BAC-WT - Bank of America Warrants

[enoch01]

There was plenty to like in today's report.  Legacy issues are getting resolved quickly now.  The stress tests and anything that happens with MBIA will be catalysts.  You can sort of think about today's price as Mr Market offering you a free option on increased mortgage lending, which seems like a certainty.

 

I got lucky.  After the new year I sold a bunch of warrants and calls.  I've been buying them back this week as the prices have come down.

 

So now the question: what does everyone think the market didn't like today, or was surprised about, and does it matter?

 

My opinion is that the market is not looking at BAC the same way we are here- they are focused on short term performance- earnings, profits this quarter- and are not appreciating the shrinking (see Eric's post) pig in the python with the potential for $2-3 per share in earnings. Market will catch on (and will like it better) when selling at $25 and earning $2.50.

 

Some days I just have to laugh at the present situation.  Banks are safer than they have been in decades.  Bank of America has a tremendous balance sheet.  It is a systematically important institution.  A precedent has been established of not wiping out shareholders in an event that almost destroyed the fabric of the country's finances.  Warren Buffett himself has said: "The banks will not get this country in trouble, I guarantee it."  Guaranteed it!

 

Yet here we are wondering when we'll get to a 10 PE for BofA on a reasonably conservative estimate of their earnings.

 

It's pretty funny if you think about it.

[berkshiremystery]

Tom Brown likes BAC

 

http://www.bloomberg.com/video/bofa-shares-significantly-undervalued-brown-says-VeomEAYDTBa1ExVFuwHSww.html

 

Interesting note from the video,... Brown spoke of some $2.50 that BofA might be able to earn someday,...

 

http://www.gurufocus.com/news/205306/banking-guru-tom-brown-thinks-bank-of-america-is-significantly-undervalued

 

Seems that he bought most of his a-warrants in the 3rd qtr.

http://holdings.nasdaq.com/asp/Institutional.asp?FormType=Institutional&symbol=BAC''A&Selected=BAC''A

 

 

 

[berkshiremystery]

Another interesting interview of Tom Brown about BofA.

 

-----

 

 

Banking Guru Tom Brown Of Second Curve - Likes Bank Of America To Go Up 50% In 2013

2012-12-28 GuruFoucus.com/ Boomberg Video

http://www.gurufocus.com/news/203257/banking-guru-tom-brown-of-second-curve--likes-bank-of-america-to-go-up-50-in-2013

 

- For 2013 he thinks the biggest surprise will be the continued improvement in Bank of America (BAC) profitability.

 

- Thinks this is 1988 and 1989 all over again when BAC doubled in '88 and went up 50% again in '89.

 

 

 

 

[ERICOPOLY]

The loan growth helps them improve the mix of earning assets, but does not increase the total earning assets.  They can ditch some securities if loan opportunities arise. 

 

Getting better instead of getting bigger.

 

 

Paul Miller - FBR Capital Markets: Guys, on your guidance for NII which was really good, you talked about a steady, I mean, you can maintain that net interest margin at current levels, what about average earning assets? Do you think you can maintain your average earning assets at these levels or grow them?

 

Bruce R. Thompson - CFO: I think the average earnings asset levels that you're probably at a level that you're not going to see an enormous amount of growth. What we do hope that happens though is that the composition of those earning assets change so that we can look at and particularly in the institutional businesses that I mentioned, as well as in GWIM, there was very strong loan growth during the fourth quarter. We are focused on continuing to drive that forward and that obviously reduces the need to invest in securities and other things and we think ultimately it has a positive impact on the NII and it's also quite frankly consistent with managing OCI risk going forward.

[ERICOPOLY]

but anyway adjusted for one-time items, they made $0.29 beneath the actual numbers !!!

 

I come up short with 21 cents for the quarter.

 

16 + 6 + 5 + 4 + 3 - 2 - 2 - 12 = 18

 

18 cents of adjustments.

 

Direct from the horse's mouth:

Previously Announced Selected Items Impact Pretax Earnings

 

Representations and Warranties, Compensatory Fees Settlements with Fannie Mae, $2.7 Billion or $0.16 EPS

Provision for Independent Foreclosure Review Acceleration Agreement, $1.1 Billion or $0.06 EPS

Total Litigation Expense, $0.9 Billion or $0.05 EPS

Negative Valuation Adjustments for Improved Credit Spreads, $0.7 Billion or $0.04 EPS

Provision for Obligations Related to Mortgage Insurance Rescissions, $0.5 Billion or $0.03 EPS

Gain on Sale of Japan Brokerage Joint Venture, $0.4 Billion or $0.02 EPS

Positive MSR Valuation Adjustment Related to Servicing Sales, $0.3 Billion or $0.02 EPS

Net Tax Benefit Primarily From Recognition of Foreign Tax Credits of Certain Non-U.S. Subsidiaries, $1.3 Billion or $0.12 EPS

[ERICOPOLY]

At the start of the Q&A they indicated that they are currently saving $900 million per quarter from New BAC.  They are 45% done with that phase-in of expense reduction.

 

Had they been 100% complete, there would have been $1.1b less expense in the quarter, or 6.5 cents after taxes (35% tax rate).

 

Add that to the 21 cents of core earnings and it's 27.5 cents for the quarter (after-tax).

 

We can hope to cut another $2.5b quarter expense from LAS runoff but I believe we lose $200m of quarterly servicing revenue from the MSR sales.  After taxes (35% tax rate) I believe we pick up another 13.5 cents per share from LAS.

 

So all put together, it's 41 cents after-tax for the quarter if you were to close your eyes and pretend that the expenses were already run off.  That comes out to $1.64 annualized.

 

This is lower return on tangible equity than the 13% lower-bound that Moynihan talked about by 2015 in the current rate environment.  I think it also benefits from some net reserve releases that may be exhausted by 2015. 

 

Thoughts on where things get better to the 13% to 15% level from here?

 

[berkshiremystery]

but anyway adjusted for one-time items, they made $0.29 beneath the actual numbers !!!

 

I come up short with 21 cents for the quarter.

 

16 + 6 + 5 + 4 + 3 - 2 - 2 - 12 = 18

 

18 cents of adjustments.

 

Direct from the horse's mouth:

Previously Announced Selected Items Impact Pretax Earnings

 

Representations and Warranties, Compensatory Fees Settlements with Fannie Mae, $2.7 Billion or $0.16 EPS

Provision for Independent Foreclosure Review Acceleration Agreement, $1.1 Billion or $0.06 EPS

Total Litigation Expense, $0.9 Billion or $0.05 EPS

Negative Valuation Adjustments for Improved Credit Spreads, $0.7 Billion or $0.04 EPS

Provision for Obligations Related to Mortgage Insurance Rescissions, $0.5 Billion or $0.03 EPS

Gain on Sale of Japan Brokerage Joint Venture, $0.4 Billion or $0.02 EPS

Positive MSR Valuation Adjustment Related to Servicing Sales, $0.3 Billion or $0.02 EPS

Net Tax Benefit Primarily From Recognition of Foreign Tax Credits of Certain Non-U.S. Subsidiaries, $1.3 Billion or $0.12 EPS

 

Eric,....

 

it seems you did better work than Bloomberg,... they came first up with this $0.29 figure in their article, but strangely deleted it, because it was probably some hasty early rounding up.

 

These earnings are considered good? They missed forecasts by 14 cents

 

 

 

 

 

... the average census estimate at the Yahoo! finance page currently says $0.02 @ 4th qtr 2012

http://finance.yahoo.com/q/ae?s=BAC+Analyst+Estimates

.

it seems that Bloomberg had other estimates compared with Yahoo! finance,

but anyway adjusted for one-time items, they made $0.29 beneath the actual numbers !!!

 

 

------

 

BofA Profit Falls Less Than Estimated After Loan Accord

2013-01-17 Bloomberg.com

 

http://www.bloomberg.com/news/2013-01-17/bofa-profit-falls-less-than-estimated-after-loan-accord.html?cmpid=yhoo

 

Net income dropped in the fourth quarter to $732 million, or 3 cents a diluted share, from $1.99 billion, or 15 cents, a year earlier, according to a statement today from the Charlotte, North Carolina-based company. Adjusted for one-time items, profit was 29 cents a share, beating the 20-cent estimate of 18 analysts surveyed by Bloomberg.

 

---

We here at the boards came to the conclusion that they might give $7b back this year, but there are also some higher estimates. We will see who is right.

---

 

Bank of America may commit as much as $10 billion to dividends and share repurchases in 2013, Ed Najarian, an analyst at International Strategy & Investment Group Inc., said in a November research note. The lender has improved capital by the most among the biggest U.S. banks and could fare comparatively well after Federal Reserve stress tests, he wrote.

 

Passing Grade

Moynihan, 53, said Dec. 4 he’s confident Bank of America will pass. The Fed’s approval could lead to a higher dividend or share repurchases.

[Kraven]

Yeah - thought that was interesting. Don't think he could've said much else though without prejudicing their negotiation position. Also noted the "[..] they owe us a lot of money in the Global Markets business, which we've marked at cents on the dollar".

 

C.

 

I thought this was an interesting comment.  Can someone explain to me what MBIA owes BAC at the present time?

[onyx1]

Overall I thought this was a good quarter.  Legacy cost are coming down fast with drop in 60+ delinquencies, and business lines are growing.  Management is also becoming more transparent as sprinkled throughout the CC were bits and pieces enough to provide implicit ex-item guidance for 2013:

"we estimate that quarterly net interest income may come in around a base of $10.5 billion plus or minus"

"we believe provision expense in 2013 will range between $1.8 billion and $2.2 billion per quarter"

Noninterest income lowered by "a $2.5 billion charge for reps and warranties with respect to the Fannie Mae settlement, approximately $0.5 billion related to the clarification of our obligations under mortgage rescissions"

Core nontinterest expenses of $13.3bln inflated in the 4th quarter by "$300 million to $400 million of stuff that we would characterize as seasonal."

New BAC progress "we achieved approximately $900 million of the $2 billion, which is 45% of our target."

 

so assuming away LAS and litigation costs we have "core" 2013:

                              Net Interest income    10.5

                          +  Noninterest income    11.3  (4Q's $8.3 add back $3.0 FNMA R&W charges and rescissions)

                          -  Noninterest expenses  13.0  (4Q's $13.3 adjusted for seasonality)

                            - provision expense        2.0  (midpoint)

                                    pretax                    6.8  per quarter

                                    after tax (35%)      4.4  per quarter

                                    after tax                  0.40/share

                                    after tax                $1.60/share annualized for 2013

 

An additional $1.1bln of New BAC savings would bring the $1.60 up to $1.87/share after tax EPS. In a more robust business environment, there is much room for improvement.  Of course with capital accumulating at pretax levels it looks even more compelling for dividends and share repurchases. 

[onyx1]

Yeah - thought that was interesting. Don't think he could've said much else though without prejudicing their negotiation position. Also noted the "[..] they owe us a lot of money in the Global Markets business, which we've marked at cents on the dollar".

 

C.

 

I thought this was an interesting comment.  Can someone explain to me what MBIA owes BAC at the present time?

 

The whole exchange about MBIA was interesting as well.  The flat assertion that the BNY settlement is "completely independent" from what is happening at MBIA is at odds with all the recent chatter about SL and its impact on the $8.5bln settlement.

 

Also,  Moynihan: "With respect to MBIA in the broader monolines, as we've said before, generally, if you look at geography within the financial statements, the majority of the work that we do and where the monolines are accrued for at this point is within the litigation line item as opposed to within our provision for reps and warranties."

 

We don't know the level of litigation reserves but given that they have marked the monies owed from MBIA (CMBS CDS) at "cents on the dollar" that would suggest to me that they are conservative on the litigation reserves as well.  If true, and the MBIA case is a loser for BAC, TBV may not be meaningfully impacted.  I found a lot of comfort in the content of the disclosure and the fact that they needed to be prodded to offer the details. 

 

I'm hardly a fan of Mike Mayo, but in this case we all benefited from his questions.

[Kraven]

Yeah - thought that was interesting. Don't think he could've said much else though without prejudicing their negotiation position. Also noted the "[..] they owe us a lot of money in the Global Markets business, which we've marked at cents on the dollar".

 

C.

 

I thought this was an interesting comment.  Can someone explain to me what MBIA owes BAC at the present time?

 

The whole exchange about MBIA was interesting as well.  The flat assertion that the BNY settlement is "completely independent" from what is happening at MBIA is at odds with all the recent chatter about SL and its impact on the $8.5bln settlement.

 

Also,  Moynihan: "With respect to MBIA in the broader monolines, as we've said before, generally, if you look at geography within the financial statements, the majority of the work that we do and where the monolines are accrued for at this point is within the litigation line item as opposed to within our provision for reps and warranties."

 

We don't know the level of litigation reserves but given that they have marked the monies owed from MBIA (CMBS CDS) at "cents on the dollar" that would suggest to me that they are conservative on the litigation reserves as well.  If true, and the MBIA case is a loser for BAC, TBV may not be meaningfully impacted.  I found a lot of comfort in the content of the disclosure and the fact that they needed to be prodded to offer the details. 

 

I'm hardly a fan of Mike Mayo, but in this case we all benefited from his questions.

 

Agreed all around.  I just thought it was interesting that they referred to potential amounts owed from MBIA as "money owed".  As of MBIA's last call there weren't even any incipient defaults on the CDS with BAC.  So either a lot has changed in the past couple months which is hard to believe since things really aren't disintegrating or it's just a bad choice of words.

 

In any case, I agree that it was kind of interesting that it's being reserved in litigation now, not R&W.  Seems as if it is very conservatively done on a monetary basis.  I've always thought that any kind of settlement with MBIA won't impact BAC much if at all. 

[Kraven]

Dan Freed at the Street.com talking for a minute about the MBIA litigation and Mike Mayo's questions.  http://www.thestreet.com/_yahoo/video/11816487/bank-of-america-mbia-case-sparks-analyst-concern.html?cm_ven=YAHOOV&cm_cat=FREE&cm_ite=NA&s=1

[onyx1]

Yeah - thought that was interesting. Don't think he could've said much else though without prejudicing their negotiation position. Also noted the "[..] they owe us a lot of money in the Global Markets business, which we've marked at cents on the dollar".

 

C.

 

I thought this was an interesting comment.  Can someone explain to me what MBIA owes BAC at the present time?

 

The whole exchange about MBIA was interesting as well.  The flat assertion that the BNY settlement is "completely independent" from what is happening at MBIA is at odds with all the recent chatter about SL and its impact on the $8.5bln settlement.

 

Also,  Moynihan: "With respect to MBIA in the broader monolines, as we've said before, generally, if you look at geography within the financial statements, the majority of the work that we do and where the monolines are accrued for at this point is within the litigation line item as opposed to within our provision for reps and warranties."

 

We don't know the level of litigation reserves but given that they have marked the monies owed from MBIA (CMBS CDS) at "cents on the dollar" that would suggest to me that they are conservative on the litigation reserves as well.  If true, and the MBIA case is a loser for BAC, TBV may not be meaningfully impacted.  I found a lot of comfort in the content of the disclosure and the fact that they needed to be prodded to offer the details. 

 

I'm hardly a fan of Mike Mayo, but in this case we all benefited from his questions.

 

Agreed all around.  I just thought it was interesting that they referred to potential amounts owed from MBIA as "money owed".  As of MBIA's last call there weren't even any incipient defaults on the CDS with BAC.  So either a lot has changed in the past couple months which is hard to believe since things really aren't disintegrating or it's just a bad choice of words.

 

In any case, I agree that it was kind of interesting that it's being reserved in litigation now, not R&W.  Seems as if it is very conservatively done on a monetary basis.  I've always thought that any kind of settlement with MBIA won't impact BAC much if at all.

 

My understanding of the "money owed" to BAC is the $6bln notional CDS on CMBS insured by MBIA that have deteriorated in credit.  Failure to pay is only a matter of time and will most likely happen on the balloon date (2016-2018?).  MBIA is not currently responsible for payments since interest and the small sliver of principal has, so far, been paid when due.  This the basis for MBIA's claim that they are not in default.  Technically they are right, but many of these CMBS are trading a distressed prices that reflect the strong opinion that a credit event will occur.

[Kraven]

My understanding of the "money owed" to BAC is the $6bln notional CDS on CMBS insured by MBIA that have deteriorated in credit.  Failure to pay is only a matter of time and will most likely happen on the balloon date (2016-2018?).  MBIA is not currently responsible for payments since interest and the small sliver of principal has, so far, been paid when due.  This the basis for MBIA's claim that they are not in default.  Technically they are right, but many of these CMBS are trading a distressed prices that reflect the strong opinion that a credit event will occur.

 

I think you're right.  That's my understanding as well.  But, all that being said, there is no money owed right now and it's unclear how much, if any, will ever be owed and when it might be owed.  A CDS calls for a credit event and none has occurred.  Maybe it will, maybe it won't.  While things in the economy aren't all peaches and cream, they certainly aren't all fire and brimstone either.  So we'll see.  I am not saying BAC shouldn't reserve for the amounts they might potentially be owed, that's just prudent management, but it's not correct for them to say "money owed" and is misleading in my view whatever the market thinks may or may not happen.  Just my view.

[onyx1]

My understanding of the "money owed" to BAC is the $6bln notional CDS on CMBS insured by MBIA that have deteriorated in credit.  Failure to pay is only a matter of time and will most likely happen on the balloon date (2016-2018?).  MBIA is not currently responsible for payments since interest and the small sliver of principal has, so far, been paid when due.  This the basis for MBIA's claim that they are not in default.  Technically they are right, but many of these CMBS are trading a distressed prices that reflect the strong opinion that a credit event will occur.

 

I think you're right.  That's my understanding as well.  But, all that being said, there is no money owed right now and it's unclear how much, if any, will ever be owed and when it might be owed.  A CDS calls for a credit event and none has occurred.  Maybe it will, maybe it won't.  While things in the economy aren't all peaches and cream, they certainly aren't all fire and brimstone either.  So we'll see.  I am not saying BAC shouldn't reserve for the amounts they might potentially be owed, that's just prudent management, but it's not correct for them to say "money owed" and is misleading in my view whatever the market thinks may or may not happen.  Just my view.

 

Disclosure of the CMBS cusips would provide some clarity to all of us, but I am unware of any.  This is much more material to MBIA so I would expect that if it ever comes to light it would come from MBIA.

[Kraven]

My understanding of the "money owed" to BAC is the $6bln notional CDS on CMBS insured by MBIA that have deteriorated in credit.  Failure to pay is only a matter of time and will most likely happen on the balloon date (2016-2018?).  MBIA is not currently responsible for payments since interest and the small sliver of principal has, so far, been paid when due.  This the basis for MBIA's claim that they are not in default.  Technically they are right, but many of these CMBS are trading a distressed prices that reflect the strong opinion that a credit event will occur.

 

I think you're right.  That's my understanding as well.  But, all that being said, there is no money owed right now and it's unclear how much, if any, will ever be owed and when it might be owed.  A CDS calls for a credit event and none has occurred.  Maybe it will, maybe it won't.  While things in the economy aren't all peaches and cream, they certainly aren't all fire and brimstone either.  So we'll see.  I am not saying BAC shouldn't reserve for the amounts they might potentially be owed, that's just prudent management, but it's not correct for them to say "money owed" and is misleading in my view whatever the market thinks may or may not happen.  Just my view.

 

Disclosure of the CMBS cusips would provide some clarity to all of us, but I am unware of any.  This is much more material to MBIA so I would expect that if it ever comes to light it would come from MBIA.

 

Agreed.  To get the cusips one would need copies of the swaps.  No way to get those unless either party disclosed a list.

[txlaw]

I haven't gotten a chance to listen to the CC or read through the presentation, but I like your numbers, fellas. ;D

 

And these numbers are without a normalization in mortgage banking business or NIM.  A true punch card investment, this one.

[ERICOPOLY]

What the market was expecting to drop the stock by more than 3% this morning??? These result are good and conform to what was expected, no?

 

The analysts in the Q&A seemed to have higher future growth expectations.

 

For example,

1)  they asked about the growth in total earning assets and were told that loan growth would replace securities already on the balance sheet (a wash in total earning assets). 

2)  another one seemed to not understand that the spat with Fannie (severed business relationship) was unrelated to the concurrent drop in mortgage business.  She seemed to believe it would just rebound up to the prior levels now that the Fannie settlement has been done.

[mankap]

I think another reason for disappointment is that BAC refused not say anything concrete on dividend or buyback.

Also the comment on recurring revenue may have turned off street.

It gives me the impression that they will not be able to return the capital to shareholders in a bog way until they have recurring revenue.This means that until legacy issues are out of the door , BAC may not be able to return capital in a big way.

[Sunrider]

I think another reason for disappointment is that BAC refused not say anything concrete on dividend or buyback.

Also the comment on recurring revenue may have turned off street.

It gives me the impression that they will not be able to return the capital to shareholders in a bog way until they have recurring revenue.This means that until legacy issues are out of the door , BAC may not be able to return capital in a big way.

 

Well in Moynihan or Thomson's shoe's I'd do the same - remember what happened last time. So better for them to say nothing and only let the cat out of the bag once they have approval. So whilst not great for the price right now, also not really changing anything (unless one wishes to interpret their silence as a negative sign in that they don't get the impressions that regulators will be accommodating ...).

[MYDemaray]

anyone else here rooting for the $8.5bn Gibbs & Bruns settlement to get rejected?  Going back and forth about this with Dan Freed today on Twitter w/ PlanMaestro.  Here are a few thoughts:

 

1. Seems the the Gibbs & Bruns settlement covered ~$184bn of face value securities. (I got that from the loan balances on the last page of this document: http://goo.gl/Ifdu7).  So settlement amount of $8.5 implies 5% of total face value of the securities.

 

2. Then we have this nugget from Gibbs & Bruns consolidated response to the settlement objections, which demonstrates that even a group of the world's largest investors -- PIMCO, BlackRock, Goldman, et al -- acting in coordinated fashion, could only come up with the 25% threshold for 14% of the securities covered by these trusts!

 

: http://goo.gl/Q3qT3

 

There are 530 Trusts involved in the settlement.  The Institutional Investors hold  25% of the Voting Rights in 189 of these Trusts.  If the settlement is not approved, they can and  will litigate claims for those Trusts, but they do not believe litigation would achieve a better—or more certain—result than the settlement the Trustee has in hand.  Though they are prepared to  litigate, they prefer the settlement. There are 341 other Trusts involved in the settlement.  In all  but two of those 341 Trusts, no group alleges that they hold 25% of the Voting Rights.  In fact,  of the over $40 billion in securities held by the Institutional Investors or by funds and clients  they advise, almost $14 billion are in Trusts where the Institutional Investors lack the required  25% threshold.  If the settlement is disapproved, these Trusts will receive no remedy at all.

 

So $40bn held, but only $26bn meets the $25% threshold -- divide that by the face amount of $184bn, and you get 14%

 

 

3. The expert testimony in the Countrywide settlement implied a settlement amount of 5-6% of face value.  If we use these same figures, and assume that all security holders which hold less than 25% are out of luck, and the ones that hold > 25% will settle with BAC, then we are looking at settlement amounts of $1.3bn - 1.6bn

 

...that sounds like a lot less than $8.5bn to me

[PlanMaestro]

I would not go to the extreme to root for it, but to the MBIA fanatics that think that Successor Liability is a big deal:

 

Bring it on!

 

anyone else here rooting for the $8.5bn Gibbs & Bruns settlement to get rejected?  Going back and forth about this with Dan Freed today on Twitter w/ PlanMaestro.  Here are a few thoughts:

 

1. Seems the the Gibbs & Bruns settlement covered ~$184bn of face value securities. (I got that from the loan balances on the last page of this document: http://goo.gl/Ifdu7).  So settlement amount of $8.5 implies 5% of total face value of the securities.

 

2. Then we have this nugget from Gibbs & Bruns consolidated response to the settlement objections, which demonstrates that even a group of the world's largest investors -- PIMCO, BlackRock, Goldman, et al -- acting in coordinated fashion, could only come up with the 25% threshold for 14% of the securities covered by these trusts!

 

: http://goo.gl/Q3qT3

 

There are 530 Trusts involved in the settlement.  The Institutional Investors hold  25% of the Voting Rights in 189 of these Trusts.  If the settlement is not approved, they can and  will litigate claims for those Trusts, but they do not believe litigation would achieve a better—or more certain—result than the settlement the Trustee has in hand.  Though they are prepared to  litigate, they prefer the settlement. There are 341 other Trusts involved in the settlement.  In all  but two of those 341 Trusts, no group alleges that they hold 25% of the Voting Rights.  In fact,  of the over $40 billion in securities held by the Institutional Investors or by funds and clients  they advise, almost $14 billion are in Trusts where the Institutional Investors lack the required  25% threshold.  If the settlement is disapproved, these Trusts will receive no remedy at all.

 

So $40bn held, but only $26bn meets the $25% threshold -- divide that by the face amount of $184bn, and you get 14%

 

 

3. The expert testimony in the Countrywide settlement implied a settlement amount of 5-6% of face value.  If we use these same figures, and assume that all security holders which hold less than 25% are out of luck, and the ones that hold > 25% will settle with BAC, then we are looking at settlement amounts of $1.3bn - 1.6bn

 

...that sounds like a lot less than $8.5bn to me

[xazp]

FWIW on the conference call, BAC said they'd expect at least $1Bn in savings in LAS in Q4 2013 vs Q4 2012.  So their guidance is a lot more conservative than your number.

 

Indeed, I'm not sure why LAS costs can't come down more in that time frame, but, that's their guidance. 

 

Litigation, reps & warranties costs should come down too.  All of those expenses don't correspond to revenues, so any expense savings drop to the bottom line. 

 

Another data point to look at is the refreshed LTV on their mortgages.  It's dropped to 78 this last quarter which means the average mortgage is now at an LTV in-line with a 20% down mortgage.  That's pretty good!

 

A couple of months ago Moynihan mentioned that there's a lag of about 6 months before the expenses fully drop off after LAS is down to normal levels.  I guess that's charges related to letting people go, waiting for their contracts to run off, etc...

 

So if they get their staff substantially down to normal levels over the next two quarters, we can expect perhaps early in 2014 to get that $12b annual LAS expense down to just $2b.  A savings of $10b.  Or at least most of it. 

 

I don't expect the number of troublesome loans to keep coming down at the rate of 160k per quarter, but at just half that rate we're 100% done by year end.

 

Even by mid-2014 it's just gravy -- we were waiting for mid-2015.

[ERICOPOLY]

FWIW on the conference call, BAC said they'd expect at least $1Bn in savings in LAS in Q4 2013 vs Q4 2012.  So their guidance is a lot more conservative than your number.

 

Indeed, I'm not sure why LAS costs can't come down more in that time frame, but, that's their guidance. 

 

Litigation, reps & warranties costs should come down too.  All of those expenses don't correspond to revenues, so any expense savings drop to the bottom line. 

 

Another data point to look at is the refreshed LTV on their mortgages.  It's dropped to 78 this last quarter which means the average mortgage is now at an LTV in-line with a 20% down mortgage.  That's pretty good!

 

A couple of months ago Moynihan mentioned that there's a lag of about 6 months before the expenses fully drop off after LAS is down to normal levels.  I guess that's charges related to letting people go, waiting for their contracts to run off, etc...

 

So if they get their staff substantially down to normal levels over the next two quarters, we can expect perhaps early in 2014 to get that $12b annual LAS expense down to just $2b.  A savings of $10b.  Or at least most of it. 

 

I don't expect the number of troublesome loans to keep coming down at the rate of 160k per quarter, but at just half that rate we're 100% done by year end.

 

Even by mid-2014 it's just gravy -- we were waiting for mid-2015.

 

I saw that too in the CC transcript.

 

In other words, 400k caseload is 60% larger than normal caseload, yet expenses will be running 300% above normal?

 

Perhaps the type of costs incurred in pushing poorly documented cases through judicial foreclosure proceedings is vastly more expensive than what they expect to be doing in the "normalized" cases. 

 

The last cases to be resolved may be the most expensive ones in the deck (which is why it will be taking them the longest to resolve those cases)?

 

 

 

[xazp]

I'm not sure. 

 

The optimistic interpretation is they're just lowballing the estimate.  They lowballed their capital ratio estimate.  They lowballed the time it'd take to get 60+ delinquencies down to this level.  So "at least a billion" could be a lowball too, and you could see something closer to a $2 billion reduction per quarter. 

 

The pessimistic assumption is what you stated; that the remaining cases are so thorny that they will cost a lot of money to resolve.  And all they've done is get rid of the easy cases that don't cost so much to resolve. 

 

A middle ground assumption is that there is a lag where you give people notice before laying them off and then a severance package; so the actual costs don't decrease for a quarter or two after the work has already come down. 

 

It's hard to tell here because it's not just the # of 60+ delinquencies that are elevated, but the costs per 60+ delinquencies. 

 

---

 

One thing that is a head scratcher to me - so BAC sold off the delinquent mortgages for a profit.  And they say this leads to a large decrease in costs.  So this is a win/win/win -- selling the MSRs increases B3 capital, it's a profitable sale, and it's a big reduction in expenses. 

 

The buyer is either a sucker or somehow knows how to foreclose a lot more efficiently than BAC. 

 

 

 

FWIW on the conference call, BAC said they'd expect at least $1Bn in savings in LAS in Q4 2013 vs Q4 2012.  So their guidance is a lot more conservative than your number.

 

Indeed, I'm not sure why LAS costs can't come down more in that time frame, but, that's their guidance. 

 

Litigation, reps & warranties costs should come down too.  All of those expenses don't correspond to revenues, so any expense savings drop to the bottom line. 

 

Another data point to look at is the refreshed LTV on their mortgages.  It's dropped to 78 this last quarter which means the average mortgage is now at an LTV in-line with a 20% down mortgage.  That's pretty good!

 

A couple of months ago Moynihan mentioned that there's a lag of about 6 months before the expenses fully drop off after LAS is down to normal levels.  I guess that's charges related to letting people go, waiting for their contracts to run off, etc...

 

So if they get their staff substantially down to normal levels over the next two quarters, we can expect perhaps early in 2014 to get that $12b annual LAS expense down to just $2b.  A savings of $10b.  Or at least most of it. 

 

I don't expect the number of troublesome loans to keep coming down at the rate of 160k per quarter, but at just half that rate we're 100% done by year end.

 

Even by mid-2014 it's just gravy -- we were waiting for mid-2015.

 

I saw that too in the CC transcript.

 

In other words, 400k caseload is 60% larger than normal caseload, yet expenses will be running 300% above normal?

 

Perhaps the type of costs incurred in pushing poorly documented cases through judicial foreclosure proceedings is vastly more expensive than what they expect to be doing in the "normalized" cases. 

 

The last cases to be resolved may be the most expensive ones in the deck (which is why it will be taking them the longest to resolve those cases)?