could be jeopardized.

 

#4.) How motivated is BNYM to stick it to BAC?  Personally, I believe they will do just enough to shield themselves from liability from the investor group, and no more.

 

There are all these articles, like this one today: http://www.nytimes.com/2013/02/04/business/new-questions-raised-over-a-bank-of-america-settlement.html?ref=business&_r=0

 

And then there is this inconvenient thing called the law.

[xazp]

My view of the ideal outcome for BAC is:

1.  Some small party derails the settlement against the best interests of G&B and the large, silent majority of un-represented/un-organized bondholders. 

2.  BAC settles with the G&B people (10% of outstanding?  I forget) on the same terms as the settlement - for 10%, or $850MM.  In return, these people can not join in any R&W or litigation claims. 

3.  Without the G&B group, very few groups will hit the 25% threshold on any of the remaining R&W.  I think G&B said there were ~4 trusts out of ~400 that actually hit the 25% threshold without them.  So, I'd imagine something like 80-90% of bondholders would end up with nothing. 

 

Even the non-ideal case for BAC is fine.  If the settlement is scotched and the individual parties have to start the litigation/R&W or whatever process over, it'll probably be 2020 before anyone gets paid.  It is preferable for BAC to pay, say, $11Bn in 2020 than $8.5Bn today. 

 

Also, G&B is motivated for the settlement to go through.  Why?

 

1)  iirc, if the settlement goes through, BAC pays G&B's legal bills.  It's not clear if or who would pay those bills if the settlement falls through, but it's not going to be BAC. 

2)  G&B is simultaneously trying to settle with other banks.  They can not settle with other banks if they renege on their agreement with BAC.  They can't even really reach settlements with other banks if the BAC settlement falls through. 

 

 

Tim,

 

I think Herzeca's logic is as follows:

 

1.) BAC loses successor liability argument

2.) BAC/Gibbs Bruns settlement was premised on inability to pierce Countrywide corporate veil (he refers to Capstone and Lin analysis)

3.) Therefore, given that successor liability has been established, the original settlement is now "unreasonable" and it will be rejected

4.) BNYM will have to renegotiate a much higher amount (remember, the security holders have to direct the trustee -- BNYM -- to bring the suit, under terms of the pooling and servicing agreement)

 

The summary of what has been debated in this logic chain is:

 

#2 & #3.) there are those who do not believe that the settlement was premised on inability to pierce the corporate veil.  In fact, the settlement amount exceeds the total net worth of Countrywide, as determined by Capstone.  Gibbs & Bruns in their argument for approval points out that one of the settlement's advantages is that it reaches into BAC's resources which would otherwise be inaccessible.  (Capstone, judged the worth of Countrywide to be less than $5bn)  However, the counter-argument is that established successor liability gives the trustee greater leverage.

 

In addition, assuming the investor group doesn't abandon the settlement with Gibbs & Bruns -- can it really be deemed unreasonable when the only group organized enough to bring action agrees to the settlement?  (remember, you have to hold > 25% of the securities in the pool to direct the trustee to bring suit.  The investor group only has $26bn worth of securities in pools which equal $205B.)

 

The greatest risk, in my opinion, is that the investor group brings action collectively.  This was a hard fought agreement by Gibbs & Bruns, and unless G&B wants to reach for a greater amount, I think they'll see any dissatisfaction among investor group members as splintering their efforts...in which case the entire settlement could be jeopardized.

 

#4.) How motivated is BNYM to stick it to BAC?  Personally, I believe they will do just enough to shield themselves from liability from the investor group, and no more.

 

There are all these articles, like this one today: http://www.nytimes.com/2013/02/04/business/new-questions-raised-over-a-bank-of-america-settlement.html?ref=business&_r=0

 

And then there is this inconvenient thing called the law.

[valuecfa]

http://www.nytimes.com/2013/02/04/business/new-questions-raised-over-a-bank-of-america-settlement.html?pagewanted=2&_r=1&hp&

[fareastwarriors]

http://professional.wsj.com/article/SB10001424127887323926104578278052123945638.html?mod=WSJ_Heard_LeadStory&mg=reno64-wsj

 

or google, BofA Sprints Toward New Mortgage Hurdle

 

 

 

In the fourth quarter of 2012, BofA originated about $22 billion of mortgages, about a third of what it produced in the first quarter of 2011. Yet at $1 billion, BofA generated nearly 50% more revenue from selling on these mortgages to investors than it did back then.

 

The trouble is, BofA may be hard-pressed to sustain this performance, especially if interest rates on government bonds continue to rise. That will put more pressure on the bank to boost its share of the mortgage market so that it can maintain this revenue source.

 

Right now, this is important as BofA and other banks have relied on a refinancing wave, which is showing signs of ebbing, to help offset pressure from superlow interest rates. Higher mortgage-production revenue also has helped blunt pain BofA has felt from losses tied to soured mortgages, a drag on overall results.

 

After absorbing billions in such losses associated with its 2008 purchase of Countrywide Financial, BofA in 2011 said it would bring mortgage origination completely in-house and no longer purchase loans from other banks, known as correspondent lenders. At Wells, the biggest mortgage originator with $125 billion in the fourth quarter, correspondent lending typically accounts for about 50% of production. After BofA's shift, origination volume plummeted from about $86 billion in the fourth quarter of 2010 to $16 billion in the first quarter of 2012.

 

 

[onyx1]

Bruce Berkowitz speaking at Columbia Student Investment Management Conference, remarking about BAC (Feb 1, 2013):

 

"You have BAC with a $20/share book value, trading at $11.  Over the next 5 to 7 years the $20/share should become $40/share, and the $11 should get to $40/share.  We won't [even] go into what happens when you make a 10% ROE [where] companies trade for more than book value.  That's [$40/share] good enough for us."

 

This gets even more exciting if you include $4-$6 in dividends over the same period.  The $40 BV math works using reasonable assumptions even if you assume a dividend payout ratio of 33%.  BV growth is fueled by buybacks from excess cash (tax sheltered earnings from NOLs) at steadily higher prices over the next 5 years (as price converges with BV/share).

 

[thomcapital]

Bruce Berkowitz speaking at Columbia Student Investment Management Conference, remarking about BAC (Feb 1, 2013):

 

"You have BAC with a $20/share book value, trading at $11.  Over the next 5 to 7 years the $20/share should become $40/share, and the $11 should get to $40/share.  We won't [even] go into what happens when you make a 10% ROE [where] companies trade for more than book value.  That's [$40/share] good enough for us."

 

This gets even more exciting if you include $4-$6 in dividends over the same period.  The $40 BV math works using reasonable assumptions even if you assume a dividend payout ratio of 33%.  BV growth is fueled by buybacks from excess cash (tax sheltered earnings from NOLs) at steadily higher prices over the next 5 years (as price converges with BV/share).

 

 

Wow I really need to listen to this when I get home. Thanks onyx. I can see how the RISK/reward of the BAC-A's is far more favorable vs. the B's, but if he's really gunning for $40, I'm surprised he doesn't own at least a few B's in FAAFX...

[ERICOPOLY]

Bruce Berkowitz speaking at Columbia Student Investment Management Conference, remarking about BAC (Feb 1, 2013):

 

"You have BAC with a $20/share book value, trading at $11.  Over the next 5 to 7 years the $20/share should become $40/share, and the $11 should get to $40/share.  We won't [even] go into what happens when you make a 10% ROE [where] companies trade for more than book value.  That's [$40/share] good enough for us."

 

This gets even more exciting if you include $4-$6 in dividends over the same period.  The $40 BV math works using reasonable assumptions even if you assume a dividend payout ratio of 33%.  BV growth is fueled by buybacks from excess cash (tax sheltered earnings from NOLs) at steadily higher prices over the next 5 years (as price converges with BV/share).

 

I can't conceive of a scenario where BV gets to 40 in 5 years even if dividends were to be retained and not paid out. 

 

There's only roughly $1.30 per share left of benefit from the NOLs.  I'll bet they're all used up by the end of 2015.

 

You need $4 gains per year on average.  2013 is not going to be easy to get $4 growth in BV (a miracle is needed for that).  That puts a lot of pressure on the remaining 4 years.

 

It's not realistic to assume that 100% of $2 per share earnings is going to be plowed into repurchase at 50% discount to book -- once any serious level of capital return begins, BV discount will erode.

[mankap]

He said $40 in 5-7 years.

Even if it is 7 years, you have a BV increase of $3/yr.

Probably Bruce B. is estimating that Net Income will be more than $2/yr in later years.

[ERICOPOLY]

Well, I owe Bruce a debt of gratitude for all his help but he is smoking crack here on the 5 years side of things, and in 7 years maybe it happens.

 

The analysts ask the bank about how much assets will grow and the bank tells them that it's going to be a wait before that happens.  They will be writing new loans will capital that frees up as portfolios run off, and they will be funding other loans by selling some of their large securities portfolio.

 

So I expect it will be many years before we see $3 earnings based on the current share count. 

 

We need $2.85 on average for 7 years to get to 40.  Keeping in mind that in 2013 and 2014 we're probably only going to get about $2 average including help from the NOLs, that means for the remaing 5 years we need to get about $3.15 per share.

 

Okay, I like his optimism and he has a lot of courage of conviction.  But this is not sounding very conservative.

 

EDIT:

Well, I guess in 7 years it's only a 10% ROE per year if they're buying shares back at book value, but that's assuming they don't pay out dividends.  Maybe if we credit the dividends back it comes out all the way to $40.

 

[PlanMaestro]

This gets even more exciting if you include $4-$6 in dividends over the same period.  The $40 BV math works using reasonable assumptions even if you assume a dividend payout ratio of 33%.  BV growth is fueled by buybacks from excess cash (tax sheltered earnings from NOLs) at steadily higher prices over the next 5 years (as price converges with BV/share).

 

Yes it does Onyx. Those are the sort of numbers that some of us are using for a base scenario. And if BofA becomes more Wells than Wells … ROEs in the 17-19% range in a reasonable period of time wouldn't be completely out of the question.

[Uccmal]

I could see the stock price getting to 40 in and around 5 yrs.

 

Premium to book of 1.3 * 30bv = 40.

 

I am shooting for a more conservative 30, on the stock price.

 

But truly, who am I to argue with Berkowitz on financials.  He is likely right.

[wescobrk]

Uccmal

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Re: BAC-WT - Bank of America Warrants

« Reply #2965 on: Today at 04:14:45 PM »

Quote

I could see the stock price getting to 40 in and around 5 yrs.

 

Premium to book of 1.3 * 30bv = 40.

 

I am shooting for a more conservative 30, on the stock price.

 

But truly, who am I to argue with Berkowitz on financials.  He is likely right.

 

Almost a 6bagger on the A warrants if he is right.

 

[ERICOPOLY]

I could see the stock price getting to 40 in and around 5 yrs.

 

Premium to book of 1.3 * 30bv = 40.

 

I am shooting for a more conservative 30, on the stock price.

 

But truly, who am I to argue with Berkowitz on financials.  He is likely right.

 

 

That's more in line with my expectations.

 

We're going to have 10% ROE soon (couple of years) but paying out 3% dividend on equity.

 

So book value grows at 7% annual rate.  That gets us to $28 per share in five years.

 

To get to $32 in five years (with 3% of equity dividend rate) you need ROE of 13% -- which is 19.5% return on tangible equity.

 

To get to $40 in five years -- well that's really aggressive.

[Guest wellmont]

bruce is a great investor, like gabelli tepper ackman and loeb he's also media savvy and a great salesman. watch what they do. he'll be starting his exit at book. once it's at book his expected return will be 10% and that's not high enough for him. if he really does believe bac is going to be another wfc (i have my doubts), then the company could earn around 13% on book. in that case he may delay his selling. but he will be "movin on" before many of you do.

[Capitalist World]

I am also a fan of the leverage of the Tarp warrants but I will wait until the Article 77 decision is made as BAC's liability could climb from $8.5B to $20B  and they still need to settle with MBIA  which wants between $3-$7B for reps and warranties.  In my opinion the AIG warrants and the HIG warrants offer the safest exposure and if BAC settles the CWC disaster in the next 3-6 months without too much damage these warrants will be ok too.

[ERICOPOLY]

I will wait until the Article 77 decision is made as BAC's liability could climb from $8.5B to $20B

 

That's only 68 cents per share after taxes.  Sort of a non-event almost considering that immediately afterwards the stock could be valued finally on a multiple of earnings power without people bringing up this legal stuff anymore.

[PlanMaestro]

Why Nationstar Is Riding High Thanks to Bank of America.

http://www.fool.com/investing/general/2013/02/04/why-nationstar-is-riding-high-thanks-to-bank-of-am.aspx

[ERICOPOLY]

Why Nationstar Is Riding High Thanks to Bank of America.

http://www.fool.com/investing/general/2013/02/04/why-nationstar-is-riding-high-thanks-to-bank-of-am.aspx

 

Thanks but that is painful to read about the huge returns people are making from what BofA is selling.

[MYDemaray]

but I will wait until the Article 77 decision is made as BAC's liability could climb from $8.5B to $20B 

 

I've heard directly from Herzeca on how he thinks this happens.  Can you walk me through exactly how you think BAC ends up with a $20bn payout?  What are the exact steps and the probability, in your opinion, of each occurring.  I only ask, because I keep hearing these vague liability comments, but when it comes to walking through the specifics, and assigning probabilities, I have yet to hear a scenario that results in a likely payout by BAC.  In the spirit of trying to "break the business" I'm interested in hearing exactly how this happens...

[Capitalist World]

This is one of the most informed opinions out there on MBIA vs BAC litigation.

 

http://mbibaclitigtion.blogspot.ca/

 

I cant help you decide (nor do I know with 100% certainty) how the litigation decision will come out.

 

Investing is about making informed decisions based on your reading of the facts in the case.

 

I agree that BAC and the Warrants are interesting but I will wait until these two clouds dissipate...

 

 

 

 

 

 

 

 

 

[MYDemaray]

I cant help you decide (nor do I know with 100% certainty) how the litigation decision will come out.

 

My questions were not aimed at handicapping the Article 77 outcome.  That's unknowable, as you state.  My question is, what is the path, after an Article 77 approval failure, to the bogeyman of "$20B+" in damages, and what are the associated probabilities of each litigation step succeeding?  I want to see this from someone making these large damage claims.  As well as I can assemble it, it's a very difficult road for investors to get these recoveries from BAC.  In fact, xazp has pointed out a plausible path where BAC's liabilities are reduced by $7.5bn in an Article 77 rejection.  I am simply trying to have someone show me how this is an easy path, because right now I don't see it.