BAC-WT - Bank of America Warrants

[MrB]

From Oct 2011 FT Lex

 

Goldman Sachs v BofA: and the winner is ... 

Quick as a flash: if you had to choose between owning Goldman Sachs or Bank of America shares for the next five years, which would you pick? Over the past half a decade the former would have been the right answer by a considerable margin (minus 45 per cent versus minus 90 per cent), although nobody would have enjoyed winning the bet. Most snap decisions would probably fall the same way today. Goldman is still considered the premier Wall Street institution, while BofA lurches between nasty rumours and panic sell-offs....

 

 

http://www.ft.com/intl/cms/s/3/f8db4eba-f9a0-11e0-a805-00144feab49a.html#axzz1n07jOlTZ

[onyx1]

The 10-K is out.  It's long and will take a while to get through it all, but the first page I turn to is regulatory capital.  I look for changes in wording to get a clue as to how management expects capital to evolve.  Here is a key paragraph and how it has changed over the last three quarters.

 

June 30, 2011:

“We have made the implementation and migration of the new capital rules our primary capital related priority. We intend to continue to build capital through retaining earnings, actively reducing legacy asset portfolios and implementing other non- dilutive capital related initiatives including focusing on the reduction of higher risk- weighted assets. As the new rules come into effect, we currently anticipate that we will be in excess of the minimum required ratios without needing to raise new equity capital.”

 

September 30, 2011:

“Preparing for the implementation of the new capital rules is a top priority. We intend to continue to build capital through retaining earnings, actively reducing legacy asset portfolios and implementing other capital related initiatives, including focusing on reducing both higher risk- weighted assets and assets currently deducted, or expected to be deducted under Basel III, from capital.”

 

Note new capital raising exclusion is missing, and I believe this contributed to the weakness in BAC shares last fall.

 

December 31, 2011:

“Preparing for the implementation of the new capital rules is a top strategic priority, and we expect to comply with the final rules when issued and effective. We intend to continue to build capital through retaining earnings, actively reducing legacy asset portfolios and implementing other capital related initiatives, including focusing on reducing both higher risk- weighted assets and assets currently deducted, or expected to be deducted under Basel III, from capital.  We expect non- core asset sales to play a less prominent role in our capital strategy in future periods.”

 

 

If BAC expected the need to raise capital it would be a disclosure item and would likely show up here.  Except for the addition of the last sentence, nothing new is disclosed and that is a positive.  But  they have hedged themselves and appear to hinge the outcome of raising capital the Fed's acceptance of their analytical models, as disclosed by the by addition of these two new paragraphs:

 

"On January 5, 2012, we submitted a capital plan to the Federal Reserve consistent with the proposed rules. The capital plan includes the ICAAP and related results, analysis and support for the capital guidelines, and planned capital actions. The ICAAP incorporates capital forecasts, stress test results, economic capital, qualitative risk assessments and assessment of regulatory changes, all of which influence the capital adequacy assessment.

 

Given that the U.S. regulatory agencies have issued neither proposed rulemaking nor supervisory guidance on Basel III, significant uncertainty exists regarding the eventual impacts of Basel III on U.S. financial institutions, including us.  These regulatory changes also require approval by the U.S. regulatory agencies of analytical models used as part of our capital measurement and assessment, especially in the case of more complex models. If these more complex models are not approved, it could require financial institutions to hold additional capital, which in some cases could be significant."

 

All eyes now turn to the fed.

 

Sorry for the long post.

 

 

 

 

[PlanMaestro]

BofA Halts Routing New Mortgages to Fannie Mae

 

http://www.bloomberg.com/news/2012-02-23/bofa-halts-routing-new-mortgages-to-fannie-mae.html

 

PS: good analysis onyx, thanks

[Uccmal]

Nice analysis Onyx - I learned something of real value.

[enoch01]

BofA Halts Routing New Mortgages to Fannie Mae

 

http://www.bloomberg.com/news/2012-02-23/bofa-halts-routing-new-mortgages-to-fannie-mae.html

 

 

I'm not sure what to make of this.  I assumed it had been more profitable to lay these off on the GSE's rather than keep them on balance sheet.  Unless they sell these all to Freddie Mac, won't they be making less on this business now?

[twacowfca]

Nice analysis Onyx - I learned something of real value.

 

Yes.  Good sleuthing.  :)

[rranjan]

BofA Halts Routing New Mortgages to Fannie Mae

 

http://www.bloomberg.com/news/2012-02-23/bofa-halts-routing-new-mortgages-to-fannie-mae.html

 

 

I'm not sure what to make of this.  I assumed it had been more profitable to lay these off on the GSE's rather than keep them on balance sheet.  Unless they sell these all to Freddie Mac, won't they be making less on this business now?

 

I was thinking about the same so I will try...

 

Historically the average difference between Key interest rate on mortgage-backed securities and 30 years mortgage loan has been around 0.50%. Now days, it is running close to 1%. If spread returns to their historical average then 30 years loan rate might drop to 3.40%. I doubt that it will happen though.

 

60% of loans are originated by 5 big banks and they claim that the cost of originating  loans have gone up due to regulations. Fannie and Freddie have gotten tougher over the documentations which pushes the cost up. Fees charged to lenders by Fredie and Fannie are going to increase this year as well.

 

So If I am BAC then I might be tempted to keep 1% spread to myself as long as tight underwriting is practiced. Yes, it will tie up the capital and BAC can write less business but major portion of spread will drop to their bottom-line.

 

Just my thoughts. I don't have any special insight on this.

 

[thomcapital]

Hello all,

 

I've been trying to wrap my head around the risk/reward of the warrants vs. the common. How do you assess future expected volatility and its impact on the warrants? While doing some big picture sensitivity analysis (comparing warrant values using B-S at WolframAlpha, assuming 72 months to expiration, BAC @ $14); owning the stock outright will outperform the warrant if you assume volatility drops to 45%, but the warrant outperforms if volatility is maintained at 60%...

 

Thanks in advance!

[sswan11]

Credit Suisse analysis of 28% (proposed) vs 35% corporate tax rate on deferred tax asset:

 

 

■  GAAP Implications.  A lower U.S. corporate tax rate would cause Bank of

America to take a write-down on a  portion of its DTA’s of $32Bn. We

estimate DTA’s of $15-19Bn that may be subject to a potential impairment

from the lower corporate rate (although likely to be less by the time the new

rate is enacted in 2013). This base excludes estimated foreign tax DTAs,

state taxes and credit carryforwards ($0-4.5bn) which would not face DTA

impairment (because not based on the U.S. corporate tax rate). We estimate

that a corporate tax rate to 28% would imply a write-down of about $3.0-

3.9Bn or a negative 2-3% to tangible book value...The shares would trade at 0.4x book value and 0.7x tangible book value (vs. 0.4x BV and 0.6x TBV currently).

[MrB]

Credit Suisse analysis of 28% (proposed) vs 35% corporate tax rate on deferred tax asset:

 

 

■  GAAP Implications.  A lower U.S. corporate tax rate would cause Bank of

America to take a write-down on a  portion of its DTA’s of $32Bn. We

estimate DTA’s of $15-19Bn that may be subject to a potential impairment

from the lower corporate rate (although likely to be less by the time the new

rate is enacted in 2013). This base excludes estimated foreign tax DTAs,

state taxes and credit carryforwards ($0-4.5bn) which would not face DTA

impairment (because not based on the U.S. corporate tax rate). We estimate

that a corporate tax rate to 28% would imply a write-down of about $3.0-

3.9Bn or a negative 2-3% to tangible book value...The shares would trade at 0.4x book value and 0.7x tangible book value (vs. 0.4x BV and 0.6x TBV currently).

 

Page 17 of 10K...

Changes in U.S. and non-U.S. tax and other laws and regulations could adversely affect our financial condition and results of operations.

The U.S. Congress and the Administration have signaled growing interest in reforming the U.S. corporate income tax. While the timing of such reform is unclear, possible approaches include lowering the 35 percent corporate tax rate, modifying the taxation of income earned outside of the U.S. and limiting or eliminating various other deductions, tax credits and/or other tax preferences. It is not possible at this time to quantify either the one-time impact from remeasuring deferred tax assets and liabilities that might result upon enactment of tax reform or the ongoing impact reform might have on income tax expense, but either of these impacts could adversely affect our financial condition and results of operations.

In addition, the income from certain non--U.S. subsidiaries has not been subject to U.S. income tax as a result of long-standing deferral provisions applicable to income that is derived in the active conduct of a banking and financing business (active finance income). The U.S. Congress has extended the application of these deferral provisions several times, most recently in 2010. These provisions now are set to expire for taxable years beginning on or after January 1, 2012. Absent an extension of these provisions, active financing income earned by certain non-U.S. subsidiaries will generally be subject to a tax provision that considers incremental U.S. income tax. The impact of the expiration of these provisions would depend upon the amount, composition and geographic mix of our future earnings.

Other countries have also proposed and, in some cases, adopted certain regulatory changes targeted at financial institutions or that otherwise affect us. The EU has adopted increased capital requirements and the U.K. has (i) increased liquidity requirements for local financial institutions, including regulated U.K. subsidiaries of non-U.K. bank holding companies and other financial institutions as well as branches of non-U.K. banks located in the U.K; (ii) adopted a Bank Tax Levy which will apply to the aggregate balance sheet of branches and subsidiaries of non-U.K. banks and banking groups operating in the U.K.; and (iii) proposed the creation and production of recovery and resolution plans by U.K.-regulated entities.

On July 19, 2011, the U.K. 2011 Finance Bill was enacted which reduced the corporate income tax rate one percent to 26 percent beginning on April 1, 2011, and then to 25 percent effective April 1, 2012. These rate reductions will favorably affect income tax expense on future U.K. earnings but also required us to remeasure our U.K. net deferred tax assets using the lower tax rates. The income tax benefit for 2011 included a $782 million charge for the remeasurement, substantially all of which was recorded in GBAM. If corporate income tax rates were to be reduced to 23 percent by 2014 as suggested in U.K. Treasury announcements and assuming no change in the deferred tax asset balance, a charge to income tax expense of approximately $400 million for each one percent reduction in the rate would result in each period of enactment (for a total of approximately $800 million). We are also monitoring other international legislative proposals that could materially impact us, such as changes to corporate income tax laws. Currently, in the U.K., net operating loss carryforwards (NOLs) have an indefinite life. Were the U.K.

[Uccmal]

rranjan, that seems reasonable.  There is no reason that BAC has to keep everything on its books.  They can lay it off to other third parties.  If the GSEs are making it too onerous 3rd parties are likely to pop up to buy.  Or alternatively, keeping prime and near prime mortgages will give them a very healthy earnings stream going forward.  They do have alot of workers to redeploy as the runoff of bad loans winds down.  This is what banks used to do and they were quite successful at it.

[PlanMaestro]

http://www.bloomberg.com/news/2012-02-23/bofa-halts-routing-new-mortgages-to-fannie-mae.html

 

 

The bank is cutting off Fannie Mae from loans starting this month, except for modifications and some refinancings, because of the U.S.-controlled company’s stance on repurchases, Bank of America said yesterday in a filing. The firms are in talks to end the disagreement, the bank said.

 

Chief Executive Officer Brian T. Moynihan is seeking to limit additional costs from faulty loans after the 2008 takeover of Countrywide Financial Corp. helped saddle the Charlotte, North Carolina-based bank with about $42 billion in expenses. In November, the lender said it refused to cooperate with what it deemed a new Fannie Mae policy that required loan repurchases if an insurer drops coverage.

“Bank of America may be saying, ‘It’s too risky to do business with Fannie’ because of what it considers to be a stricter loan-recourse policy,” said David Felt, a former deputy general counsel at the Federal Housing Finance Agency, Fannie Mae’s regulator. “I don’t know if Fannie really cares; it’s the largest mortgage purchaser in the world, and if Bank of America turns to Freddie Mac instead, that’s like a different subsidiary of the same company.”

 

Bank of America will sell new loans to Freddie Mac, the other U.S.-controlled mortgage-finance firm, and Ginnie Mae, a company that packages loans backed by the Federal Housing Administration, said a person with direct knowledge of the lender’s plans. The lender also may keep some loans on the balance sheet, said the person, who spoke on condition of anonymity because the plans aren’t public.

 

[PlanMaestro]

On Bank of America Buffett says the bank's deposit base is a "huge asset" and CEO Brian Moynihan has done exactly what he would do.

 

Nothing on the video or transcript but Moynihan starting to get the recognition he deserves. Plus some other Buffet stuff,

http://www.cnbc.com/id/46538421

[onyx1]

BofA $8.5 bln deal returned to NY state court

 

 

    Feb 27 (Reuters) - Bank of America Corp's proposed

$8.5 billion settlement with investors in mortgage-backed

securities should be returned to New York state court for

review, a U.S. appeals court ruled Monday. 

    The decision by the 2nd U.S. Circuit Court of Appeals is a

win for Bank of America, which is seeking approval to settle

claims by investors in 530 mortgage securitization trusts with

$174 billion of unpaid principal. 

    The ruling reverses an October decision by U.S. District

Judge William Pauley taking the case from state court. 

 

 

Ontime ruling promised by the court, and a big win for BAC.  This should make it easier to finalize the BNY-Mellon settlement, which will in turn justify much (if not all) of BAC's remaining non-GSE R&W reserves. 

[Grenville]

BofA $8.5 bln deal returned to NY state court

 

 

    Feb 27 (Reuters) - Bank of America Corp's proposed

$8.5 billion settlement with investors in mortgage-backed

securities should be returned to New York state court for

review, a U.S. appeals court ruled Monday. 

    The decision by the 2nd U.S. Circuit Court of Appeals is a

win for Bank of America, which is seeking approval to settle

claims by investors in 530 mortgage securitization trusts with

$174 billion of unpaid principal. 

    The ruling reverses an October decision by U.S. District

Judge William Pauley taking the case from state court. 

 

 

Ontime ruling promised by the court, and a big win for BAC.  This should make it easier to finalize the BNY-Mellon settlement, which will in turn justify much (if not all) of BAC's remaining non-GSE R&W reserves.

 

Thanks for posting. Here is the link on Bloomberg

http://www.bloomberg.com/news/2012-02-27/bofa-mortgage-bond-settlement-returned-to-n-y-state-court.html

[PlanMaestro]

Alison Frankel from Reuters is doing a great job following the legal proceedings.

 

http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=40610&terms=@ReutersTopicCodes+CONTAINS+'ANV'

 

Walnut counsel Owen Cyrulnik of Grais & Ellworth declined my request for comment. A BNY Mellon spokesman declined Reuters' request. (The bank is represented in the BofA case by Mayer Brown and DLA Piper.) BofA's spokesman offered a statement: "Bank of America's chief interest has been that the proposed settlement be considered and eventually approved by a court of unquestionable jurisdiction," he said. "We are gratified that the matter has been resolved on appeal. We believe the trustee acted reasonably in entering into the settlement agreement and we look forward to completing judicial proceedings to approve the decision." BofA counsel Mirvis of Wachtell sent an email statement: "Yippee."

[Grenville]

Alison Frankel from Reuters is doing a great job following the legal proceedings.

 

http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=40610&terms=@ReutersTopicCodes+CONTAINS+'ANV'

 

Walnut counsel Owen Cyrulnik of Grais & Ellworth declined my request for comment. A BNY Mellon spokesman declined Reuters' request. (The bank is represented in the BofA case by Mayer Brown and DLA Piper.) BofA's spokesman offered a statement: "Bank of America's chief interest has been that the proposed settlement be considered and eventually approved by a court of unquestionable jurisdiction," he said. "We are gratified that the matter has been resolved on appeal. We believe the trustee acted reasonably in entering into the settlement agreement and we look forward to completing judicial proceedings to approve the decision." BofA counsel Mirvis of Wachtell sent an email statement: "Yippee."

 

Thanks! I've enjoyed her posts. If any of you want to follow her twitter account, I just figured out how to do so in google reader. Here are the instructions:

 

"For what it’s worth, Google Reader users can add Twitter feeds by clicking “Browse for stuff > Search > Stay connected to friends and family”, filling in the feed name and selecting Twitter in the combo box."

 

[PlanMaestro]

Another good  legal blog, that has been a BAC skeptic, but still declares the recent news a victory.

 

 

http://www.subprimeshakeout.com/2012/02/breaking-bony-bofa-settlement-to-return-to-state-court-after-second-circuit-reverses-pauley.html

 

Regardless of the propriety of this decision, and barring a Hail Mary appeal to the Supreme Court by Walnut Place, it’s clear that this decision is a big win for Bank of America and other institutions with large exposure to legacy private label mortgage issuance.  State court provides a much more favorable forum to the banks, as previously discussed, as it ensures that Article 77′s shortened procedures and deferential standard of review will be applied.  New York Supreme Court Judge Barbara Kapnick will still have her hands full determining how to deal with the impressive slate of intervenors opposed to the settlement, including the New York Attorney General Schneiderman, when ruling on the scope and timing of discovery.  But BoNY and BofA can rest assured that any decision approving the settlement will ultimately bind all bondholders in the affected trusts.

 

[sswan11]

Merrill Lynch comments on AG settlement:

 

we do not view the settlement as a game-changer for the

housing market or the economy. In our view, the healing of the housing market

will continue to be slow and bumpy

 

Speeding up foreclosures

The AG settlement does three things, in our view. First, it resolves the outstanding

legal liability for servicer processing errors, otherwise known as “robo-signing.”

Second, it also allocates money to principal reduction. Third, it puts in place

guidelines for servicing delinquent loans. For example, it clarifies how a servicer

must communicate with a borrower before foreclosing.

In our home price model, created with Chris Flanagan MBS/ABS Strategist and

the securitized products research team, we assumed the settlement would be

reached early this year. This is a key reason we have expected foreclosure

speeds to pick up this year and next. In our baseline forecast, we assume 1.8

million distressed mortgages will be liquidated this year and 2.1 million next year.

This is up from 1.5 million in 2011 (Chart 1). This is the crucial factor for our

forecast for home prices to fall through this year before bottoming in early 2013 as

liquidations peak. We are on track with our forecast and look for prices to fall 7%

from 3Q11. We forecast the real recovery will start in 2014, and the bounce, when

it comes, could be strong.

 

The “transfer” to borrowers

A lot of the press reports have taken a very narrow view of the impact on GDP

from the agreement. They note that the total of about $40bn (assuming the

smaller bank agreement is also completed) could be as much as a 0.25%

stimulus to the economy. We disagree. It is important to recognize that the

payments are a transfer from banks to state governments and households.

Therefore we think it likely that bank profitability could be affected and that banks

would be encouraged to seek other sources of revenue, such as raising fees and

interest overall spending to the extent that the receivers of the transfer have a higher

“marginal propensity to consume (MPC)” the monies than the payers. In our view,

the net effect of this transfer will be a stimulus to GDP of less than 0.1% spread

over three years.

 

Neither a lender nor a borrower be

It is also important to recognize that credit to the household sector will likely

remain tight for the foreseeable future. The AG settlement only helps reduce one

kind of risk for banks. Lending to the household sector has become risky for

banks. If a loan goes bad, the bank could face considerable legal and reputational

risk. As a result, lending standards for mortgage loans have remained

exceptionally tight

 

Mortgage lending is particularly risky. In some states it now takes more than three

years to repossess the loan and during that period many homeowners do not pay

their mortgage. This “squatters rent” amounts to a transfer payment from the

mortgage holders to the delinquent homeowner of about $50bn per year. The

harder and more expensive it is to repossess homes, the less willing lenders will

likely be to extend credit. Confidence in the home as collateral has been reduced,

in our view. 

[PlanMaestro]

Pricing power. As a shareholder, one of the few times that I've liked the banks finding ways to raise fees or price out marginal customers. Banking is not a bad business if you don't do stupid things.

 

http://online.wsj.com/article/SB10001424052970204571404577253742237347180.html

 

Bank of America Corp. is working on sweeping changes that would require many users of basic checking accounts to pay a monthly fee unless they agree to bank online, buy more products or maintain certain balances.

The plan by the nation's second-largest bank by assets is the latest sign of stresses in the banking industry at a time of low interest rates, slow economic growth and new rules limiting many types of service charges. Many other big banks, including J.P. Morgan Chase & Co.—the nation's largest—and Wells Fargo & Co., have rolled out plans that aim to raise fee revenue or push customers to do more business with the bank.

 

Those efforts are tricky, because they risk upsetting the banks' best customers or drawing fire from politicians. Bank of America retreated last fall from a new $5 debit-card charge following a customer revolt and a wave of criticism.

 

[Guest misterstockwell]

There is no pricing power in banking. Raise my fees and I have 8,000 other choices

[PlanMaestro]

There is no pricing power in banking. Raise my fees and I have 8,000 other choices

 

Not that easy, there are switching costs and, where it matters, banking is a regulated oligopoly with barriers to entry. And when your raw material (interest rate) is under pressure, the ability to find other sources of income and transfer pricing to customers is a good indication of pricing power. Banks worldwide have had very stable and growing pre-provision earnings in all types of environments (with the exception of deflation).

 

For example, American credit unions beat large banks on pricing on several products, but do they really matter (ref: additional factors to consider) ?

 

http://stock.ly/16rdtj

I am not saying this is See's Candy but talk to an auto parts company what happens when steel prices go up. THAT is a commodity business with zero pricing power.

[ERICOPOLY]

The kind of people who complain about these $5 a month fees probably spend $200+ per month on their Comcast bill and regularly pay $5 for a pay per view movie.

 

Why not instead bitch about how the bailout of the banks actually netted you a profit?

 

[Guest Dazel]

Bac wants their unprofitable customers to leave....those that are profitable will not likely pay the fee...they want to cross sell...ie mortagage, investment account...no fee...

Bring your investment account in and we will waive the fee...etc...everyone said the durbin law was short sighted and they are right...no banks want the customers that do not want to pay it and the debit fee covered off this fee...millions will go with out checking accounts because of stupid law makers...it is not just bac...

Unintended consequences...bac and the other banks have an excuse...the new law..

 

Dazel.

[ERICOPOLY]

Bac wants their unprofitable customers to leave....those that are profitable will not likely pay the fee...they want to cross sell...ie mortagage, investment account...no fee...

Bring your investment account in and we will waive the fee...etc...everyone said the durbin law was short sighted and they are right...no banks want the customers that do not want to pay it and the debit fee covered off this fee...millions will go with out checking accounts because of stupid law makers...it is not just bac...

Unintended consequences...bac and the other banks have an excuse...the new law..

 

Dazel.

 

In summary:

 

You need to make a purchase if you come in to use the restroom.