BAC-WT - Bank of America Warrants

[menlo]

For what it's worth, I found this report helpful in explaining the MBS market and the big banks' potential exposure to the put back issue (click through the ZeroHedge and scroll down to the Iridian report). 

 

http://www.zerohedge.com/article/iridian-asset-management-devotes-entire-q3-update-letter-mbs-crisis

[ERICOPOLY]

For what it's worth, I found this report helpful in explaining the MBS market and the big banks' potential exposure to the put back issue (click through the ZeroHedge and scroll down to the Iridian report). 

 

http://www.zerohedge.com/article/iridian-asset-management-devotes-entire-q3-update-letter-mbs-crisis

 

This year's pace suggests an increase of 50b tangible common equity over next two years -- that covers the 50b settlement proposed in that document.  Their analysis assumes no increase in tangible equity.

 

BofA stated they intend to challenge claims in the courts -- how many years does that buy them?

[Myth465]

Extremely interesting post.

 

http://valueinvestorcanada.blogspot.com/2010/11/why-id-avoid-or-maybe-even-short-bank.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CanadianValueInvesting-StudyOfBuffett+%28Canadian+Value+Investing+-+Study+of+Buffett%29&utm_content=Google+Feedfetcher

 

Let me know what you think. I have no dog in the fight, but knew along time ago I could never understand these banks. Hopefully you guys are smarter.

[stahleyp]

Myth, thanks for the article.

 

For me, it's a speculative position. Because of it's speculative nature, it should only be small portion of assets.

 

I think the risk/reward trade off is pretty good. You have a very long term option on a stock that many great investors see as undervalued, like Berkowitz and Chou with the warrants.

 

Many institutions can't buy warrants so the prices one pays should be a little better than the common.

 

Again, it's a speculative position that I feel has a good risk/return trade off.

 

8 years from now, most of this stuff should be in the rear view mirror. BAC should either be bankrupt, or much higher than it is now.

 

If we assume that BV stays the same over the next 8 years, and the company just gets back to BV, that would be about breakeven with a very small profit by buying the warrants.

 

If BV increases or even doubles (really, that should be more than doable over 8 years) and the stock still trades at .6 of BV (or just gets back to its 5 year average BV), you'd earn about a 6% return. Klarman feels that over the next decade that we would be lucky to experience low single digit returns. If it starts to pay a dividend, things get a bit better.

 

 

Or, it could be worthless and there is a small loss! :P

 

 

[Uccmal]

Myth, The artlicle you posted is kind of conflicted.  I looked up Iridian AM and their large cap fund has nearly a 5% weighting in BAC - long - as of June 30.  Maybe they have changed this.  Their results in their large cap and mid cap funds were barely above 0% over five years.  Their small cap fund had fared better with about 9% over five years.  So, I guess you gotta take the article with a grain of salt.

 

I agree that BAC is hard to understand.  I am working my way through the 2009 10 K right now.  In the short term there will be headwinds.  After the CW putbacks were tossed out by the court late last week you begin to realize how long this process could draw out.  BAC can drag much of this out in court for alot longer than 2 years I expect.  In the meantime the core BAC and ML businesses are recovering nicely. 

 

I dont see their Teir 1 capital ratios being in any danger as a result of this.  The cash is going to keep pouring onto the balance sheet and they are handling it conservatively for now.

 

As Stahleyp has indicated this is a speculative position and I am treating it as such (keep the position small).  However, I figure the probability of

a bankruptcy is minimal.  I think the worst case scenario is dead money for 8 years which being about 3% of my total holdings via the warrants is not too threatening.  IMHO the upside is pretty big.

[treasurehunt]

Extremely interesting post.

 

http://valueinvestorcanada.blogspot.com/2010/11/why-id-avoid-or-maybe-even-short-bank.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CanadianValueInvesting-StudyOfBuffett+%28Canadian+Value+Investing+-+Study+of+Buffett%29&utm_content=Google+Feedfetcher

 

Let me know what you think. I have no dog in the fight, but knew along time ago I could never understand these banks. Hopefully you guys are smarter.

 

The entire report from Iridian Asset Management that is referenced at valueinvestorcanada.blogspot.com is available at Zero Hedge: http://www.zerohedge.com/article/iridian-asset-management-devotes-entire-q3-update-letter-mbs-crisis

 

Makes for interesting reading, but I think the numbers are wildly inflated. Admittedly I am not enough of an expert to be sure about this, however. You can also see the big banks' views on mortgage repurchases that they presented at the recent BancAnalysts conference in Boston: http://www.wsw.com/webcast/baab10/. Registration is needed for access; alternatively, you can go to the investor relations site of BofA, JPM, WFC etc and view the slides.

 

I think WFC and JPM make a good case that their repurchase liability is manageable. BofA not so much.

[ERICOPOLY]

Extremely interesting post.

 

http://valueinvestorcanada.blogspot.com/2010/11/why-id-avoid-or-maybe-even-short-bank.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CanadianValueInvesting-StudyOfBuffett+%28Canadian+Value+Investing+-+Study+of+Buffett%29&utm_content=Google+Feedfetcher

 

Let me know what you think. I have no dog in the fight, but knew along time ago I could never understand these banks. Hopefully you guys are smarter.

 

Regardless of how this plays out, what risks are remaining after this is behind them?  I mean, on an income per share basis, they are headed in the right direction today -- absent this repurchase liability.

 

In the absolute worst case they lay out, at what price per share do you think they could recapitalize (to pay the liability).  The very next day after the liability is lifted, there won't be a ratings overhang on the bank and it can then be valued on an earnings per share basis.  

 

And I expect this liability won't be settled for at least a couple of years as BofA intends to fight in court -- that gives time for earnings to approach normalization as credit losses decline (assumes they do).

 

I mention this because John Paulson has stated that he holds the shares long with a target EPS of about $2.70 in 2012 -- that would be a bit more than a double from today's price level at a 10x P/E.  I figure it would be worth 10x P/E if this liability were behind it and if they were earning a strong $2.70 per share.

 

That assumes Paulson is being reasonable in his estimate.  Now, given that today it trades under tangible book... do you think it reasonable that a bank with a healthy earnings stream would trade at a discount to tangible bank the day after recapitalization?  I don't find it reasonable... in that case, I assume they would recapitalize at a price higher than today, and due to dilution the full $27 wouldn't be realized.  But if it's 50% dilution, then the new value per share (post recapitalization) is still in the high teen, probably at least $20 to account for accrued earnings over the next few years.  

 

So how do they (Iridian) make money on the short side if a recapitalization two years from now would likely happen higher than the current price per share?

 

What is Iridian's pedigree -- is this just another hedge fund to buy CDS and then pump and dump?  Notice they speculate on where CDS spreads will go and only talk about worst case scenarios -- including mention recapitalization in a 2008/2009 type environment, even though we'd be 4 years removed from the credit panic by then.  They just smell bad -- I sense a huge agenda in their independent research.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[Uccmal]

I would have to check but I believe the Warrants are protected in the event of a dilution.  i.e. If the dilution was 50% each warrant would convert to 1.5 shares at 13.30 instead of 1.0 shares now.  The common is actually at more risk than the warrants with alot of events.

[Myth465]

I think buying CDS insurance is a bit extreme also unless its 1% or less of a port. I can say I dont know what will happen or what anything is worth, I can also say it would be hard for me to get really comfortable with most of the mega banks given my time constraints and lack of interest in the business.

 

Long banks seems to be basically long economic recovery at some point after muddling around for a while. I think its a good move but will find other ways to play it. We sure do have quite a few smart people going long banks right now though.

[ECCO]

 

 

I would have to check but I believe the Warrants are protected in the event of a dilution.  i.e. If the dilution was 50% each warrant would convert to 1.5 shares at 13.30 instead of 1.0 shares now.  The common is actually at more risk than the warrants with alot of events.

 

 

Could you tell us where you saw that, it is the first time I read something about a protection in case of a dilution.

 

Thanks!

[valuecfa]

 

 

I would have to check but I believe the Warrants are protected in the event of a dilution.  i.e. If the dilution was 50% each warrant would convert to 1.5 shares at 13.30 instead of 1.0 shares now.  The common is actually at more risk than the warrants with alot of events.

 

 

Could you tell us where you saw that, it is the first time I read something about a protection in case of a dilution.

 

Thanks!

 

You can find the adjustment provisions beginning on page S-28 of the prospectus:

 

http://www.sec.gov/Archives/edgar/data/70858/000119312510044940/d424b7.htm

[Uccmal]

 

 

I would have to check but I believe the Warrants are protected in the event of a dilution.  i.e. If the dilution was 50% each warrant would convert to 1.5 shares at 13.30 instead of 1.0 shares now.  The common is actually at more risk than the warrants with alot of events.

http://www.sec.gov/Archives/edgar/data/70858/000119312510044940/d424b7.htm

 

My mistake... Warrants are subject to dilution in the event of any stock issuance.  Same as any stock option, or common stock for that matter.  The warrants readjust for the increasing dividend and any stock splits or consolidations, the same as a normal call or put option. Al.

[ERICOPOLY]

Iridian admits that BofA can earn the expected loss over the next couple of years -- their thesis is that BofA won't have the capital to bring these loans back onto their balance sheet.  It's merely the issue of trying to fund an expanding balance sheet that Iridian says will cause BofA to go to the capital markets.

 

So... doesn't this immediately lead you to ask whether BofA can instead just sell assets to raise cash?  On this point, BofA says that they are planning to pay down $150b in debt in the next few years, and by the end of 2011 they expect to pay down about $75b to $100b.  Where do they get $75b-$100b by the end of 2011?  The answer has to be asset sales.

 

See page 9 from BofA's recent presentation:

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9Njg5MDV8Q2hpbGRJRD0tMXxUeXBlPTM=&t=1

 

Instead of paying down debt, can't they use that cash to take back these loans (if forced to do so)?

 

Notice that Iridian doesn't even mention BofA's debt reduction plan -- why not?

 

 

 

 

 

[calonego]

Or that most of these issues are likely in a sub that they have no capital in, that's probably non-recorse.

[ERICOPOLY]

I've sold this -- I want to think more about it.

[Uccmal]

There is one curiosity operating here that I started to think about.  BAC.WS.A trades as around $7 right now and the common is bouncing between 12 and 14.  So, the leverage one is getting from the warrant is limited.  Now if a dividend is added into the mix then the leverage will improve.   

 

From this standpoint it would be better to hold the WFC.WS warrants relative to its stock where the stock is 27 and the warrants are around $8.00.  The downside of course is that you lose out on the WFCs existing dividend.

 

[Junto]

Extremely interesting post.

 

http://valueinvestorcanada.blogspot.com/2010/11/why-id-avoid-or-maybe-even-short-bank.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CanadianValueInvesting-StudyOfBuffett+%28Canadian+Value+Investing+-+Study+of+Buffett%29&utm_content=Google+Feedfetcher

 

Let me know what you think. I have no dog in the fight, but knew along time ago I could never understand these banks. Hopefully you guys are smarter.

 

The entire report from Iridian Asset Management that is referenced at valueinvestorcanada.blogspot.com is available at Zero Hedge: http://www.zerohedge.com/article/iridian-asset-management-devotes-entire-q3-update-letter-mbs-crisis

 

Makes for interesting reading, but I think the numbers are wildly inflated. Admittedly I am not enough of an expert to be sure about this, however. You can also see the big banks' views on mortgage repurchases that they presented at the recent BancAnalysts conference in Boston: http://www.wsw.com/webcast/baab10/. Registration is needed for access; alternatively, you can go to the investor relations site of BofA, JPM, WFC etc and view the slides.

 

I think WFC and JPM make a good case that their repurchase liability is manageable. BofA not so much.

 

Numbers are widely inflated. Why don't you look at more reputable firm's research like Goldman Sachs and the likes. No one has heard of these guys and their assumptions are not well founded. I am long here. Hedgeanalyst.com - bit.ly/abtDP3 and Stifel - http://bit.ly/chCd3R

 

 

[claphands22]

There is one curiosity operating here that I started to think about.  BAC.WS.A trades as around $7 right now and the common is bouncing between 12 and 14.  So, the leverage one is getting from the warrant is limited.  Now if a dividend is added into the mix then the leverage will improve.   

 

From this standpoint it would be better to hold the WFC.WS warrants relative to its stock where the stock is 27 and the warrants are around $8.00.  The downside of course is that you lose out on the WFCs existing dividend.

 

 

Looks like Mohnish has succumbed to the warrant idea. He now owns 14K WFC warrants.

 

http://www.sec.gov/Archives/edgar/data/1173334/000095012311045783/c64521e13fvhrza.txt

 

Interesting since I think this is the first time he has bought anything but common stocks for his fund (sans the loan he gave to DFC)

[biaggio]

http://www.cnbc.com/id/43343328

 

Video of interview (video is 1/4 down the page) with Bruce Berkowitz. Discussion re financials especialy BAC

[finetrader]

After listening to those two interviews I've decided to put 5% of my assets in BAC options jan 2013 10$ strike.

 

http://www.gurufocus.com/news/137706/berkowitz-discusses-why-he-likes-financials-and-st-joe

http://www.cnbc.com/id/43671706/page/3/

 

I might buy more.

 

Cheers!

[moore_capital54]

Ive been buying BAC as well. It is a screaming buy here.

[Rabbitisrich]

If I could just buy depository lender I would snap it up in a heatbeat, litigation headaches and all. But, even though it may be the wrong environment to worry about this, I still can't get comfortable with $2 trillion + notional exposure, albeit hedged, and whatever is going on inside Merrill Lynch's day to day operations. It's easy to focus so much upon earnings power that you forget about losing power, and there is plenty to lose in a financial superstore model (which I still believe is the trend for these guys, management rhetoric aside).

 

Again, I acknowledge that this is probably the wrong environment to be worrying about such things with household deleveraging, shadow finance breakdown, Basel II+, liquidity preference, etc... There just seem to be plenty of bargains in the plain jane world of boring lenders.

[Kraven]

But, even though it may be the wrong environment to worry about this, I still can't get comfortable with $2 trillion + notional exposure, albeit hedged, and whatever is going on inside Merrill Lynch's day to day operations.

 

My view is that BAC is probably cheap at these levels and I go along with the Berkowitz analysis.  That being said, I think that you have to take a leap of faith on the derivatives, structured products, off shore vehicles, etc.  I personally believe that it is impossible to accurately value these assets other than with making a boatload of assumptions, any one of which can change the outcome.  I don't think Berkowitz or anyone else can do it.  Someone sitting there with the 10-K is fooling themselves to even try.  I am familiar with these types of assets and I don't believe that even the people inside the institution can accurately value them.  In fact the guys who did the deals can't accurately value them.  The truth of it is is that if things remain ok in the economy then stocks like BAC are probably home runs.  If we go into a big tailspin again like in 2008, then who knows.  More so than most other stocks, it really is a bet on the economy stabilizing and improving.  Even a double dip, if not serious, probably doesn't tank it.  But there is no way, in my view, to say read BAC's 10-K and accurately value their assets.   

[Rabbitisrich]

A good updated summary of BAC's legal woes:

 

http://newsandinsight.thomsonreuters.com/Legal/News/2011/08_-_August/On_a_very_dark_day,_BofA_s_dim_ray_of_hope/

 

The AIG fraud complaint is also a canny document. The suit lumps together allegations against Countrywide, Merrill Lynch, and BofA, painting all of them with the same tarry brush even though Countrywide and Merrill Lynch committed a good chunk of the alleged wrongdoing before they became part of BofA. Quinn includes public record information about their manifestly-deficient underwriting practices, but has brought the case as a fraud suit-not a contract case accusing BofA, Countrywide, and Merrill of breaching the representations and warranties on the mortgage loans underlying the securitizations AIG invested in. That way, AIG doesn't have to show that it controls 25 percent of the voting rights, the threshold for standing in a securitization contract case. But under the causes of action the complaint asserts-state-law claims and federal claims under the Securities Act of 1933--Quinn Emanuel doesn't have to show that BofA, Countrywide, and Merrill acted with fraudulent intent.

 

Patrick said that deal supporters were encouraged by Friday's hearing, at which Judge Kapnick seemed to be well-versed in the filings and eager to move things along. A transcript suggests that Gibbs & Bruns; BofA counsel from Wachtell, Lipton, Rosen & Katz; and BNY Mellon lawyers from Mayer Brown took a smart course when they filed the case as an Article 77 trust proceeding, under which the court is supposed to pay deference to the trustee unless objectors can show the trustee acted unreasonably or breached its duty.

 

"That's the proceeding they brought," Kapnick said, after noting that she had to look up the obscure Article 77 in the New York code. "It's not, it's not a class action. There aren't provisions in there to opt out that you are talking about. That's not what this is. If you started it, maybe that's what you would have done, but they started it and that's what they did. I have to work, at least now, within the confines of the proceeding that is before me." (A lawyer from the New York Attorney General's office was at the hearing, according to the transcript, but didn't remind Judge Kapnick that the case now has additional fraud and Martin Act implications, thanks to the AG's counterclaims against BNY Mellon.)

[anders]

Im thinking of switching my BAC common to the warrants but I am not sure about the price level of the warrants.. According to B&S formula it should be trading around 2.15-2.30..

 

What am I missing ?  ???