BAC-WT - Bank of America Warrants

[Sunrider]

At this point, the warrants have such a high time premium there is actually negative leverage versus to the stock up to for example 15.  So if the stock goes to 15, the common is up 112% and warrants would only be up 91%.  I calculated the warrant price at 15 based upon a 3.9% borrowing rate on the $13.3 strike price plus the intrinsic value.  This is the borrowing rate of the slightly in the money GM warrants today.  So one stratgey is to hold the stock until the stock price approaches the strike price then switch to the warrants (assuming the IV is significantly greater than the strike price).

 

Packer

 

Sorry Packer, would you mind elaborating on this slightly? Are you referring to the warrants being expensive (high Implied Vol compared to stock)? Do you mean you get your results when you plug in a 3.9% rate into,e.g. Black-Scholes at some assumed point in the future? At what point? What's your time horizon here?

 

Thank you very much!

[Packer16]

The implied volatilty is one way to measure the "expensiveness" of options.  The others are: 1) determine the cost to borrow the strike price over the option's life or 2) determine the profit versus the stock at various prices.  I am assuming a "cost to borrow" the strike price to estimate the time premium to compare the option value to the stock price in say 12 months.

 

Packer 

[Green King]

The implied volatilty is one way to measure the "expensiveness" of options.  The others are: 1) determine the cost to borrow the strike price over the option's life or 2) determine the profit versus the stock at various prices.  I am assuming a "cost to borrow" the strike price to estimate the time premium to compare the option value to the stock price in say 12 months.

 

Packer

 

can i see a equation please?

 

edit

is this what you are talking about  ?

 

((13.3*(1.039^6.416666667))-13.3)=3.7

[Sunrider]

The implied volatilty is one way to measure the "expensiveness" of options.  The others are: 1) determine the cost to borrow the strike price over the option's life or 2) determine the profit versus the stock at various prices.  I am assuming a "cost to borrow" the strike price to estimate the time premium to compare the option value to the stock price in say 12 months.

 

Packer

 

can i see a equation please?

 

Yeah, still slightly confused to. Are you saying you want to calculate the amount it would cost you to borrow 13.3 @ 3.9% interest. I'm really not following what you are saying, please explain by way of example.

 

Thank you.

[newbee]

One more Good news for BAC.

 

Walnut Place lifts objection to $8.5 billion Bank of America deal

 

http://www.reuters.com/article/2012/07/23/us-bankofamerica-mbs-walnut-idUSBRE86M12020120723?type=companyNews

[PlanMaestro]

You beat me to it! Not many left standing, I can bet the DOI is putting pressure on MBIA to settle.

[PlanMaestro]

Request to Withdraw: http://newsandinsight.thomsonreuters.com/uploadedFiles/Reuters_Content/2012/07_-_July/bofambs--walnutwithdrawalmotion.pdf

 

But Baupost was facing an imminent decision about whether to request leave to appeal the dismissal of its case against BofA to New York's highest court. Given the unlikely prospect that the Court of Appeals would agree to take the case, the hedge fund appears to have decided not to continue to spend money on litigation with little chance of a return. And given that the dismissal of Walnut's suit makes it very difficult for the hedge fund -- or any other MBS investor -- to recover on put-back claims outside of the global settlement, Walnut apparently determined that it wasn't economically rational to continue its challenge to the $8.5 billion deal. (From what I've heard, Bank of America did not pay Walnut anything in exchange for the hedge fund's withdrawal; a Bank of America spokesman declined to comment to my Reuters colleague Karen Freifeld.)

 

In fact, according to the International Financing Review, which checked a trading database of securitized debt run by Empirasign Strategies, Walnut Place has teed up several of its Countrywide notes to be sold into the secondary MBS market Tuesday. The fund seems to have decided to cut its losses and move on.

[xazp]

I feel like her title is inverted -- "BofA catches big break."  Baupost made a calculated bet that further litigation would not make them money.  The people who "caught a big break" are the trust-holders that were either too small or otherwise disinterested in suing.  Had Baupost succeeded, those guys would have gotten nothing. 

 

IR confirmed with me today that A) the new claims they saw were part of the big R&W reserve they did last year;  B) that the claims are the original principal i.e. they include loans that have been fully paid off;  and C) to expect more claims.

 

Just as a reminder, the settlement covers $424Bn of original principal, and settled at $8.5Bn, or about 2 cents on the dollar.  So when you see $8Bn of original principle claims from private investors (the current level), at the settlement rate, that would be about $160 million, against reserves of $15 billion.  This is what analysts seem to be excited about... strangely. 

 

I would actually invert.  There are $400Bn of original principle in non-CFC trusts.  BAC made reserves with respect to those, but today there are only $8.6Bn of claims outstanding.  Where are the other $390Bn of claims?  It seems possible (since we're now 4-8 years after they bought these trusts) that some of these claims aren't even going to happen, in which case, dare I say it, BAC might be over-reserved. 

 

 

 

Request to Withdraw: http://newsandinsight.thomsonreuters.com/uploadedFiles/Reuters_Content/2012/07_-_July/bofambs--walnutwithdrawalmotion.pdf

 

But Baupost was facing an imminent decision about whether to request leave to appeal the dismissal of its case against BofA to New York's highest court. Given the unlikely prospect that the Court of Appeals would agree to take the case, the hedge fund appears to have decided not to continue to spend money on litigation with little chance of a return. And given that the dismissal of Walnut's suit makes it very difficult for the hedge fund -- or any other MBS investor -- to recover on put-back claims outside of the global settlement, Walnut apparently determined that it wasn't economically rational to continue its challenge to the $8.5 billion deal. (From what I've heard, Bank of America did not pay Walnut anything in exchange for the hedge fund's withdrawal; a Bank of America spokesman declined to comment to my Reuters colleague Karen Freifeld.)

 

In fact, according to the International Financing Review, which checked a trading database of securitized debt run by Empirasign Strategies, Walnut Place has teed up several of its Countrywide notes to be sold into the secondary MBS market Tuesday. The fund seems to have decided to cut its losses and move on.

[moore_capital54]

I feel like her title is inverted -- "BofA catches big break."  Baupost made a calculated bet that further litigation would not make them money.  The people who "caught a big break" are the trust-holders that were either too small or otherwise disinterested in suing.  Had Baupost succeeded, those guys would have gotten nothing. 

 

IR confirmed with me today that A) the new claims they saw were part of the big R&W reserve they did last year;  B) that the claims are the original principal i.e. they include loans that have been fully paid off;  and C) to expect more claims.

 

Just as a reminder, the settlement covers $424Bn of original principal, and settled at $8.5Bn, or about 2 cents on the dollar.  So when you see $8Bn of original principle claims from private investors (the current level), at the settlement rate, that would be about $160 million, against reserves of $15 billion.  This is what analysts seem to be excited about... strangely. 

 

I would actually invert.  There are $400Bn of original principle in non-CFC trusts.  BAC made reserves with respect to those, but today there are only $8.6Bn of claims outstanding.  Where are the other $390Bn of claims?  It seems possible (since we're now 4-8 years after they bought these trusts) that some of these claims aren't even going to happen, in which case, dare I say it, BAC might be over-reserved. 

 

 

 

Request to Withdraw: http://newsandinsight.thomsonreuters.com/uploadedFiles/Reuters_Content/2012/07_-_July/bofambs--walnutwithdrawalmotion.pdf

 

But Baupost was facing an imminent decision about whether to request leave to appeal the dismissal of its case against BofA to New York's highest court. Given the unlikely prospect that the Court of Appeals would agree to take the case, the hedge fund appears to have decided not to continue to spend money on litigation with little chance of a return. And given that the dismissal of Walnut's suit makes it very difficult for the hedge fund -- or any other MBS investor -- to recover on put-back claims outside of the global settlement, Walnut apparently determined that it wasn't economically rational to continue its challenge to the $8.5 billion deal. (From what I've heard, Bank of America did not pay Walnut anything in exchange for the hedge fund's withdrawal; a Bank of America spokesman declined to comment to my Reuters colleague Karen Freifeld.)

 

In fact, according to the International Financing Review, which checked a trading database of securitized debt run by Empirasign Strategies, Walnut Place has teed up several of its Countrywide notes to be sold into the secondary MBS market Tuesday. The fund seems to have decided to cut its losses and move on.

 

XAZP you have been a breath of fresh air, I would very much appreciate your continued contributions on this board.

[PlanMaestro]

in which case, dare I say it, BAC might be over-reserved. 

 

Bank of America overcapitalized and over-reserved? Heresy!  ;)

[xazp]

XAZP you have been a breath of fresh air, I would very much appreciate your continued contributions on this board.

 

In general, I find high-profile litigation to be a fertile ground for value investments.  The first thing that happens, some plaintiff gets up and says "we're suing for $XXX billion in damages" and some investors read this as an $XXX loss, and they leave.  Then, the media says "up to $XXX billion in losses" and another wave leaves.  Then there's the inherent uncertainty in litigation, which makes more people leave.  The final outcome is almost always some small fraction of $XXX billion. 

 

Well since I like litigation-plagued stocks, it's kind of inevitable that I landed at BAC, right?  :P. 

 

Here are two current examples. 

1)  One analyst raised his R&W liability by $10 billion after the call.  To put this in context, the entire countrywide settlement is $8.5 billion, which let's call "one countrywide" as a litigation unit.  The analyst seems to be saying BAC has one additional "countrywide" on their hands.  This seems excessive (though it's a similar number to my downside analysis).  Even if he's right, it's less than a year of earnings. 

 

2)  Others talk about the $10 billion in loss for LIBOR.  Well, there were 16 banks doing LIBOR.  So less than a billion per bank?  A billion in fines or settlements is what I jokingly call "a great quarter for BAC."  They spent a billion dollars on lawyers alone last quarter!  Hey if you can settle for a billion dollars and you stop spending that amount on lawyers each quarter, then go plead guilty right away. 

 

 

 

[biaggio]

xazp, any insight as to why these claims have been settled for such a small fraction? Is it just the nature of litigation that the plaintiffs ask for an unrealistic sum?

[xazp]

xazp, any insight as to why these claims have been settled for such a small fraction? Is it just the nature of litigation that the plaintiffs ask for an unrealistic sum?

 

A good piece to read is the Gibbs/Brun brief in support of the settlement, which describes all the legal obstacles. 

http://crapstocks.com/files/BAC/legal/BofAMBS--Gibbs10.31brief.pdf

 

But I'll summarize numerically:

$400Bn in countrywide MBS 

* 35% remaining balance

* 30% violated R&W

* 50% recovery via foreclosure

===========

$21 billion if they win every lawsuit

* 40% (lawsuit win probability)

=========

$8.5Bn, or 2% of original value. 

 

This is essentially why you hear the "$100 BILLION DOLLAR" number thrown around, and then they settle for 2% of that.  Also why the claims $ value vastly overstates the final payout. 

 

 

 

 

 

 

[biaggio]

Thanks xazp

[ERICOPOLY]

I am glad on more than one level that Klarman isn't going to make a profit here.  It's one thing if you were harmed and you use the courts to defend your rights, it's another thing entirely to buy at a discount (harm priced in) and then sue as if you were harmed.  I thought the whole thing was slimy.

[rranjan]

I am glad on more than one level that Klarman isn't going to make a profit here.  It's one thing if you were harmed and you use the courts to defend your rights, it's another thing entirely to buy at a discount (harm priced in) and then sue as if you were harmed.  I thought the whole thing was slimy.

 

+1.

 

I felt same when I heard that Buapost was involved in lawsuit after knowingly buying it. Klarman is not an ambulance chaser so I was not sure why he went with this approach.

[PlanMaestro]

 

+1.

 

I felt same when I heard that Buapost was involved in lawsuit after knowingly buying it. Klarman is not an ambulance chaser so I was not sure why he went with this approach.

 

Probably he already profit buying them at 30 cents on the dollar. This was a nice extra. What really got into my nerves was he saying that Bank of America was a crappy company. We'll see.

[Parsad]

I am glad on more than one level that Klarman isn't going to make a profit here.  It's one thing if you were harmed and you use the courts to defend your rights, it's another thing entirely to buy at a discount (harm priced in) and then sue as if you were harmed.  I thought the whole thing was slimy.

 

+2!  Smelled a little foul to me as well.  Cheers!

[bmichaud]

xazp, any insight as to why these claims have been settled for such a small fraction? Is it just the nature of litigation that the plaintiffs ask for an unrealistic sum?

 

A good piece to read is the Gibbs/Brun brief in support of the settlement, which describes all the legal obstacles. 

http://crapstocks.com/files/BAC/legal/BofAMBS--Gibbs10.31brief.pdf

 

But I'll summarize numerically:

$400Bn in countrywide MBS 

* 35% remaining balance

* 30% violated R&W

* 50% recovery via foreclosure

===========

$21 billion if they win every lawsuit

* 40% (lawsuit win probability)

=========

$8.5Bn, or 2% of original value. 

 

This is essentially why you hear the "$100 BILLION DOLLAR" number thrown around, and then they settle for 2% of that.  Also why the claims $ value vastly overstates the final payout.

 

XZAP - your analysis is phenomenal...in less than 10 posts I've already learned a ton from your work. My only question is this - do you think the marketplace is naïve enough to take these blatantly absurd litigation numbers (such as the $100B number you cited - something ZeroHedge likes to throw around as well) seriously? While your analysis is compelling, it is not so complex to inhibit the billions of dollars managed by extremely smart, value-oriented investors from driving up the stock price - in other words, why is BAC not at the top of every single hard-core value investor's portfolio? Not once was it discussed at the Sohn Conference, for example.

 

Curious what your thoughts are.

 

Edit: I wasn't clear enough what my question was/is.....basically I am wondering if there is something going on that we're not seeing. The story is just so obvious to me and there are untold numbers of value-investor eyes on the name - what are we missing? Is it merely a time arbitrage story where the market is not going to pay up for something until the free cash actually starts flowing?

[MrB]

 

XZAP - your analysis is phenomenal...in less than 10 posts I've already learned a ton from your work. My only question is this - do you think the marketplace is naïve enough to take these blatantly absurd litigation numbers (such as the $100B number you cited - something ZeroHedge likes to throw around as well) seriously? While your analysis is compelling, it is not so complex to inhibit the billions of dollars managed by extremely smart, value-oriented investors from driving up the stock price - in other words, why is BAC not at the top of every single hard-core value investor's portfolio? Not once was it discussed at the Sohn Conference, for example.

 

Curious what your thoughts are.

 

-BM, I think you overestimate the diligence of the market. No scientific way to determine it, but what percentage of professional managers that owned AIG over the last decade actually bothered to read the annual report? I certainly will not put it at more than 10% and even less today.

 

-Ben consistently points out how perception and reality differs with AIG. Most journalists interviewing him do not realize that a) debt has been repaid and b) government stake has been reduced to under 70%

 

-You might be getting help from an unlikely source in the not too distant future; the campaign trail.

 

-That said, they come around one at a time.

 

 

Today at 05:25 

July 24 (Reuters) - AIG (AIG.N):

* Evercore starts AIG (AIG.N) with overweight rating and a price target of $38

 

-Personally I hope the share price stays down here for as long as Ben allocates cash to buybacks; even if it is for the next three years. I have no problem with the low share price.

 

[bmichaud]

 

XZAP - your analysis is phenomenal...in less than 10 posts I've already learned a ton from your work. My only question is this - do you think the marketplace is naïve enough to take these blatantly absurd litigation numbers (such as the $100B number you cited - something ZeroHedge likes to throw around as well) seriously? While your analysis is compelling, it is not so complex to inhibit the billions of dollars managed by extremely smart, value-oriented investors from driving up the stock price - in other words, why is BAC not at the top of every single hard-core value investor's portfolio? Not once was it discussed at the Sohn Conference, for example.

 

Curious what your thoughts are.

 

-BM, I think you overestimate the diligence of the market. No scientific way to determine it, but what percentage of professional managers that owned AIG over the last decade actually bothered to read the annual report? I certainly will not put it at more than 10% and even less today.

 

-Ben consistently points out how perception and reality differs with AIG. Most journalists interviewing him do not realize that a) debt has been repaid and b) government stake has been reduced to under 70%

 

-You might be getting help from an unlikely source in the not too distant future; the campaign trail.

 

-That said, they come around one at a time.

 

 

Today at 05:25 

July 24 (Reuters) - AIG (AIG.N):

* Evercore starts AIG (AIG.N) with overweight rating and a price target of $38

 

-Personally I hope the share price stays down here for as long as Ben allocates cash to buybacks; even if it is for the next three years. I have no problem with the low share price.

 

Mr. B,

 

It's a great point - I am most likely giving Mr. Market too much credit. Probabaly just a matter of waiting.....

[MrB]

 

 

Mr. B,

 

It's a great point - I am most likely giving Mr. Market too much credit. Probabaly just a matter of waiting.....

 

I had a quick look at Valueinvestorsclub and SumZero. VIC-two writeups on equity and one on warrant. The one writeup on the equity is very poor and on the one that is ok, one of the comments made is that they cannot believe how few comments there were on the writeup...so very little interest.

 

No writeup on AIG on SumZero.

 

So, I think pull up a chair. Put up your feet. Crack a cold one and shoot the mini hoop with your free hand. They will get it eventually ;-)

[bmichaud]

 

 

Mr. B,

 

It's a great point - I am most likely giving Mr. Market too much credit. Probabaly just a matter of waiting.....

 

I had a quick look at Valueinvestorsclub and SumZero. VIC-two writeups on equity and one on warrant. The one writeup on the equity is very poor and on the one that is ok, one of the comments made is that they cannot believe how few comments there were on the writeup...so very little interest.

 

No writeup on AIG on SumZero.

 

So, I think pull up a chair. Put up your feet. Crack a cold one and shoot the mini hoop with your free hand. They will get it eventually ;-)

 

haha I like it  8)

[racemize]

At this point, the warrants have such a high time premium there is actually negative leverage versus to the stock up to for example 15.  So if the stock goes to 15, the common is up 112% and warrants would only be up 91%.  I calculated the warrant price at 15 based upon a 3.9% borrowing rate on the $13.3 strike price plus the intrinsic value.  This is the borrowing rate of the slightly in the money GM warrants today.  So one stratgey is to hold the stock until the stock price approaches the strike price then switch to the warrants (assuming the IV is significantly greater than the strike price).

 

Packer

 

Sorry Packer, would you mind elaborating on this slightly? Are you referring to the warrants being expensive (high Implied Vol compared to stock)? Do you mean you get your results when you plug in a 3.9% rate into,e.g. Black-Scholes at some assumed point in the future? At what point? What's your time horizon here?

 

Thank you very much!

 

incidentally, I have just been calculating the break-even price for warrants vs strike price.  I've made a spreadsheet for the various warrants--right now BAC-A warrants has a break-over point at around 23 dollars a share.

 

 

[writser]

Edit: I wasn't clear enough what my question was/is.....basically I am wondering if there is something going on that we're not seeing. The story is just so obvious to me and there are untold numbers of value-investor eyes on the name - what are we missing? Is it merely a time arbitrage story where the market is not going to pay up for something until the free cash actually starts flowing?

 

I would say take a step backwards. Since the start of 2011 BAC common has moved from 15 to 5, back to 10 and now trades at 7. There has been no significant news. The crisis in Europe, US mortgage problems, all were known back then. It appears that the market is not rational and we should be happy about that, even though it's hard to stomach in the short term.

 

This topic has been in existence for 2 years, the warrants have 6 more years to go.