BAC-WT - Bank of America Warrants

[xazp]

Unlikely this is the last cockroach.  One has to have a high tolerance for cockroaches to invest in BAC. 

 

You pay 10x next year's earnings for this company, vs, what 17x for the market?  Meanwhile, I'd say the 3-year eps growth of BAC will be greater than the market overall.  So you're paying less for more growth... it's just that you have to agree to eat cockroaches periodically to get it. 

 

 

Market seems to be vastly overreacting to the report. 

http://finance.yahoo.com/news/bank-america-announces-adjustment-estimated-123300009.html

 

They are revising down their estimated capital ratios by around 20bps.  They're going to resubmit "expeditiously" and maybe instead of a $4Bn stock repurchase we get a $3.8Bn stock repurchase.  Doesn't seem in-line with the 3-4% drop in the stock right now.  This isn't an analog to the Citigroup issue, this is a self-caught ~20bps mistake that is causing a 300bps drop in the stock price. 

 

 

On $1,282.5 bln of risk-weighted assets, aren't we talking about a 20bp mistake of $2.6bln?

 

Here I think is the problem...

 

A bank is SUPPOSED to know what they are doing, they are SUPPOSED to keep accurate books.  It is not quite so much the magnitude of the mistake, but simply the fact that it was made.

 

I think investors have a "cock roach" theory going here.  If you see ONE, how many are there hiding, that you can't see?

 

I've heard stories and rumors for years that BAC was riddled with incompetence, toxic assets, bad processes, etc. etc.

 

The question is does more bad news come out, or is this the end?

[ERICOPOLY]

I just checked the news.  Wow.

 

This reminds me of the Fairfax "currency translation error" in July 2006, except in that case it was a much larger mistake relative to book value.

 

It must be my bad luck to be invested in financials that make mistakes you wouldn't imagine possible.

[schin]

Time premiums on in the money Jan 2016 LEAP calls - $8, $10, $12.

 

I understand that deep in the money calls, should have little time premium, but does it seem strange that the $8, $10, $12 have so little time premium factored?

[mankap]

I am hoping that BAC settle with DOJ also this week. Of course this will mean a negative second qtr also. But then they will be done with all the bad news at least for the short term.

 

Does anyone know what is the big pending settlement that BAC has after DOJ.

[kmukul]

I just checked the news.  Wow.

 

This reminds me of the Fairfax "currency translation error" in July 2006, except in that case it was a much larger mistake relative to book value.

 

It must be my bad luck to be invested in financials that make mistakes you wouldn't imagine possible.

 

of all the people I guess you are best positioned to take advantage of this opportunity :). Who said market cant be times :) You added the puts at the right time and now you can book some profits (roll them to lower strikes) and make some money on them.

[plato1976]

Besides this stupid math error, I am confused how many "big" legal settlements are still ahead...

 

I just checked the news.  Wow.

 

This reminds me of the Fairfax "currency translation error" in July 2006, except in that case it was a much larger mistake relative to book value.

 

It must be my bad luck to be invested in financials that make mistakes you wouldn't imagine possible.

 

of all the people I guess you are best positioned to take advantage of this opportunity :). Who said market cant be times :) You added the puts at the right time and now you can book some profits (roll them to lower strikes) and make some money on them.

[DTEJD1997]

Besides this stupid math error, I am confused how many "big" legal settlements are still ahead...

 

I am going to guess that there are going to be more...

 

There are literally TRAINLOADS of documents in lawsuits being processed and waiting to be processed.  A lot of it is related to the CountryWide acquisition.

[Kraven]

Besides this stupid math error, I am confused how many "big" legal settlements are still ahead...

 

I just checked the news.  Wow.

 

This reminds me of the Fairfax "currency translation error" in July 2006, except in that case it was a much larger mistake relative to book value.

 

It must be my bad luck to be invested in financials that make mistakes you wouldn't imagine possible.

 

of all the people I guess you are best positioned to take advantage of this opportunity :). Who said market cant be times :) You added the puts at the right time and now you can book some profits (roll them to lower strikes) and make some money on them.

 

You know the saying you can't get blood from a stone?  In this case best efforts will be made and every option for doing so explored until it is finally over. 

[fareastwarriors]

Is it ground hog day?

[Uccmal]

One day we will all look back on this and laugh, or not....

 

BAC needs to clarify their litigation and regulatory exposure in the worst way.  That mess in the 10k explains nearly nothing.  If they get the biggest fines and suits cleared the stock can move forward unencumbered. 

 

As to the earnings being lost on the DOJ settlement and the earlier one.  Recall that BACs Eps is after tax estimated.  The actual cash coming in the door is much higher due to past, and apparently current losses, and tax loss carry-forwards.

 

The settlement with the housing authority is a loss on the balance sheet.  The DOJ settlement, depending on how it is structured may also be a loss. Strangely, the government is screwing itself out of tax revenue over the longer term to get short term headlines.  Must be an election year, eh?

 

 

 

 

[Uccmal]

Is it ground hog day?

 

good one

[plato1976]

"If they get the biggest fines and suits cleared the stock can move forward unencumbered.  "

 

maybe they themselves also don't know where is the biggest and the 2nd biggest suits and when they will be "cleared" ?

 

One day we will all look back on this and laugh, or not....

 

BAC needs to clarify their litigation and regulatory exposure in the worst way.  That mess in the 10k explains nearly nothing.  If they get the biggest fines and suits cleared the stock can move forward unencumbered. 

 

As to the earnings being lost on the DOJ settlement and the earlier one.  Recall that BACs Eps is after tax estimated.  The actual cash coming in the door is much higher due to past, and apparently current losses, and tax loss carry-forwards.

 

The settlement with the housing authority is a loss on the balance sheet.  The DOJ settlement, depending on how it is structured may also be a loss. Strangely, the government is screwing itself out of tax revenue over the longer term to get short term headlines.  Must be an election year, eh?

[xazp]

http://finance.yahoo.com/news/analyst-bank-america-just-completed-161816775.html

 

Bank Of America Just Completed The Wall Street 'Trifecta Of Misery'

 

- I don't like Mayo, but, the phrase made me laugh. 

 

 

"If they get the biggest fines and suits cleared the stock can move forward unencumbered.  "

 

maybe they themselves also don't know where is the biggest and the 2nd biggest suits and when they will be "cleared" ?

 

One day we will all look back on this and laugh, or not....

 

BAC needs to clarify their litigation and regulatory exposure in the worst way.  That mess in the 10k explains nearly nothing.  If they get the biggest fines and suits cleared the stock can move forward unencumbered. 

 

As to the earnings being lost on the DOJ settlement and the earlier one.  Recall that BACs Eps is after tax estimated.  The actual cash coming in the door is much higher due to past, and apparently current losses, and tax loss carry-forwards.

 

The settlement with the housing authority is a loss on the balance sheet.  The DOJ settlement, depending on how it is structured may also be a loss. Strangely, the government is screwing itself out of tax revenue over the longer term to get short term headlines.  Must be an election year, eh?

[ERICOPOLY]

I'll bet wescobrk is now cured of his self-loathing.

[wescobrk]

"I'll bet wescobrk is now cured of his self-loathing"

 

Haha, I think I'll be complaining about my Citigroup losses for a long time.

Buffett still talks about the pain from his service station loss at age 20.

That man really hates to lose money.

[gokou3]

Just added more 2016 $12 calls today.  Not going back to full position yet as I suspect there will be some more weakness when the media circus has had its run (class action lawsuit, anyone?).

 

This is just BAC's version of the whale incident.  JPM lost $6B from its whale.  BAC didn't actually lose anything other than the calculation / reporting error.  Of course there's impact from the delayed buybacks, but we have argued extensively about the usefulness of buybacks.

 

Coincidentally, BAC stock has dropped $1.4 (from $16.4 to $15) or about $14.7B market cap since the new $13B settlement and this calculation error were revealed.

 

This too shall pass.  Now, no more big lawsuits please.

[ERICOPOLY]

With today's announcement they are back to 9% B3 Tier 1 ratio under the "Standardized" approach.

 

They should be running at about 9.7% at end of Q2, unless they add to legal reserves again (which they will quite likely do given the talk of the big DOJ settlement .  Of course, one could hope that they truly reserved for it in Q1).

 

Then 10.2% by end of Q3.  Here's to hoping they finally got their reserves straightened out, but I have no confidence in that.

 

[Rabbitisrich]

I don't see this error as being as meaningful as, for example, an earnings restatement. I may be biased as a current holder of the stock, but today's news looks like a contained error, followed by aggressive relationship management with the Fed. Moynihan is showing regulatrs that they will face investor anger to support capital levels.

 

 

 

[Uccmal]

A really good article describing the absurdity of the situation and accounting in general.

 

http://www.bloombergview.com/articles/2014-04-28/bank-of-america-lost-2-7-billion-in-a-maze-of-accounting

[indirect]

Another view on the settlement

http://dealbook.nytimes.com/2014/04/28/doing-the-math-of-a-bank-of-america-settlement/

[MYDemaray]

They should be running at about 9.7% at end of Q2, unless they add to legal reserves again (which they will quite likely do given the talk of the big DOJ settlement .  Of course, one could hope that they truly reserved for it in Q1).

 

Just thinking about this in light of the Dealbook article which explained how the security repurchases are included in the headline number for the settlements. I wonder how they are treating these? Do you think they are expensing the headline number which includes the securities repurchases? If so, it seems like this would be sandbagging earnings today for potential recovery/"growth" down the road. No idea if they are doing this, but just thinking out loud...

[xazp]

http://newsroom.bankofamerica.com/press-releases/corporate-and-financial-news/bank-america-announces-settlements-federal-housing-finan

I just re-read the BAC press release, where they talk about how they bought $3.2 billion of securities "at fair market value."  If their statement is true, then basically that security repurchase is just a misleading way for FHFA to trumpet a $9.5 billion settlement.  Indeed search results suggest that people do think it was a $9.5 billion settlement. 

 

In that vein, you really don't know what the "$20 billion settlement" rumors entail and it is not necessarily true that a large topline settlement number means that BAC needs to take more reserves. 

 

Other question for me is, how much does litigation expense go down with these settlements?  I feel like after the big litigation gets clear we should get to a much lower normalized litigation expense. 

 

 

They should be running at about 9.7% at end of Q2, unless they add to legal reserves again (which they will quite likely do given the talk of the big DOJ settlement .  Of course, one could hope that they truly reserved for it in Q1).

 

Just thinking about this in light of the Dealbook article which explained how the security repurchases are included in the headline number for the settlements. I wonder how they are treating these? Do you think they are expensing the headline number which includes the securities repurchases? If so, it seems like this would be sandbagging earnings today for potential recovery/"growth" down the road. No idea if they are doing this, but just thinking out loud...

[Uccmal]

I thought I would summarize where we are at right now:

 

1) BACs capital levels are adequate according to all metrics (Basel, TBTF, etc).  If not adequate today they can be reached very easily years before any deadlines.

2) They have more cash coming in than indicated by GAAP EPS due to tax loss carryforwards.

3) The actual earnings capability is unaffected by the fines, settlements, and the recent mistakes.

4) They cannot make any acquisitions in the US which is a good thing.  Management does not seem inclined this way, and anything significant would require the Feds approval anyway.

5) They are facing a settlement of unknown nature with the DOJ.  Part of the settlement may have already been covered in other settlements, or not. 

 

The way I see it, after the DOJ settlement they are going to be adding cash to the balance sheet at the rate of at least 4 billion per quarter.  It will sit there adding to capital levels until it is allowed to be paid out. 

 

Other positives:

1) ML should do well in an environment of increasing M&A activity.

2) A rising interest rate environment when it comes should be a benefit.

 

Other negatives:

1) Ongoing litigation expense.  There is going to be at some run rate forever (unknown as Xazp suggests)  It is the nature of the business these days.

2) Libor suits - who knows?  My take is Providence is bankrupt and corrupt, and just looking to make easy money any way it can. 

3) Other lawsuits, fines - we need to look to JPM as a leading indicator.  Since their big DOJ settlement late last year there has been nothing of note. 

 

 

[fareastwarriors]

Bank of America Weighs Push for Dividend Over Buyback After Blunder

 

 

 

http://www.bloomberg.com/news/2014-04-29/bofa-seen-asking-fed-for-dividends-rather-than-buybacks.html

[ERICOPOLY]

In that vein, you really don't know what the "$20 billion settlement" rumors entail and it is not necessarily true that a large topline settlement number means that BAC needs to take more reserves. 

 

The JPMorgan/DOJ global settlement was known at the time that the bank estimated "maximum $6.1b" unreserved legal liability for previously disclosed lawsuits.

 

Less than 2 months later the bank records a $6b charge.

 

So if they are being honest and straightforward, then they are now fully reserved for the DOJ Settlement if they settle on the same terms as JPMorgan.

 

You would have to believe that merely getting the same terms as another peer could not be the "worst case" -- it would hardly be an unforseeable event for them.

 

That recent article pointed out that even the $13b upcoming settlement rumor is merely just the same terms that JP Morgan got.

 

So, therefore, they had better not tell us that they need to take another charge when that DOJ settlement is finalized.