BAC-WT - Bank of America Warrants

[ERICOPOLY]

Not that I agree but the market I think is worried about Citi's European assets.

 

Possibly, but the charts of C and BAC are almost identical.  And BAC has basically no exposure to Europe.

 

Here is a summary of C's exposure:

 

 As of June 30, 2011, Citi’s net funded exposure to the sovereign entities of Greece, Ireland, Italy, Portugal and Spain (GIIPS), as well as financial institutions and corporations domiciled in these countries, totaled $13B based on our internal risk management measures

 Of the $13B in existing net exposure: – About $2B is in assets held in trading portfolios and Available-for-Sale portfolios, which are marked-to-

market daily; trading portfolio exposure levels vary as we maintain inventory consistent with our customer

needs – The remaining $11B is net credit exposure, mostly in the form of funded loans comprised of:

 a little more than $1B to sovereigns;  approximately $6B to financial institutions of which 70% represents parent guaranteed short-term, off-shore

placements with these financial institutions’ non-GIIPS subsidiaries or fully collateralized by high quality,

primarily non-GIIPS collateral;  and approximately $4B to corporates of which 2/3rds is to multi-national corporations domiciled in the GIIPS

 We also have $9B unfunded exposure, primarily to multinational corporations headquartered in these countries. Like other banks, we also provide settlement and clearing facilities for a variety of clients in these countries, and are actively monitoring and managing these intra-day exposures

 Citi also has additional, locally-funded exposure in these countries to retail customers and small businesses, as part of our local lending activities. The vast majority of this is in Citi Holdings (Spain and Greece) and has been previously disclosed

 The sovereign entities of Greece, Ireland, Italy, Portugal and Spain, as well as the financial institutions and corporations domiciled in these countries, are an important part of the global Citi franchise. We fully expect to maintain our long-standing relationships with these entities going forward, and to continue to maintain a presence in these markets to service all of our global customers

 

[ERICOPOLY]

The only reason why I'm now wholly in BAC versus C is because I believe BAC is cheaper with less risk (yes, less risk) because of its exposure to the US versus all these other foreign markets, and because I think there is a catalyst with BAC.

 

Also, I really like what I hear out of Moynihan, whereas some of the things Pandit has said give me pause.

 

 

I have liked what both of the men are saying in general.  However if you look at actions taken, Pandit shows to be more prudent thus far IMO.

 

Moynihan wanted to start returning capital to shareholders long before he is even meeting the Basel III requirements, and long before he even knows what his ultimate putback costs will be.  Lo and behold, now he's diluting the shareholders giving a sweetheart deal to Buffett.

 

All along Pandit has been saying no dividend until they exceed Basel III by a large cushion.  As he pointed out, they also needed to wait to see what the regulators are actually going to require!  That doesn't stop Moynihan though.

 

I am heavily long BAC though.

 

I like Moynihan's plan for the future:  no more acquisitions.  Given a slow growth lending environment in the US, this means we'll be getting our hands on the earnings via dividends and share buybacks.

 

Citi on the other hand has tremendous growth opportunity in Asia and Latin America.  Perhaps it will be the one trading at a higher multiple to BAC years down the road for this reason.

[txlaw]

The only reason why I'm now wholly in BAC versus C is because I believe BAC is cheaper with less risk (yes, less risk) because of its exposure to the US versus all these other foreign markets, and because I think there is a catalyst with BAC.

 

Also, I really like what I hear out of Moynihan, whereas some of the things Pandit has said give me pause.

 

 

I have liked what both of the men are saying in general.  However if you look at actions taken, Pandit shows to be more prudent thus far IMO.

 

Moynihan wanted to start returning capital to shareholders long before he is even meeting the Basel III requirements, and long before he even knows what his ultimate putback costs will be.  Lo and behold, now he's diluting the shareholders giving a sweetheart deal to Buffett.

 

All along Pandit has been saying no dividend until they exceed Basel III by a large cushion.  As he pointed out, they also needed to wait to see what the regulators are actually going to require!  That doesn't stop Moynihan though.

 

I am heavily long BAC though.

 

I like Moynihan's plan for the future:  no more acquisitions.  Given a slow growth lending environment in the US, this means we'll be getting our hands on the earnings via dividends and share buybacks.

 

Citi on the other hand has tremendous growth opportunity in Asia and Latin America.  Perhaps it will be the one trading at a higher multiple to BAC years down the road for this reason.

 

Moynihan definitely made a mistake by talking about reinstating a real dividend so early.

 

It's not that I think Pandit has said anything egregious.  Actually, I like most of what he's said.  But I tend to go with the Moynihan perspective in certain instances.  For example, when asked about Glass-Steagall and the separation of depository institutions from investment banks and proprietary trading operations, they've had similar responses with different rationales.

 

Both have argued that we do not need a new Glass-Steagall.  Moynihan has said that the problem was excesses at both types of firms, not the fact that they were housed under the same umbrella, and that customers want to have an integrated experience for raising capital (debatable points, I think, but I like the customer focus.)

 

Pandit has argued, in a different manner, that it's good to have asset diversification among loans, commodities, currencies, etc. and so it makes sense to have all of these business under one roof.

 

While I'm not sure I buy either of these guys' explanations, I do like Moynihan's focus more than Pandit's.  Pandit's take makes it a little too easy to rely on diversifying your risk away (among countries and asset classes) rather than really focusing on risk at a more micro level. 

 

So that's why I said some things Pandit has said give me pause.

 

The other thing about Citi is that the very reason for its attractiveness makes it less attractive for me at the same time.  I know a lot more about the US financial system and economy than I do about the economies and financial systems in many of the markets in which Citi operates.  I just have no idea if financial markets might blow up in some of the markets Citi is in, whereas I know that there won't be a financial blow up in the US for a while.

 

But, yeah, you're probably right that Citi will probably trade at a higher multiple at some point because of its being all over the world.

[ERICOPOLY]

Anyways, since we both own BAC and MBI, here's a question:

 

How high do you think MBI will trade by Jan 2013 and how high do you think BAC will trade?

 

For example, you can get at least $2.50 for the MBI $10 strike call, and turn around and buy the BAC $10 strike call for just under $1.  So if BAC gets to $20, that would be the same as MBI at $35.

 

Or you can buy one BAC call at $10 strike for every MBI written at $17.50.  Or more than one BAC $12.50 for every MBI call written at $20.

 

[txlaw]

Anyways, since we both own BAC and MBI, here's a question:

 

How high do you think MBI will trade by Jan 2013 and how high do you think BAC will trade?

 

For example, you can get at least $2.50 for the MBI $10 strike call, and turn around and buy the BAC $10 strike call for just under $1.  So if BAC gets to $20, that would be the same as MBI at $35.

 

Or you can buy one BAC call at $10 strike for every MBI written at $17.50.  Or more than one BAC $12.50 for every MBI call written at $20.

 

Hmm, interesting question.

 

I think it's much less likely that MBI trades anywhere near $35 than BAC trading at $20 by Jan 2013, unless there is a bid for the company, which is entirely possible if MBIA starts writing business again. 

 

My guess is that BAC trades between $15 and $20 at Jan 2013.  My guess on MBI is that it trades at whatever National's equity value per share is at that time.

 

[ERICOPOLY]

To me it's interesting because $35 from an $8.50 MBI share price today is a 300% return.

 

With BAC today at $7 we need to get to $28 to have a 300% return. 

 

However it can be a 300% return when only getting to $20 in BAC if done using MBI as the downside risk (writing the covered $10 strike MBI and buying the $10 strike BAC with proceeds).

 

Sort of the same return you'd get if you could pick up BAC for $5, which you can't (thus far anyhow).

[NormR]

To me it's interesting because $35 from an $8.50 MBI share price today is a 300% return.

 

With BAC today at $7 we need to get to $28 to have a 300% return. 

 

However it can be a 300% return when only getting to $20 in BAC if done using MBI as the downside risk (writing the covered $10 strike MBI and buying the $10 strike BAC with proceeds).

 

Sort of the same return you'd get if you could pick up BAC for $5, which you can't (thus far anyhow).

 

I don't touch options but I love reading your options musings.  :)

[txlaw]

To me it's interesting because $35 from an $8.50 MBI share price today is a 300% return.

 

With BAC today at $7 we need to get to $28 to have a 300% return. 

 

However it can be a 300% return when only getting to $20 in BAC if done using MBI as the downside risk (writing the covered $10 strike MBI and buying the $10 strike BAC with proceeds).

 

Sort of the same return you'd get if you could pick up BAC for $5, which you can't (thus far anyhow).

 

but I love reading your options musings.  :)

 

Same.

[rjstc]

To me it's interesting because $35 from an $8.50 MBI share price today is a 300% return.

 

With BAC today at $7 we need to get to $28 to have a 300% return. 

 

However it can be a 300% return when only getting to $20 in BAC if done using MBI as the downside risk (writing the covered $10 strike MBI and buying the $10 strike BAC with proceeds).

 

Sort of the same return you'd get if you could pick up BAC for $5, which you can't (thus far anyhow).

 

but I love reading your options musings.  :)

 

Same.

Same with me

[vinod1]

To me it's interesting because $35 from an $8.50 MBI share price today is a 300% return.

 

With BAC today at $7 we need to get to $28 to have a 300% return. 

 

However it can be a 300% return when only getting to $20 in BAC if done using MBI as the downside risk (writing the covered $10 strike MBI and buying the $10 strike BAC with proceeds).

 

Sort of the same return you'd get if you could pick up BAC for $5, which you can't (thus far anyhow).

 

but I love reading your options musings.  :)

 

Same.

 

+1. Eric's musings probably helped me more in thinking through options than in passing the CFA exams.

 

Vinod

[west]

Fwiw, if you like Eric's thinking, I can't recommend the books Value Investing, by Bruce Greenwald, and You Can Be a Stock Market Genius, by Joel Greenblatt, highly enough.  With both of them you can build a really solid mental framework on how to think about valuing stocks versus their current price using the same sort of reasoning Eric's is above.  They helped me understand value investing way more than any finance or business valuation course I've ever taken.

[Kraven]

Pretty good article from Todd Sullivan over on Seeking Alpha about BAC's mortgage put back risk.

 

http://seekingalpha.com/article/294629-bank-of-america-s-mortgage-put-back-risk-what-are-investors-really-entitled-to

[merkhet]

 

Pretty good article from Todd Sullivan over on Seeking Alpha about BAC's mortgage put back risk.

 

http://seekingalpha.com/article/294629-bank-of-america-s-mortgage-put-back-risk-what-are-investors-really-entitled-to

 

 

Great find, Kraven.  I remember watching this guy's videos on Howard Hughes Corp. -- I sat that one out since I figured real estate was outside my circle of competence at that time.

[tombgrt]

Pretty good article from Todd Sullivan over on Seeking Alpha about BAC's mortgage put back risk.

 

http://seekingalpha.com/article/294629-bank-of-america-s-mortgage-put-back-risk-what-are-investors-really-entitled-to

 

He sums up the essence. I bought BAC yesterday with new cash. Yes, pro timing, I know...

 

http://www.bloomberg.com/news/2011-09-21/bank-of-america-credit-rating-downgraded-by-moody-s-on-waning-u-s-support.html

[Uccmal]

The rationale for the rating downgrades seems kind of perverse.  In effect we dont see the government stepping in to support them because they are strong enough to stand on their own now, so we downgraded them.  I just dont understand it.

 

As an aside, can anyone reflect on this for me:  Am I correct that the ratings agencies can only use publicly available information or are they privy to things that only insiders have access to?

[Kraven]

The rationale for the rating downgrades seems kind of perverse.  In effect we dont see the government stepping in to support them because they are strong enough to stand on their own now, so we downgraded them.  I just dont understand it.

 

As an aside, can anyone reflect on this for me:  Am I correct that the ratings agencies can only use publicly available information or are they privy to things that only insiders have access to?

 

Agreed.  The rationale was strange and rather weak.

 

Typically the rating agencies are privy to non-public information.  The only time this wouldn't be the case is if they are rating something and the company, entity, sovereign, etc. does not want to be rated by them.  That is, there is no legal requirement that anyone be rated say by Moody's or S&P or Fitch, for example.  They could decide to get rated by one of them, but not the others.  In which case, they don't need to cooperate, but then they run the risk of the rating not being based on all the relevant facts and data.  The rating agencies can always rate whatever they want even if there is no cooperation by the thing being rated.  Usually people want to cooperate.  Even if it's going to be a negative result, better to have your voice heard than not.  But this isn't always the case.

[merkhet]

I look at it this way...

 

If the ratings agencies downgrade Bank of America, and it does well anyway -- well, kudos to Moynihan for steering it out of "disaster."

 

If the ratings agencies maintain Bank of America, and it doesn't do well -- look at those ratings agencies asleep at the wheel again.

 

(The other two combinations are self-explanatory.)

[oec2000]

We are still paying attention to the ratings agencies?!  ??? ??? ???

[Uccmal]

OEC, Not really, just curious. 

 

I see that WFC is now below book and in the single digit PE range. 

[BargainValueHunter]

The rationale for the rating downgrades seems kind of perverse.  In effect we dont see the government stepping in to support them because they are strong enough to stand on their own now, so we downgraded them.  I just dont understand it.

 

As an aside, can anyone reflect on this for me:  Am I correct that the ratings agencies can only use publicly available information or are they privy to things that only insiders have access to?

 

After 2007-2008 no sane, rational human being should take the "ratings agencies" seriously.

 

Moody’s (MCO)

 

Holding Value: $929.2 million

Shares: 28,415,250

Stake in Company: 12.46 percent

 

It hurts Mr. Buffett's public image that Berkshire still owns a huge chunk of Moody's.

[biaggio]

We are still paying attention to the ratings agencies?!  ??? ??? ???

 

with their track record, I would feel good about your holdings (BAC bound to go up)

[oec2000]

OEC, Not really, just curious. 

 

I see that WFC is now below book and in the single digit PE range.

 

I prefer to use tangible book - better for making comparisons between banks and for normalising ROEs. WFC is still at a premium to tangible book. GS, admittedly a different kettle of fish, looks cheaper at a 20% discount to tangible book.

 

Many financials do look cheap. Wonder though whether flattening yield curve (especially if FFH's deflation thesis works out) in the US will hurt bank margins significantly going forward - the steep yield curve has helped banks turn in very strong PTPP earnings in the past few quarters.

[biaggio]

Pretty good article from Todd Sullivan over on Seeking Alpha about BAC's mortgage put back risk.

 

http://seekingalpha.com/article/294629-bank-of-america-s-mortgage-put-back-risk-what-are-investors-really-entitled-to

[/quote

 

Thanks for posting.

 

Can anyone here verify that how he describes the put backs is actually how they work. I have no idea. Has anyone dug into the actual paperwork. I assume they would be posted on Sec.gov.

 

Very good article + basically is the same as Fairholmes theory on BAC in that the bank as earnings power of $3 per share and will be allowed to earn their way thru the bad loans, putbacks etc. ie they will be able to write off or pay $30b per year from their earnings + then have a corp earning $3 per share per year as this is best for all concerned, especially those who are owed money.

 

Basically selling for 2 x earnings today. Wow.

[Rabbitisrich]

Pretty good article from Todd Sullivan over on Seeking Alpha about BAC's mortgage put back risk.

 

http://seekingalpha.com/article/294629-bank-of-america-s-mortgage-put-back-risk-what-are-investors-really-entitled-to

[/quote

 

Thanks for posting.

 

Can anyone here verify that how he describes the put backs is actually how they work. I have no idea. Has anyone dug into the actual paperwork. I assume they would be posted on Sec.gov.

 

Very good article + basically is the same as Fairholmes theory on BAC in that the bank as earnings power of $3 per share and will be allowed to earn their way thru the bad loans, putbacks etc. ie they will be able to write off or pay $30b per year from their earnings + then have a corp earning $3 per share per year as this is best for all concerned, especially those who are owed money.

 

Basically selling for 2 x earnings today. Wow.

 

Typically the reps and warranties language allows for putbacks if the originator's mistakes/lies qualify as material and adverse. Sullivan is probably referring to the difficulty of separating impairment due to misrepresentations from non-covered factors. There is also a fraud issue that may be separately raised.

 

 

[Rabbitisrich]

Alison Frankel at Thomson Reuters is a good source for updates on investor/trustee suits:

 

http://newsandinsight.thomsonreuters.com/Legal/OnTheCase/