BAC-WT - Bank of America Warrants

[sswan11]

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

 

Maybe Someone should ask him at the annual meeting!

[ERICOPOLY]

The accounting error knocked 35 cents off of the value of the shares.

 

Take off another 30 cents for the after-tax impact of the litigation liability increase.

 

Sixty-five cents per share.  You can't wave that off by talking about "long run value" or "this is only short-term".

 

It's permanent impairment.

 

[stevevri]

The accounting error knocked 35 cents off of the value of the shares.

 

Take off another 30 cents for the after-tax impact of the litigation liability increase.

 

Sixty-five cents per share.  You can't wave that off by talking about "long run value" or "this is only short-term".

 

It's permanent impairment.

 

It doesn't permanent impair their ability to earn in anyway, it does destroy capital which could have been immediately returned to shareholders. Of course it isn't good.

 

I'm merely saying that fixing Consumer Real Estate services which even ex litigation lost like >$10B in 2011, 6.4B in 2012, I believe around 5.1B in 2013, (my numbers may be off this is from memory) and then another $1.6B ex litigation in Q1 2014 will have a larger impact on the bank's long term value.

[ScottHall]

The accounting error knocked 35 cents off of the value of the shares.

 

Take off another 30 cents for the after-tax impact of the litigation liability increase.

 

Sixty-five cents per share.  You can't wave that off by talking about "long run value" or "this is only short-term".

 

It's permanent impairment.

 

It's a single digit reduction in tangible book. If 5% or whatever is instrumental to your thesis, you're probably not doing this properly.

[gary17]

Every penny counts! Anyway, five percent is like twenty percent in the leveraged world. I think

[ERICOPOLY]

The accounting error knocked 35 cents off of the value of the shares.

 

Take off another 30 cents for the after-tax impact of the litigation liability increase.

 

Sixty-five cents per share.  You can't wave that off by talking about "long run value" or "this is only short-term".

 

It's permanent impairment.

 

It's a single digit reduction in tangible book. If 5% or whatever is instrumental to your thesis, you're probably not doing this properly.

 

 

Yeah, silly me.  You know, I should really figure out what they proper way to invest is.  Will you please help me with some pointers Scott?

[ScottHall]

The accounting error knocked 35 cents off of the value of the shares.

 

Take off another 30 cents for the after-tax impact of the litigation liability increase.

 

Sixty-five cents per share.  You can't wave that off by talking about "long run value" or "this is only short-term".

 

It's permanent impairment.

 

It's a single digit reduction in tangible book. If 5% or whatever is instrumental to your thesis, you're probably not doing this properly.

 

 

Yeah, silly me.  You know, I should really figure out what they proper way to invest is.  Will you please help me with some pointers Scott?

 

Based on your recent posts, I think you've figured out that it's not to gamble your entire life's savings on call options and hoping the market agrees with you before you bankrupt yourself. So you've got that going for you.

 

More seriously, it's understandable if you don't trust management after this. If it's just based on the numbers, though, balking at a single digit decrease in tangible book means you weren't giving yourself enough of a margin of safety. That's all I was saying.

[ERICOPOLY]

The accounting error knocked 35 cents off of the value of the shares.

 

Take off another 30 cents for the after-tax impact of the litigation liability increase.

 

Sixty-five cents per share.  You can't wave that off by talking about "long run value" or "this is only short-term".

 

It's permanent impairment.

 

It's a single digit reduction in tangible book. If 5% or whatever is instrumental to your thesis, you're probably not doing this properly.

 

 

Yeah, silly me.  You know, I should really figure out what they proper way to invest is.  Will you please help me with some pointers Scott?

 

Based on your recent posts, I think you've figured out that it's not to gamble your entire life's savings on call options and hoping the market agrees with you before you bankrupt yourself. So you've got that going for you.

 

More seriously, it's understandable if you don't trust management after this. If it's just based on the numbers, though, balking at a single digit decrease in tangible book means you weren't giving yourself enough of a margin of safety. That's all I was saying.

 

 

Okay, so that's why you are talking like a bloody ass.  So much clearer now.  However, I am leveraged 1x to the downside, so you are not only being an ass, you are also wrong.

[ScottHall]

The accounting error knocked 35 cents off of the value of the shares.

 

Take off another 30 cents for the after-tax impact of the litigation liability increase.

 

Sixty-five cents per share.  You can't wave that off by talking about "long run value" or "this is only short-term".

 

It's permanent impairment.

 

It's a single digit reduction in tangible book. If 5% or whatever is instrumental to your thesis, you're probably not doing this properly.

 

 

Yeah, silly me.  You know, I should really figure out what they proper way to invest is.  Will you please help me with some pointers Scott?

 

Based on your recent posts, I think you've figured out that it's not to gamble your entire life's savings on call options and hoping the market agrees with you before you bankrupt yourself. So you've got that going for you.

 

More seriously, it's understandable if you don't trust management after this. If it's just based on the numbers, though, balking at a single digit decrease in tangible book means you weren't giving yourself enough of a margin of safety. That's all I was saying.

 

 

Okay, so that's why you are talking like a bloody ass.  So much clearer now.  However, I am leveraged 1x to the downside, so you are not only being an ass, you are also wrong.

 

I don't really have any intention of being an ass. I really am glad for you that you quit going all in on call options before you got burned for doing so. I'm not sure what's hard to understand about that.

 

I just also think that if you're concerned about a single digit drop in tangible book, you probably aren't buying stuff that's cheap enough. It's fine if you don't trust management; that's always a good reason for concern.

 

 

[ERICOPOLY]

The accounting error knocked 35 cents off of the value of the shares.

 

Take off another 30 cents for the after-tax impact of the litigation liability increase.

 

Sixty-five cents per share.  You can't wave that off by talking about "long run value" or "this is only short-term".

 

It's permanent impairment.

 

It's a single digit reduction in tangible book. If 5% or whatever is instrumental to your thesis, you're probably not doing this properly.

 

 

Yeah, silly me.  You know, I should really figure out what they proper way to invest is.  Will you please help me with some pointers Scott?

 

Based on your recent posts, I think you've figured out that it's not to gamble your entire life's savings on call options and hoping the market agrees with you before you bankrupt yourself. So you've got that going for you.

 

More seriously, it's understandable if you don't trust management after this. If it's just based on the numbers, though, balking at a single digit decrease in tangible book means you weren't giving yourself enough of a margin of safety. That's all I was saying.

 

 

Okay, so that's why you are talking like a bloody ass.  So much clearer now.  However, I am leveraged 1x to the downside, so you are not only being an ass, you are also wrong.

 

I don't really have any intention of being an ass. I really am glad for you that you quit going all in on call options before you got burned for doing so. I'm not sure what's hard to understand about that.

 

I just also think that if you're concerned about a single digit drop in tangible book, you probably aren't buying stuff that's cheap enough. It's fine if you don't trust management; that's always a good reason for concern.

 

 

So the proper way to do things is not to care if 65 cents of perceived share value disappears in a week?  It's more comforting when the shares are cheaper?  I don't get it.  It's the same amount of percieved value destroyed either way.  I look at my shares and figure out a range of what they're "worth".  This week I dropped 65 cents off that value.  Last year it was other reductions.  The year before that, more reductions.  The year before that... yep, reductions.

 

Berkowitz is still holding his position and it is trading roughly at his cost basis -- he bought it three years ago and touted how Mr Market just didn't get it and etc... etc....  Well, in order for him to get out to the double digits annually in rate of return on the investment, he needs the stock to already be at $20 today.  However, the reason why it's not there is all these little single digit hits to book value.  They keep coming up and we're well into the double digits hit to book value now.  It's completely destroyed his margin of safety.  Meaning -- there was no real margin of safety, rather just an underestimation of how bad things really were for the bank in terms of their future liabilities.

 

This latest hit I'm griping about is just what happened this week.  I've had the stock since 2011.  A married couple fights and fights and fights.  Finally it ends in divorce.  It's not necessarily that last fight that caused the divorce. 

 

It wasn't too long ago that Bruce Thompson was reminding Mike Mayo that there will be tons of shares bought back so that in 2016 the earnings will be over $2 a share.  I'm still waiting Bruce.  Does Bruce still want to make that argument today?  It's only been a few months and he barely asked for much of a buyback anyways (before these hits).

[stahleyp]

Eric, are you still thinking BAC will be $20 by 2015 (or was it 2016)?

[ScottHall]

The accounting error knocked 35 cents off of the value of the shares.

 

Take off another 30 cents for the after-tax impact of the litigation liability increase.

 

Sixty-five cents per share.  You can't wave that off by talking about "long run value" or "this is only short-term".

 

It's permanent impairment.

 

It's a single digit reduction in tangible book. If 5% or whatever is instrumental to your thesis, you're probably not doing this properly.

 

 

Yeah, silly me.  You know, I should really figure out what they proper way to invest is.  Will you please help me with some pointers Scott?

 

Based on your recent posts, I think you've figured out that it's not to gamble your entire life's savings on call options and hoping the market agrees with you before you bankrupt yourself. So you've got that going for you.

 

More seriously, it's understandable if you don't trust management after this. If it's just based on the numbers, though, balking at a single digit decrease in tangible book means you weren't giving yourself enough of a margin of safety. That's all I was saying.

 

 

Okay, so that's why you are talking like a bloody ass.  So much clearer now.  However, I am leveraged 1x to the downside, so you are not only being an ass, you are also wrong.

 

I don't really have any intention of being an ass. I really am glad for you that you quit going all in on call options before you got burned for doing so. I'm not sure what's hard to understand about that.

 

I just also think that if you're concerned about a single digit drop in tangible book, you probably aren't buying stuff that's cheap enough. It's fine if you don't trust management; that's always a good reason for concern.

 

 

So the proper way to do things is not to care if 65 cents of perceived share value disappears in a week?  It's more comforting when the shares are cheaper?  I don't get it.  It's the same amount of percieved value destroyed either way.  I look at my shares and figure out a range of what they're "worth".  This week I dropped 65 cents off that value.  Last year it was other reductions.  The year before that, more reductions.  The year before that... yep, reductions.

 

Berkowitz is still holding his position and it is trading roughly at his cost basis -- he bought it three years ago and touted how Mr Market just didn't get it and etc... etc....  Well, in order for him to get out to the double digits annually in rate of return on the investment, he needs the stock to already be at $20 today.  However, the reason why it's not there is all these little single digit hits to book value.  They keep coming up and we're well into the double digits hit to book value now.  It's completely destroyed his margin of safety.  Meaning -- there was no real margin of safety, rather just an underestimation of how bad things really were for the bank in terms of their future liabilities.

 

This latest hit I'm griping about is just what happened this week.  I've had the stock since 2011.  A married couple fights and fights and fights.  Finally it ends in divorce.  It's not necessarily that last fight that caused the divorce. 

 

It wasn't too long ago that Bruce Thompson was reminding Mike Mayo that there will be tons of shares bought back so that in 2016 the earnings will be over $2 a share.  I'm still waiting Bruce.  Does Bruce still want to make that argument today?  It's only been a few months and he barely asked for much of a buyback anyways (before these hits).

 

To start with, I'm not sure where you keep getting this $0.65 number from, to be honest with you. I get your concern over legal liabilities, but I'm pretty sure the accounting debacle didn't impact BV at all unless I completely misread the press release. So, it's less than $0.65, unless you're using a different yardstick than I am.

 

As for the higher than expected legal expenses/potential settlements, it's important to remember that companies are valued based on the cash they can generate from now in to forever, though, and not overweight bad news that doesn't move the needle much on the value of the company. So, I wouldn't say you should just ignore it, just try to keep it in context. If you don't think the stock is cheap enough to withstand errors in your valuation now that it is substantially off of its lows, I think that makes sense.

 

It just probably shouldn't be the higher legal losses that makes the difference, because if it's close enough to matter, it's not cheap enough to own. It sounds more like you just don't trust management, though, and that's understandable.

 

I'm not going to address the Berkowitz stuff, as what he did or didn't do isn't really relevant here.

[dutchman]

I think Eric is sending divorce papers to Moynihan monday morning.  This relationship has been more riveting than brangelina.  I'm sorta sad :(   

[ERICOPOLY]

To start with, I'm not sure where you keep getting this $0.65 number from

 

They raised the range of legal liability by $4.9 billion.  That's 30 cents per share after-tax that we thought we would be seeing, but now we're pretty sure we'll never see it.

 

Then add the 35 cents from the accounting error.

 

30+35=

 

[ERICOPOLY]

but I'm pretty sure the accounting debacle didn't impact BV at all unless I completely misread the press release. So, it's less than $0.65, unless you're using a different yardstick than I am.

 

The yardstick I'm using is shareholder value.

 

The accounting error wiped out $4billion of Basel 3, fully phased in Tier 1 common capital.

 

That's money that otherwise would have been returned to shareholders.  Instead, it won't be. 

 

So that's directly a $4billion reduction in shareholder value.  They now need to retain $4billion of after-tax earnings down the road, and that's earnings that they can otherwise distribute to shareholders. 

 

So it's $4b that we perceived to be included in the intrinsic value of the shares.  The key phrase being that intrinsic value is based on what the business generates that is distributable to shareholders.

 

Whenever you reduce distributable earnings... that's what really matters.  Whether or not book value changes due to the error is unimportant.

[ERICOPOLY]

So, I wouldn't say you should just ignore it, just try to keep it in context. If you don't think the stock is cheap enough to withstand errors in your valuation now that it is substantially off of its lows, I think that makes sense.

 

 

It hurts just as much as a 65 cent "loss" to my perception of it's value in both scenarios:

 

A)  Shares are trading at $15

B)  Shares are trading at $7

 

In both cases, I will miss out on the last 65 cents of eventual gain.  In theory, if 65 cents of value is gone and I eventually sell at IV, I've lost the 65 cents no matter what.

 

It makes no difference what the stock trades at today.  It's still a 65 cent loss in value.

 

That's what I think anyway -- I don't think it matters if the stock is cheap or expensive.  In both scenarios, the loss is just as painful.  I'm not sure how you are able to rationalize the loss as being less painful if the stock is lower -- it's some sort of cognitive trick that perhaps I should master if it would make me less pissed off at the management right now.  Like for example I could just say to myself "Oh well, 65 cents is gone.  Just pocket change since my shares trade at a low value.".  I just don't get the argument at all.

[gary17]

Eric

I tend to agree with you on this one...

 

However, I wonder if we should think about this: what if they did not have this math error and announced a few weeks ago that there's a capital shortfall....  or whatever it is.....  then the shares would have only appreciated to the extent reflecting the actual state of the business...  So instead of saying they wiped off some intrinsic value... may be it's more fair to say they did not create that much intrinsic value to begin with...  the accounting error did not wipe anything out... it simply bring it back to what it should have been...

[ERICOPOLY]

So instead of saying they wiped off some intrinsic value... may be it's more fair to say they did not create that much intrinsic value to begin with...  the accounting error did not wipe anything out... it simply bring it back to what it should have been...

 

I agree, it was never there in the first place.  I have thought about this too, and chose to be careful whenever I thought of it to keep on saying "perceived" shareholder value.

 

 

[gary17]

if you are going to fire them i'd say wait that 30 days to see what they came back with -  see what the corrected intrinsic value is so that an informed decision can be made....  i'd say the 6% drop the other day is just a harsh punishment -- the emotions in play.... 

[ERICOPOLY]

if you are going to fire them i'd say wait that 30 days to see what they came back with -  see what the corrected intrinsic value is so that an informed decision can be made....  i'd say the 6% drop the other day is just a harsh punishment -- the emotions in play....

 

I'm not selling at this price.  However I am very irritated that 5 months of waiting just went up in smoke (that's how long it takes to earn that money back).  It's a bit like getting stuck in unexpected traffic for hours and hours -- you are just impatient, annoyed, and getting hungry.

[hyten1]

Eric

Correct me if I am wrong

 

But the 4bil in accounting error isn't that purely "accounting"?

 

They could of easily in the next quarter have a "accounting adjustment" where there will be a "gain" of 4bil?

 

But the legal issue is a pain, annoying and worrisome

 

Hy

[Uccmal]

Eric

Correct me if I am wrong

 

But the 4bil in accounting error isn't that purely "accounting"?

 

They could of easily in the next quarter have a "accounting adjustment" where there will be a "gain" of 4bil?

 

But the legal issue is a pain, annoying and worrisome

 

Hy

 

The 4 billion error is not even within GAAP accounting.  It only affects the stress test.  It does not have an effect on the TBv of the company.  People are over reacting.  Not paying out the money to make up the possible capital shortfall, only means that more cash is on the balance sheet. 

 

My understanding is that the 4 b shortfall only occurs under the stressed conditions. 

[ERICOPOLY]

Eric

Correct me if I am wrong

 

But the 4bil in accounting error isn't that purely "accounting"?

 

They could of easily in the next quarter have a "accounting adjustment" where there will be a "gain" of 4bil?

 

But the legal issue is a pain, annoying and worrisome

 

Hy

 

The 4 billion error is not even within GAAP accounting.  It only affects the stress test.  It does not have an effect on the TBv of the company.  People are over reacting.  Not paying out the money to make up the possible capital shortfall, only means that more cash is on the balance sheet. 

 

My understanding is that the 4 b shortfall only occurs under the stressed conditions.

 

The TBV isn't what affects payouts to shareholders.  That doesn't matter.

 

What matters (I believe) is regulatory capital ratios.  And here, it's B3 Tier 1 common ratio that will be what matters.

 

And it drops by 29 basis points.  I believe that's about $4b of cash they need to retain from earnings in order to fill the hole.  Down the road, that will be after-tax earnings (so I'm treating it as such).

 

It says it right here in the 4th paragraph:

 

http://newsroom.bankofamerica.com/press-releases/corporate-and-financial-news/bank-america-announces-adjustment-estimated-regulatory-c

 

Sorry, copy&paste of the paragraph isn't working for me (tried it).



 

[ERICOPOLY]

But the 4bil in accounting error isn't that purely "accounting"?

 

They could of easily in the next quarter have a "accounting adjustment" where there will be a "gain" of 4bil?

 

It never annoyed me when (in playing Monopoly) I pulled the "bank error in your favor" card.

 

Too bad that isn't the case here.

[ERICOPOLY]

The reason why I believe TBV doesn't matter, is that the company won't be liquidated.

 

It will be operated for decades going forward, if not centuries, and the only value here in the stock is the distributable earnings generated by the businesses.  That anticipated distribution drops by $4b with this error.  Thus, the value of the stock drops by $4b too.

 

I just go ahead and call that a $4b reduction to our perception of intrinsic value (as best as we can estimate it).