BAC-WT - Bank of America Warrants

[racemize]

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.

 

This is my thinking as well.

[ERICOPOLY]

I take it we may get our answer next week.

 

They filed their 2013 Q1 10-Q on Wednesday, May 7th, 2013.

 

Will they have reduced the $6.1b "maximum" to only $0.1b?

 

 

 

[Grenville]

We currently estimate that the range of possible loss for representations and warranties exposures could be up to $4 billion over existing accruals at March 31, 2014. The estimated range of possible loss reflects principally non-GSE exposures. It represents a reasonably possible loss, but does not represent a probable loss, and is based on currently available information, significant judgment and a number of assumptions that are subject to change.

 

page 50

 

http://www.sec.gov/Archives/edgar/data/70858/000007085814000056/bac-3312014x10q.htm

[gary17]

I don't follow this 6.1B and the 0.1B - no where do I see this in the 10-K or the recent and last 10-Qs... I must be missing something.

 

OK - I think I found it now

 

Dec 31 - 2013:

For those matters where an estimate of the range of possible loss is possible, management currently estimates the aggregate range of possible loss is $0 to $6.1 billion in excess of the accrued liability (if any) related to those matters

 

March 31 - 2014:

For those matters where an estimate of the range of possible loss is possible, management currently estimates the aggregate range of possible loss is $0 to $5.0 billion in excess of the accrued liability (if any) related to those matters

[OracleofCarolina]

In today's wire,

 

 

Before Bank of America (BAC) had to suspend its capital plan this week, it had permission from the Fed to buy back up to $4B of its own shares for the year. The clock on that started ticking April 1, and BAC bought back $233M of its own shares before a calculation error, announced Monday, forced it to suspend that buyback plan. BAC said in a regulatory filing today that, through those purchases, it had retired 14.4M shares. Investors are now waiting to see if the bank will have to shelf any more buyback plans or if it can get permission from the Fed to continue

[xazp]

MAXIMUM.  MAXIMUM. - B. Moynihan. 

 

"You keep using that word. I do not think it means what you think it means."

 

I take it we may get our answer next week.

 

They filed their 2013 Q1 10-Q on Wednesday, May 7th, 2013.

 

Will they have reduced the $6.1b "maximum" to only $0.1b?

[Grenville]

 

March 31 - 2014:

For those matters where an estimate of the range of possible loss is possible, management currently estimates the aggregate range of possible loss is $0 to $5.0 billion in excess of the accrued liability (if any) related to those matters

 

Thanks. I was off on what I thought was the right number from the Q

[ERICOPOLY]

So, in other words, their expected unreserved liability range climbed by $4.9 billion over the past 3 months.

 

This despite the revelation of no new lawsuits, and a rumor that the DOJ wants them to settle on the same terms as JPMorgan.

 

So what the fuck!!

[gary17]

i think the market punished more for the math error than the estimate if i recall the price action correctly

[kevin4u2]

So, in other words, their expected unreserved liability range climbed by $4.9 billion over the past 3 months.

 

This despite the revelation of no new lawsuits, and a rumor that the DOJ wants them to settle on the same terms as JPMorgan.

 

So what the fuck!!

 

No , the range for possible losses over litigation reserves fell to $5.0 billion at end of Q1 from $6.1 billion from the end of 2013 Q4

[ERICOPOLY]

So, in other words, their expected unreserved liability range climbed by $4.9 billion over the past 3 months.

 

This despite the revelation of no new lawsuits, and a rumor that the DOJ wants them to settle on the same terms as JPMorgan.

 

So what the fuck!!

 

No , the range for possible losses over litigation reserves fell to $5.0 billion at end of Q1 from $6.1 billion from the end of 2013 Q4

 

 

What do you mean "No"?

 

Recheck the math.

 

$6.1b

-$6b (declared in Q1 earnings)

 

That leaves you with just $0.1b left.

 

Oh, but how did we get back up to $5b again???

 

Must be an increase of $4.9b, right?

[ERICOPOLY]

The $4.9b is presumably pre-tax, and about $3.43 billion after-tax (at 30% tax rate).

 

So this has been a tough week....

 

We get a "whoops, where did that $4b of capital go" restatement of capital.

 

Then we get a "sorry, did I say $6.1b?  Oh I meant $11b" adjustment to potential unreserved legal expenses.

 

That's like... some serious dough.  Just about soaks up the first 5 months of earnings.

 

Do you remember when they wanted to pay a dividend 3 years ago?  I kind of feel like the management knows about as much as we do.

[gary17]

 

The night is the darkest before dawn. Let's hope for the best.

 

 

 

The $4.9b is presumably pre-tax, and about $3.43 billion after-tax (at 30% tax rate).

 

So this has been a tough week....

 

We get a "whoops, where did that $4b of capital go" restatement of capital.

 

Then we get a "sorry, did I say $6.1b?  Oh I meant $11b" adjustment to potential unreserved legal expenses.

 

That's like... some serious dough.  Just about soaks up the first 5 months of earnings.

 

Do you remember when they wanted to pay a dividend 3 years ago?  I kind of feel like the management knows about as much as we do.

[kevin4u2]

So, in other words, their expected unreserved liability range climbed by $4.9 billion over the past 3 months.

 

This despite the revelation of no new lawsuits, and a rumor that the DOJ wants them to settle on the same terms as JPMorgan.

 

So what the fuck!!

 

No , the range for possible losses over litigation reserves fell to $5.0 billion at end of Q1 from $6.1 billion from the end of 2013 Q4

 

 

What do you mean "No"?

 

Recheck the math.

 

$6.1b

-$6b (declared in Q1 earnings)

 

That leaves you with just $0.1b left.

 

Oh, but how did we get back up to $5b again???

 

Must be an increase of $4.9b, right?

 

No they reserve for expected losses and there will always be some uncertainty with estimates. I hear Ya that they have been horrible forecasters of litigation reserves but there is light at the end of the tunnel.

[ERICOPOLY]

No they reserve for expected losses and there will always be some uncertainty with estimates.

 

 

Are you sure they are reserving for expected losses?  I mean, then why weren't they reserved for these "expected" losses?

 

What new unexpected losses have popped up in just 3 months?  They're just settling things on the same terms as peers -- how is that something they can't reserve for? 

[nkp007]

No they reserve for expected losses and there will always be some uncertainty with estimates.

 

 

Are you sure they are reserving for expected losses?  I mean, then why weren't they reserved for these "expected" losses?

 

What new unexpected losses have popped up in just 3 months?  They're just settling things on the same terms as peers -- how is that something they can't reserve for?

 

I wonder if this results in a material deterioration in the margin of safety given the current valuation.

[plato1976]

Yes it's a big concern

 

No they reserve for expected losses and there will always be some uncertainty with estimates.

 

 

Are you sure they are reserving for expected losses?  I mean, then why weren't they reserved for these "expected" losses?

 

What new unexpected losses have popped up in just 3 months?  They're just settling things on the same terms as peers -- how is that something they can't reserve for?

[JRH]

I wonder if this results in a material deterioration in the margin of safety given the current valuation.

 

 

$4.9B one-time hit? No.

Possible management incompetence? Uh oh...

[vinod1]

I disagree with comments above on BAC's RPL and litigation estimates. My thinking is that for various reasons it makes a lot of sense for management to low ball these estimates. Say you put a RPL of $30 billion

 

1. You are just making yourself more of a target for further lawsuits. Look at BP.

2. Regulators as is are super stingy with capital return, a large RPL would pretty much force their hand on any capital return.

 

Extend and pretend has worked extraordinarily well in banking history and I am all for it.

 

Vinod

[Uccmal]

Please let me know if I am off base here. 

 

A possible reason for the reserve addition may be a simple matter of timing of the FHFa settlement.

 

The 10 q shows a snapshot for March 31.  The settlement with the FHFA was to be paid out on April 1.  The reserve may have been spent that day bringing it back down.  The numbers dont quite add up but we known that a certain portion of the FHFA settlement was the buyback of securities which is a cash rather than a reserve item.

 

Further to that it is my understanding that reserves cannot be added until a settlement is known or anticipated.  That would be bad accounting. 

[Uccmal]

With the employment numbers in the US trending up the biggest beneficiaries will be BAC and WFC.  Think out 1 to 2 years: The DOJ settlement is gone, the litigation costs finally come down.  The NOLs shield half the pre tax earnings for time to come.  As it occasionally does, Mr. Market is handing us another opportunity. 

 

I cant think there are too many cockroaches left at BAC.  They have one of the most scrutinized balance sheets in history. 

[fareastwarriors]

With the employment numbers in the US trending up the biggest beneficiaries will be BAC and WFC.  Think out 1 to 2 years: The DOJ settlement is gone, the litigation costs finally come down.  The NOLs shield half the pre tax earnings for time to come.  As it occasionally does, Mr. Market is handing us another opportunity. 

 

I cant think there are too many cockroaches left at BAC.  They have one of the most scrutinized balance sheets in history.

 

And yet quarter after quarter, something new still pops up....

[xazp]

That's not really true - 2013 was a pretty clean year (not a lot of one-timers). 

 

My experience with BAC is they like to dump all the bad news in batches ... so they'll do a bunch of big settlements in half a year, then radio silence for the next 1.5 years, then back to kitchen sinks. 

 

I'm hoping all the "current" bad news is out 1H 2014 and we have a fairly clean rest of the year and through 2015. 

 

With the employment numbers in the US trending up the biggest beneficiaries will be BAC and WFC.  Think out 1 to 2 years: The DOJ settlement is gone, the litigation costs finally come down.  The NOLs shield half the pre tax earnings for time to come.  As it occasionally does, Mr. Market is handing us another opportunity. 

 

I cant think there are too many cockroaches left at BAC.  They have one of the most scrutinized balance sheets in history.

 

And yet quarter after quarter, something new still pops up....

[Uccmal]

With the employment numbers in the US trending up the biggest beneficiaries will be BAC and WFC.  Think out 1 to 2 years: The DOJ settlement is gone, the litigation costs finally come down.  The NOLs shield half the pre tax earnings for time to come.  As it occasionally does, Mr. Market is handing us another opportunity. 

 

I cant think there are too many cockroaches left at BAC.  They have one of the most scrutinized balance sheets in history.

 

And yet quarter after quarter, something new still pops up....

 

You are right of course but it will end.  A few of us here went through the Fairfax gyrations of the mid 2000s.  Questionable reinsurance contracts, DOJ investigations, Contigent commissions and Eliot Sitzer, asset sales, a major accounting restatement that dropped Book value significantly, etc.  By comparison the goings on at BAC are pretty tame.  There is no coordinated short attack, no accusations of large scale fraud.  Right now it seems like death by a thousand cuts. 

 

Does anyone suppose Buffett is sweating this.  He is locked in until 2021, actually forever, if you accounted for the fact that he couldn't unload his position without killing the stock completely. 

[stevevri]

I don't think Buffett is sweating this at all, I think he's focused on what the normalized earnings will be and a much longer time frame.

 

This stuff isn't good for right now and shorter time periods but over the long term the bank's normalized earnings will be far more important.