BAC-WT - Bank of America Warrants

[Uccmal]

 

 

Exactly....you pay for perfection...Bank of America is not fixed and it trades at discount to book value. WFC trades at a large premium.....where is your margin safety? in perfection or a broken wing? Mr. Buffett bought both...

 

Dazel.

 

Funny you mention that. I hold a position in WFC (warrants, a few Leaps, and some common) that is nearly 50% of the size of my Leaps holding in BAC, today.  I pay very little attention to it, other than tracking the quarterlies.  I added the Leaps a couple of months ago during the downturn - otherwise I have held the warrants since issue, and the common for even longer.  With BAC, I trade around the gyrations.  With WFC, trading is not worth the trouble or taxes owing. 

 

I wonder if I would do better over the long term holding a position size in WFC equal to my BAC + WFC positions, after tax.  My WFC warrants and common have about doubled.  Maybe I am seeing my investment future. 

[gary17]

I find it interesting to look back at old videos from time to time -

 

https://www.youtube.com/watch?v=krB21heTyR4

 

Gary

[xazp]

How old is this video?  It was posted Dec 2013, but it's obviously older based on his comments. 

 

He's really stressing the importance of BAC's huge deposit base, as an "asset" that will be very profitable down the line, but of course with limited loans and interest rates, isn't so much of an asset now. 

 

I find it interesting to look back at old videos from time to time -

 

https://www.youtube.com/watch?v=krB21heTyR4

 

Gary

[gary17]

I believe when bac was trading around $8 when he spoke. 

 

I have a simplistic view. So if they earn $1.50 and the interest rate remains so low for 10 years... there's not much discount of future earnings simply because of the low rates...

 

If interest rates rise the discount will be heavier but the asset is now worth more....

 

His warrants do not expire until 2020 or something like that I believe. And he can't sell them (right?) so I'd imagine he's more confident about the prospect of this company in a much longer time frame than many on this board would be willing to hold probably.

 

If BAC can earn $15 over the next decade then that's. 7% return annualized. Can it earn more than $15 over the next decade? 

[xazp]

I came across an interesting potential piece of upside.    http://www.bloomberg.com/news/2014-05-11/fed-s-lockhart-sees-end-of-u-s-qe-stimulus-program-this-year.html

 

I believe their intention is to use reverse repos and the excess reserve rate to try to control inflation.  BAC has ~$300Bn in these on the books.  I believe, between the lines, they're saying that prior to raising official Fed Funds rates, they will pay banks more money to not lend.  If they bump that 1%, that is ~$3Bn in extra pre-tax income a year, which would be risk-free and not change capital ratios.  It also should not impact deposit rates on the other end, IMO (since only a few entities have access to the reverse repo market - only big banks, etc). 

 

 

 

I believe when bac was trading around $8 when he spoke. 

 

I have a simplistic view. So if they earn $1.50 and the interest rate remains so low for 10 years... there's not much discount of future earnings simply because of the low rates...

 

If interest rates rise the discount will be heavier but the asset is now worth more....

 

His warrants do not expire until 2020 or something like that I believe. And he can't sell them (right?) so I'd imagine he's more confident about the prospect of this company in a much longer time frame than many on this board would be willing to hold probably.

 

If BAC can earn $15 over the next decade then that's. 7% return annualized. Can it earn more than $15 over the next decade?

[fareastwarriors]

Attorney General Holder Tightens the Squeeze on Banks

 

Justice Department Makes Push to Pursue Wall Street for Past Conduct

 

http://online.wsj.com/news/articles/SB10001424052702304655304579550270949037020?mod=WSJ_hp_LEFTWhatsNewsCollection&mg=reno64-wsj

 

Justice Department officials met with Bank of America Corp. BAC +2.24% last Thursday in a bid to hammer out a multibillion-dollar settlement related to the bank's handling of mortgage-backed securities in the run-up to the 2008 financial crisis, according to people familiar with the meeting. Later this month, Citigroup Inc. C +0.60% will meet with department lawyers to discuss a settlement stemming from an investigation into mortgage-backed securities that racked up large losses.

[blainehodder]

The FASB guidelines seem to indicate that if the possibility of loss is probable (>90% likely) and  can be estimated, it must be recorded in the financial statements. If the loss is reasonably possible, (10-90%) the estimated loss or range of loss should be disclosed in the notes.

 

I would personally argue that the possibility of loss is probable (>90%) and that it can be estimated due to the JPM settlement.

 

Depending on how the accountant handled the reporting, a JPM level accrual could already be reserved, while a "possible" additional range based on discussions with the DOJ would be the piece disclosed in the notes... If I am correct, Eric might be in for a happy surprise as BAC may not take an additional hit if they settle on similar terms to JPM.

 

This is all speculation though.  Any CPAs on the board?

[xazp]

Mayo (http://blogs.wsj.com/moneybeat/2014/05/08/mike-mayo-cuts-his-bofa-estimate-after-shareholder-meeting/) puts BAC's reserves for the DOJ settlement at $2.4Bn.

This is exactly the extra amount BAC reserved in Q1 for these settlements, which implies he believes they had reserved $0 for the DOJ settlement prior to the quarter. 

 

Of course we won't know until BAC actually settles, but, his idea they had reserved $0 prior to last quarter seems implausible (and kind of lazy) to me.  We'll see if he's right, but, his track record on legal stuff is extremely poor and I don't see anything about his comments that lead me to think he's learned from his past errors. 

 

They may be under-reserved (as we all know, BAC does that routinely) but assuming BAC was at $0 post-huge-JPM-settlement seems a bit nutty to me. 

[gary17]

Has nobody (I mean the investor community at large; not just people here) asked management or IR if they have reserved for settlement with the US government?

[blainehodder]

Hi Gary,

 

Sorry I haven't had a chance to get back to you. Banks typically will not disclose legal reserves as they feel it can influence the results of the settlements.

 

I was pulling up the FASB guidelines in a wishful attempt to estimate what is reserved. I may not be interpreting the guidelines correctly,  and in the end it would be a judgment call for the accountants. Any CPAs have some insight?

.

 

I personally think BAC will have sufficient reserves to cover a comparable settlement to JPM. It could swing worse for BAC given the notoriously egregious behavior of Countrywide, but who knows?  I would be pretty surprised if they had 0 reserves for the DOJ prior to the recent 2.4B.

 

Mayo is assuming the worst.  Mayo has made a name for himself by making exaggerated claims and extreme calls. We are all discussing him.... so this strategy appears to work

[gary17]

I emailed them and asked the question and here's what they wrote back

 

Fully understand your line of questioning.  The only other thing I would remind you as you think about BAC.  JPM settled with DOJ and others because of things they did to harm themselves according to media and not so much their predecessor companies as much of the discussion around that settlement had to do with a whisteblower and FIRREA.  Most of the issues we have faced have been Countrywide issues so it is a bit different and difficult to estimate.  And as we noted in our FHFA settlement announcement press release at the end of March we had just begun to have preliminary discussions with DOJ, RMBS working Group and state AGs.  So really not much basis for us to do reserving before 1Q14. And even if to your point probable it has to be estimable to take a reserve. In 1Q14 we did take an additional $2.4B for reserves outside FHFA settlement as we discussed.  And also as we discussed any settlement reached like JPM had a hard dollar or cash component and a soft dollar component “borrower relief” and is difficult to know if we reach similar conclusions at some point but that is the rumors in the papers obviously.

Not sure if this helped or not but glad to discuss further.  I think importantly from the stock perspective the type numbers being discussed at this point in the media are in the minds of those in the stock now so not sure the size of those is really a surprise positive or negative and although painful to swallow are not that large in the context of our businesses earnings $5B+ a quarter now and our capital base of $140B.

[fareastwarriors]

BofA's CFO Thompson Doesn't Expand on Capital Miscalculation

 

Speaking at Conference, Executive Says He Expects 'Ebbs and Flows' in FICC Revenue

 

 

http://online.wsj.com/news/articles/SB10001424052702304908304579561542706232428?mod=WSJ_LatestHeadlines&mg=reno64-wsj

[ERICOPOLY]

I emailed them and asked the question and here's what they wrote back

 

So really not much basis for us to do reserving before 1Q14. And even if to your point probable it has to be estimable to take a reserve. In 1Q14 we did take an additional $2.4B for reserves outside FHFA settlement as we discussed. 

 

 

That reads like Mike Mayo is right -- they reserved $0 for this thing prior to the charge taken in 1Q14.

[gary17]

Yes that appears to be the case here - unfortunately. On the other hand, it is priced at what it is... and based on my understanding, the DOJ settlement would be the last (?) of the big legal issues and we can finally move on - hopefully.  So at $5B / quarter or $20B / year earnings over the next 10 years that's like $200B right there -- so why is BAC only valued at $157????  I think the only logical conclusion is just fear in the market about the world economy.  But what do I know... 

 

[xazp]

Dang it sure does sound like Mayo was right (mea culpa I guess).  I was wrong - I really thought BAC would have taken substantial charges in the past. 

 

This is how I imagine it going:

Secretary:  Brian, Eric Holder is on line 1 for you. 

Brian:  He must be asking about a play date for our kids.  Can you transfer the call to my wife?  Thanks.  (humming to himself)  That Eric is so nice, he's calling every day about a play date.  I bet that's why he's calling Jamie Dimon too ... such a nice, social man. 

Secretary:  Brian I think it's about a multi-billi...

Brian: Thanks, bye!  (sticks his fingers in his ears) - if I can't hear it, I don't have to reserve for it!  It being ... the playdate. 

 

This is the only way I can imagine not realizing that the DOJ and all the attorneys general had a number in mind greater than $0. 

 

I guess I'm the only one who voted against Moynihan and his pay package ... I was surprised more people didn't vote against him given his mistakes were on par with Vikram's when that pay package got voted down. 

 

 

 

 

 

 

 

I emailed them and asked the question and here's what they wrote back

 

Fully understand your line of questioning.  The only other thing I would remind you as you think about BAC.  JPM settled with DOJ and others because of things they did to harm themselves according to media and not so much their predecessor companies as much of the discussion around that settlement had to do with a whisteblower and FIRREA.  Most of the issues we have faced have been Countrywide issues so it is a bit different and difficult to estimate.  And as we noted in our FHFA settlement announcement press release at the end of March we had just begun to have preliminary discussions with DOJ, RMBS working Group and state AGs.  So really not much basis for us to do reserving before 1Q14. And even if to your point probable it has to be estimable to take a reserve. In 1Q14 we did take an additional $2.4B for reserves outside FHFA settlement as we discussed.  And also as we discussed any settlement reached like JPM had a hard dollar or cash component and a soft dollar component “borrower relief” and is difficult to know if we reach similar conclusions at some point but that is the rumors in the papers obviously.

Not sure if this helped or not but glad to discuss further.  I think importantly from the stock perspective the type numbers being discussed at this point in the media are in the minds of those in the stock now so not sure the size of those is really a surprise positive or negative and although painful to swallow are not that large in the context of our businesses earnings $5B+ a quarter now and our capital base of $140B.

[fareastwarriors]

I guess I'm the only one who voted against Moynihan and his pay package ... I was surprised more people didn't vote against him given his mistakes were on par with Vikram's when that pay package got voted down. 

 

I guess my shares and yours weren't enough to move the needle...

:-\

[xazp]

I do not understand how BAC could be far off after Q1 earnings.  Literally a week after BAC reported, the media had numbers on the settlement discussions (http://www.cnbc.com/id/101582319).  I don't understand how they could be off by a factor of 2-4x literally a week after reporting. 

 

Maybe I'm in denial but this is not making any sense to me.  If they're going to do a kitchen sink quarter like Q1, it makes sense to me they reserve pretty close to the numbers they were discussing. 

 

I'm looking back through JPM and the quarter prior to the settlement (Q3 2013) they did take a $9Bn settlement charge, and BAC didn't take a corresponding charge.  So I guess we're paying the piper now.  I still think it's strange that BAC would come into it totally unreserved prior to Q1, then take a charge which wasn't sufficient to cover a settlement that hopefully will happen during Q2 or Q3. 

 

Also ... BAC does not earn $5Bn/quarter, give me a break. 

 

 

I guess I'm the only one who voted against Moynihan and his pay package ... I was surprised more people didn't vote against him given his mistakes were on par with Vikram's when that pay package got voted down. 

 

I guess my shares and yours weren't enough to move the needle...

:-\

[Grenville]

I emailed them and asked the question and here's what they wrote back

 

I think importantly from the stock perspective the type numbers being discussed at this point in the media are in the minds of those in the stock now so not sure the size of those is really a surprise positive or negative and although painful to swallow are not that large in the context of our businesses earnings $5B+ a quarter now and our capital base of $140B.

 

Thanks for posting your response. I'm a bit surprised that someone in IR would be touting what the stock is earning on a quarterly basis. It's almost like they are a sales person. I've never heard someone on a conference call/management try to pitch the stock like that especially to mitigate litigation levels.

 

Could you post the text of your question if possible?

[doc75]

I emailed them and asked the question and here's what they wrote back

 

I think importantly from the stock perspective the type numbers being discussed at this point in the media are in the minds of those in the stock now so not sure the size of those is really a surprise positive or negative and although painful to swallow are not that large in the context of our businesses earnings $5B+ a quarter now and our capital base of $140B.

 

Thanks for posting your response. I'm a bit surprised that someone in IR would be touting what the stock is earning on a quarterly basis. It's almost like they are a sales person. I've never heard someone on a conference call/management try to pitch the stock like that especially to mitigate litigation levels.

 

Could you post the text of your question if possible?

 

I've had IR people do this type of thing on a number of occasions, admittedly in much smaller companies where their job is more obviously part promotional.  I chalk it up to the nature of the beast.  Their email boxes must be full of pretty inane questions/comments about the stock price (as opposed to the company itself).

[gary17]

Thank you for taking the time to call me a few days ago to answer my question - I am wondering if I may ask a follow-up question.

 

I want to ask about the reserve reported in the Annual Report 2013 regarding the ongoing legal issues with the US Department of Justice -- specifically, the settlement with the US Justice Department and whether that has been reserved for --

 

Here's a bit of where we are thinking:

 

The FASB guidelines appear to indicate that if the possibility of loss is probable and can be estimated, it must be recorded in the financial statements; on the other hand if the loss is reasonably possible, the potential loss should be disclosed in the notes.

 

Given a loss due to the settlement with the US government is probable and that it can be estimated based on the JPM settlement - is it reasonable to expect that a JPM level accrual could or should have already been reserved?

 

Is there any way that you could comment on whether this thinking is correct?

[Grenville]

Thank you for taking the time to call me a few days ago to answer my question - I am wondering if I may ask a follow-up question.

 

I want to ask about the reserve reported in the Annual Report 2013 regarding the ongoing legal issues with the US Department of Justice -- specifically, the settlement with the US Justice Department and whether that has been reserved for --

 

Here's a bit of where we are thinking:

 

The FASB guidelines appear to indicate that if the possibility of loss is probable and can be estimated, it must be recorded in the financial statements; on the other hand if the loss is reasonably possible, the potential loss should be disclosed in the notes.

 

Given a loss due to the settlement with the US government is probable and that it can be estimated based on the JPM settlement - is it reasonable to expect that a JPM level accrual could or should have already been reserved?

 

Is there any way that you could comment on whether this thinking is correct?

 

Thank you for the question text. The answer they give makes sense except the justification about the stock price & capital base. Thank you for asking the question to IR and posting the response here.

[gary17]

 

Also ... BAC does not earn $5Bn/quarter, give me a break. 

 

 

"$5B+/quarter" -  not "$5B/quarter" !

[xazp]

I guess if you're a fan of "adjusted earnings" you could argue that.  CBB + GWIM + GB + GM add up to about $5Bn. 

 

It's not hard to report good earnings if you are allowed to subtract out the divisions that are losing money!

 

It raises an interesting point though ... if you assume CRES is eventually break-even or dare I say profitable (mortgage servicing of paying customers is a profitable, boring business - mortgage servicing of non-paying customers is a money-losing, exciting business) then indeed they would be doing $5Bn+/quarter without even the interest rate shift.  Something to think about after I'm done fuming.  There actually is a pretty straightforward path to $20Bn in earnings if you look at it that way. 

 

 

Also ... BAC does not earn $5Bn/quarter, give me a break. 

 

 

"$5B+/quarter" -  not "$5B/quarter" !

[Uccmal]

Thanks Gary, for your efforts and for posting.

 

from bloomberg - JPM 13 b settlement:

 

"Terms call for JPMorgan to pay $9 billion for federal and state claims, with $2 billion to the Justice Department, $1.4 billion to the National Credit Union Administration and $515.4 million to the Federal Deposit Insurance Corp.

 

The state of New York will receive $613.8 million, California will get $298.9 million, Illinois will get $100 million, Delaware will get $19.7 million and Massachusetts will receive $34.4 million, according to the Justice Department’s statement.

 

The agreement includes a previously disclosed accord to end a 2011 Federal Housing Finance Agency lawsuit. The bank will devote $4 billion to consumer relief for affected homeowners, including principal forgiveness, loan modifications and efforts to reduce blight, according to the statement.

 

The bank also agreed not to pursue reimbursement from the FDIC for bad loans issued by WaMu. The FDIC and JPMorgan have wrangled about who should pay claims tied to faulty mortgages issued by Seattle-based WaMu, which ranked among the biggest providers of subprime home loans before it collapsed during the financial crisis. The FDIC seized WaMu’s banking operations and sold them to JPMorgan for $1.9 billion."

 

In relation to BAC, I suggest the rumour mill is going full bore, and that no one has any idea what will come, especially the analyst who will remain nameless. 

 

One can reasonably assume some sort of DOJ fine (the 2 bn part).  I am thinking that BAC has handled some of the remainder, piecemeal. along the way.  The FHFA has been dealt with.  I am unclear as to whether 9 b of state and federal claims has been dealt with in the various suits along the way.  BAC is clearly not willing to put a number to it.  Therefore, no one knows, or is telling. 

 

Lets go with... 2 bn to 15 Bn.

 

The next question is "why is the stock down when no one really knows the state of this situation?".  The state of our unknowing has been the same since November.  In the interim the stock rose to nearly 18 and dropped - oh, forgot about the Ccar goofup. 

[jm25]

Sentiment seems to have taken a bit of a turn. Might be a good time to buy more!