BAC-WT - Bank of America Warrants

[vinod1]

SYSTEMIC RISK ANALYSIS (DYNAMIC MES WITH SIMULATION) OF U.S. FINANCIALS

http://vlab.stern.nyu.edu/welcome/risk/

BAC tops the list for the US http://vlab.stern.nyu.edu/analysis/RISK.USFIN-MR.MESSIM

 

#11 globally:

 

http://vlab.stern.nyu.edu/analysis/RISK.WORLDFIN-MR.GMES

 

I once read the Deutsche Bank annual report, and my gut feeling was always that DB had the most suspicious balance sheet leverage (equity vs assets). But what do I know,... I only like to look through the eyes of a 12 year old at the numbers,...  ::)

 

I just saw this year it's almost the same:

-> http://www.db.com/ir/en/content/ordinary_share.htm

--> http://www.db.com/ir/en/content/reports_2011.htm

---> http://www.db.com/ir/en/download/Deutsche_Bank_Annual_Report_2011_entire.pdf

 

 

#1 DB, currently as of 2011:

2,164 assets

53.4 total equity

 

#11 BofA, currently as of 2011:

2,129 assets

230 total equity

 

There might be something to Dimon's complaint about how european banks risk weight their assets. DB RWA are $380 billion on total asset base of $2100 billion.

 

Vinod

 

[PlanMaestro]

Dismissed! Good for BAC, bad for Baupost. Now ... to read the ruling in detail.

 

 

http://newsandinsight.thomsonreuters.com/uploadedFiles/Reuters_Content/2012/03_-_March/Walnut_place_I_decision_order.pdf

[Grenville]

Dismissed! Good for BAC, bad for Baupost. Now ... to read the ruling in detail.

 

 

http://newsandinsight.thomsonreuters.com/uploadedFiles/Reuters_Content/2012/03_-_March/Walnut_place_I_decision_order.pdf

 

Nice! Thanks for the link to the decision.

[PlanMaestro]

 

Moreover, the trustee did in fact act upon plaintiff's complaints as demonstrated by the settlement agreement reached with the defendents

 

Hurray?

[PlanMaestro]

Hurray!

 

http://newsandinsight.thomsonreuters.com/Legal/News/ViewNews.aspx?id=43567&terms=@ReutersTopicCodes+CONTAINS+'ANV'

 

 

Given that the pooling and servicing agreements governing the 503 Countrywide MBS trusts in the proposed settlement are similar to those at issue in the Walnut case, it's hard to see how any investor could get past Kapnick's reasoning on the trustee's action. That means all Countrywide reps and warranties claims against BofA and BNY Mellon are at stake in the proposed global deal.

Kapnick's ruling also seems to me to reduce the leverage of settlement objectors as the Article 77 proceeding continues before her. For one thing, Walnut and the few other objectors who brought their own suits against Countrywide, BofA, and BNY Mellon can't argue that the settlement is usurping their individual claims; under Kapnick's reasoning, they don't have viable cases because of the settlement. For another, Kapnick's ruling means more uncertainty for investors thinking about blowing up the settlement and bringing individual claims. At the very least, it gives the banks an argument that investors are procedurally barred from bringing individual suits, even if Kapnick decides BNY Mellon's agreement to the deal was unreasonable. The procedural argument would further complicate an already unprecedented scenario. Those pooling and servicing agreements never contemplated anything like the Countrywide MBS litigation. (Walnut Place counsel David Grais and Owen Cyrulnik of Grais & Ellsworth didn't respond to an email request for comment.)

 

Meanwhile, next week will officially relaunch the Article 77 proceeding before Kapnick. The case returned to state court last month. BNY Mellon counsel Matthew Ingber of Mayer Brown sent a letter outlining the issues to the judge on March 12; Daniel Reilly of Reilly Pozner, on behalf of the steering committee for settlement objectors, responded on March 16 with a letter contending that Article 77 is an improper vehicle for deciding the case.

 

[MrB]

Hurray!

 

Yep, I'll second that. Hurray!!

[ERICOPOLY]

At today's low of $4.50 the BAC class A warrants are now down 18.2% from their recent peak of $5.50.

[onyx1]

Great news indeed, and a step closer to validation of the BNY settlement.  Validation is very important since the BNY settlement is the basis for most of BAC's non-GSE R&W liability reserves.

[rranjan]

Dismissed! Good for BAC, bad for Baupost. Now ... to read the ruling in detail.

 

 

http://newsandinsight.thomsonreuters.com/uploadedFiles/Reuters_Content/2012/03_-_March/Walnut_place_I_decision_order.pdf

 

Baupost does look for obscure stuff but I thought it was strange for them to get involved like this.

[PlanMaestro]

Baupost does look for obscure stuff but I thought it was strange for them to get involved like this.

 

It does look litigious when the trustee was working on the reps and warranties issue. Does not look as if Baupost was suing in good faith, just looking for ways to put pressure on the trustee.

[value-is-what-you-get]

Great news indeed, and a step closer to validation of the BNY settlement.  Validation is very important since the BNY settlement is the basis for most of BAC's non-GSE R&W liability reserves.

 

From an earnings perspective, are releases from reserves added straight to the bottom line when a suit is thrown out?

[twacowfca]

We closed out our BAC B warrants a few days ago.  This isn't necessarily being negative on BAC, but simply is a reflection that the position was initiated in anticipation of a rebound from the end of the year extreme low that BAC reached.  :)

[tombgrt]

We closed out our BAC B warrants a few days ago.  This isn't necessarily being negative on BAC, but simply is a reflection that the position was initiated in anticipation of a rebound from the end of the year extreme low that BAC reached.  :)

 

I must say, you guys have some extreme timing! And I'm not only speaking of BAC. Impressive!

 

I did sell some common stock (1/5th of position = 5% of portfolio) myself yesterday, but that was only because I wanted to buy FTP with the proceeds.

[twacowfca]

We closed out our BAC B warrants a few days ago.  This isn't necessarily being negative on BAC, but simply is a reflection that the position was initiated in anticipation of a rebound from the end of the year extreme low that BAC reached.  :)

 

I must say, you guys have some extreme timing! And I'm not only speaking of BAC. Impressive!

 

I did sell some common stock (1/5th of position = 5% of portfolio) myself yesterday, but that was only because I wanted to buy FTP with the proceeds.

 

The rebound from extreme end of the year lows is a phenomenom that has high probability.  :)

[alertmeipp]

yup. besides BAC, a lot other have bounced too. But financial was the key driver for this rally for sure.

 

I am waiting for energy to turn. :)

[twacowfca]

We closed out our BAC B warrants a few days ago.  This isn't necessarily being negative on BAC, but simply is a reflection that the position was initiated in anticipation of a rebound from the end of the year extreme low that BAC reached.  :)

 

I must say, you guys have some extreme timing! And I'm not only speaking of BAC. Impressive!

 

I did sell some common stock (1/5th of position = 5% of portfolio) myself yesterday, but that was only because I wanted to buy FTP with the proceeds.

 

The rebound from extreme end of the year lows is a phenomenom that has high probability.  :)

 

There is one more thing we considered before closing out the position.  Pricing of long dated options is exquisitely sensitive to volatility.  The historical volatility of the stock and the implied vol of options on the stock has been very high.  If BAC's stock becomes less volatile in the future, the price of the warrants should decline significantly, ceteris paribus.

[thomcapital]

There is one more thing we considered before closing out the position.  Pricing of long dated options is exquisitely sensitive to volatility.  The historical volatility of the stock and the implied vol of options on the stock has been very high.  If BAC's stock becomes less volatile in the future, the price of the warrants should decline significantly, ceteris paribus.

 

I asked a related question about changing implied volatility several pages back in this thread (pg 34) but didn't get any takers. In the end, I decided implied volatility won't matter at expiration, which is when I plan on converting.  :)

 

Am still curious what others think about the matter, though.

[twacowfca]

There is one more thing we considered before closing out the position.  Pricing of long dated options is exquisitely sensitive to volatility.  The historical volatility of the stock and the implied vol of options on the stock has been very high.  If BAC's stock becomes less volatile in the future, the price of the warrants should decline significantly, ceteris paribus.

 

I asked a related question about changing implied volatility several pages back in this thread (pg 34) but didn't get any takers. In the end, I decided implied volatility won't matter at expiration, which is when I plan on converting.  :)

 

Am still curious what others think about the matter, though.

 

Implied vol does matter because it affected the price you paid for the warrants.  As BAC is now trading closer to a rational price, it doesn't make as much sense to pay a large premium for the warrants.  Owning the stock instead of the warrants is something to consider  as the price of the warrants will decay if the price of the stock becomes less volatile for an extended period.  :)

 

[yitech]

I agree. I swapped A shares for common since I thought high implied vol may not be sustainable once the stock price appreciates/stabilizes and no longer the poster child of high frequency trading...

[thomcapital]

 

Implied vol does matter because it affected the price you paid for the warrants.  As BAC is now trading closer to a rational price, it doesn't make as much sense to pay a large premium for the warrants.  Owning the stock instead of the warrants is something to consider  as the price of the warrants will decay if the price of the stock becomes less volatile for an extended period.  :)

 

 

But if I am satisfied with the size of my current warrant position, and at my purchase price expect to realize an outstanding return on the warrants (especially after adjusting the strike price down for expected dividends, etc), should I care what happens to the warrant price between now and expiration? I suppose I get what you're saying, but really I'd hate to screw up a great thing and am just content to sit still. Please feel free to convince me otherwise. :)

[berkshiremystery]

Francis Chou bought these warrants until last summer at an average purchase price of $7.7 (3.9 million warrants at a cost of $30,013,801), and averaged down in the last half year to $5.89 (6.9 million warrants at a cost of $40,628,161), probably with purchases at around ~$3.3...something. At cost basis he put about 1/10 of his Chou Associates Funds assets into them. IMHO, I think Chou must have thought that he got his first warrants with a significant margin of safety,...why would he have bought them in first place. Well, in hindsight, with the recent lows, around $2 before x-mas, he got them a little high, but sure i bet he has some higher value in his head. These warrants are a leveraged form of investing, i.e. derivatives, like FFH former CDS positions, and heck they are volatile, sure they are, but FFH wouldn't have sold them just at double price. We also shouldn't forget that Francis was the mastermind, behind Fairfax CDS ideas. You also have to be emotionally stable and patient. I only can follow Sanjeev's opinion for the BAC share price estimate, as it's also somehow my gut feeling and estimate,... BAC at tangible book value in one year, at book value probably in 2 years, further beyond they will be a good likelihood to pay good dividends and share repurchases. The warrants have a time frame until 2019. I rather would sit still, too much trading action (*sights, don't like the  word "trading action") can be sometimes hazardous to your wealth, i.e. paying capital gain taxes.

[twacowfca]

 

Implied vol does matter because it affected the price you paid for the warrants.  As BAC is now trading closer to a rational price, it doesn't make as much sense to pay a large premium for the warrants.  Owning the stock instead of the warrants is something to consider  as the price of the warrants will decay if the price of the stock becomes less volatile for an extended period.  :)

 

 

But if I am satisfied with the size of my current warrant position, and at my purchase price expect to realize an outstanding return on the warrants (especially after adjusting the strike price down for expected dividends, etc), should I care what happens to the warrant price between now and expiration? I suppose I get what you're saying, but really I'd hate to screw up a great thing and am just content to sit still. Please feel free to convince me otherwise. :)

 

I don't have a fixed opinion on the merits of owning the stock vs the A or B warrants as a long term investment.  In fact, I like leaps.  These are ultra leaps, and the A warrants have substantial protection if increased dividends are paid.  Also, a possible rise in interest rates in the years ahead may cancel out some of the possible decay in value from future normalization of the very high implied vol of the warrants.

[MrB]

Martin Cap advisors neg view on BofA

see page 7 http://www.mcmadvisors.com/downloads/mcm_2011_annual_report__public_version.pdf

[rranjan]

Martin Cap advisors neg view on BofA

see page 7 http://www.mcmadvisors.com/downloads/mcm_2011_annual_report__public_version.pdf

 

I was hoping for something new but most of the comments are not applicable in current situation. He is talking about historical mistakes made during last 15-20 years. Mistakes were made but investors need to look at the steps taken by current management and find the flaws. How much downside is still left due to mistakes made by past managements?

 

Somewhere he is mentioning about below average loans made during 2004 to 2008. Well, we are in 2012 and investors need to look how much bad loans are left and what's the impact due to these bad loans going forward. Total loan portfolio also has above average loans made after 2007-2008 but it was conveniently left out.

 

 

There is no point in only highlighting mistakes made by old management and ignore the good work done by new management. I also don't see the point of some older bad loans without seeing their impact going forward. No talk about earning powers of banks at all. It seems that he covered the negatives pretty well but ignored the positives completely. He has been negative on BAC for long time and it was correct decision to be negative initially but now he is using outdated arguments. Lots of this talk seems to be made mainly to convince his clients that he told them so without looking at the current situation rationally.

 

[racemize]

Martin Cap advisors neg view on BofA

see page 7 http://www.mcmadvisors.com/downloads/mcm_2011_annual_report__public_version.pdf

 

I was hoping for something new but most of the comments are not applicable in current situation. He is talking about historical mistakes made during last 15-20 years. Mistakes were made but investors need to look at the steps taken by current management and find the flaws. How much downside is still left due to mistakes made by past managements?

 

Somewhere he is mentioning about below average loans made during 2004 to 2008. Well, we are in 2012 and investors need to look how much bad loans are left and what's the impact due to these bad loans going forward. Total loan porfolio also has above average loans made after 2007-2008 but it was conveniently left out.

 

 

There is no point in only highlighting mistakes made by old management and ignore the good work done by new management. I also don't see the point of some older bad loans without seeing their impact going forward. No talk about earning powers of banks at all. It seems that he covered the negatives pretty well but ignored the positives completely. He has been negative on BAC for long time and it was currect decision to be negative initially but now he is using outdated arguments. Lots of this talk seems to be made mainly to convince his clients that he told them so without looking at the current sitaution rationally.

 

I agree--the only point he seemed to have was on the FICA scores for 80 billion of the loans (compared to 120 billion of tier 1 equity), otherwise it seemed to be in the past (except for a reminder of the dividend issue, which I don't really care about).  Further, I don't care for the "clearly we were right because the stock dropped 50%" argument, particularly from someone who appears to be a value guy. 

 

Interesting letter, otherwise, though.  I'm on board with the debt level concerns.