BAC-WT - Bank of America Warrants

[enoch01]

"BAC settles ML shareholder lawsuit, but for an amount exceeding existing litigation reserves for this case."

 

I'd worry about that.

 

When buying BAC, I add (in my mind) a 1$/share ~10B$ on the price I pay for ligitation settlement above what has been reserved for.

 

Another way you could think about it:

 

Once they hit their capital requirements next year some time, they would be able to the following on a normalized basis:

 

1.  Withstand that amount of litigation expense every year, and

2.  Pay you a 10% dividend yield on shares purchased at today's prices, and

3.  Continue to build capital.

 

Bank of America is not quite drowning in money, but the bathtub is filling up.

[hardincap]

In 2011 Berkowitz said about BAC at the AAII conference:  "It’s going to be a long time before they pay taxes, given that they have to blow through $80 billion roughly of past losses.  Which means the next $80 billion that they make, they don’t pay any taxes on"

 

Yet BAC's '10 10k listed gross deferred tax assets at 50.7B. 80B and 50.7B is far apart. Anyone know whats up with this?

[ERICOPOLY]

In 2011 Berkowitz said about BAC at the AAII conference:  "It’s going to be a long time before they pay taxes, given that they have to blow through $80 billion roughly of past losses.  Which means the next $80 billion that they make, they don’t pay any taxes on"

 

Yet BAC's '10 10k listed gross deferred tax assets at 50.7B. 80B and 50.7B is far apart. Anyone know whats up with this?

 

 

That's weird about Bruce.

 

I like to think of the value of the DTA in terms of how much capital it's worth to them.

 

The 10-Q claims that the disallowed DTA subtracts exactly $15.598 billion from Tier 1 common capital as of June 30th, 2012.

 

So if the DTA were not disallowed, then the company estimate for fully phased in 2019 rules Basel III tier 1 ratio would already be at 9.09%.

 

They would already be done right now -- with the 2019 goals.

 

Unless they get required to hold even more, of course.

[woltac]

In 2011 Berkowitz said about BAC at the AAII conference:  "It’s going to be a long time before they pay taxes, given that they have to blow through $80 billion roughly of past losses.  Which means the next $80 billion that they make, they don’t pay any taxes on"

 

Yet BAC's '10 10k listed gross deferred tax assets at 50.7B. 80B and 50.7B is far apart. Anyone know whats up with this?

You are comparing deferred tax assets with the losses that create the deferred tax assets.  The losses would be multiplied by an effective tax rate to calculate the related DTA.  There may be items other than losses included in the gross DTA listed in the 10K.

[hardincap]

In 2011 Berkowitz said about BAC at the AAII conference:  "It’s going to be a long time before they pay taxes, given that they have to blow through $80 billion roughly of past losses.  Which means the next $80 billion that they make, they don’t pay any taxes on"

 

Yet BAC's '10 10k listed gross deferred tax assets at 50.7B. 80B and 50.7B is far apart. Anyone know whats up with this?

You are comparing deferred tax assets with the losses that create the deferred tax assets.  The losses would be multiplied by an effective tax rate to calculate the related DTA.  There may be items other than losses included in the gross DTA listed in the 10K.

 

DTA is calculated by adding up various loss carryfowards, primarily net operating losses. Take a look at page 224 of the '10 10k.

[xazp]

I have mixed feelings about BB.  On a conference call he held to discuss his large (and then-rapidly-losing-value) position in BAC, someone asked if BAC paid a dividend.  He replied "no."  I find his analysis fairly simplistic and I don't know if that's how he thinks or if he's talking down to his audience.  His 10% ROE = 1% ROA = stock should trade at book value contains no details on why he thinks BAC will generate 10% ROE.  In the absence of any reasoning if you just assert a 10% ROE, then you should buy any bank below BV.  Which is kinda what he seems to be doing. 

 

What the guy is saying about DTAs is, it represents an offset to your income tax.  So if you're at a 33% tax rate, $1 of DTAs shields $3 of earnings (because you'd be paying $1 of tax on the $3 of earnings).  So the guy replying to you is saying, it's the DTA/(tax rate) that is the number BB was handing out.  The number is complicated because the DTAs are in different jurisdictions (countries, states, etc) with different tax rates and rules. 

 

 

 

 

 

 

DTA is calculated by adding up various loss carryfowards, primarily net operating losses. Take a look at page 224 of the '10 10k.

[hardincap]

I have mixed feelings about BB.  On a conference call he held to discuss his large (and then-rapidly-losing-value) position in BAC, someone asked if BAC paid a dividend.  He replied "no."  I find his analysis fairly simplistic and I don't know if that's how he thinks or if he's talking down to his audience.  His 10% ROE = 1% ROA = stock should trade at book value contains no details on why he thinks BAC will generate 10% ROE.  In the absence of any reasoning if you just assert a 10% ROE, then you should buy any bank below BV.  Which is kinda what he seems to be doing. 

 

What the guy is saying about DTAs is, it represents an offset to your income tax.  So if you're at a 33% tax rate, $1 of DTAs shields $3 of earnings (because you'd be paying $1 of tax on the $3 of earnings).  So the guy replying to you is saying, it's the DTA/(tax rate) that is the number BB was handing out.  The number is complicated because the DTAs are in different jurisdictions (countries, states, etc) with different tax rates and rules. 

 

 

 

 

 

 

DTA is calculated by adding up various loss carryfowards, primarily net operating losses. Take a look at page 224 of the '10 10k.

 

this is my understanding of how DTAs are calculated:

if a company loses 10,000 in year 2000, it has a net operating loss of 10,000. DTA = 10,000 (from what I can tell NOLs are NOT multiplied by an effective tax rate to record it as a DTA)

then if it earns 15,000 in 2001, it can use its DTA of 10,000 to offset its taxable income down to 5,000

 

this is how im reading it from various 10ks. is this incorrect?

 

going by your DTA/(tax rate) number, his 80bn figure still doesnt make sense (47bn in net DTA / .35  = 134bn, not 80bn).

[hardincap]

BB provided alot more details about his WFC investment in OID. He seems to be just dumbing things down for a wider audience, but still, he hasnt defended his position very well IMO. He doesnt address their litigation risk at all, for example.

[Kraven]

I have mixed feelings about BB.  On a conference call he held to discuss his large (and then-rapidly-losing-value) position in BAC, someone asked if BAC paid a dividend.  He replied "no."  I find his analysis fairly simplistic and I don't know if that's how he thinks or if he's talking down to his audience.  His 10% ROE = 1% ROA = stock should trade at book value contains no details on why he thinks BAC will generate 10% ROE.  In the absence of any reasoning if you just assert a 10% ROE, then you should buy any bank below BV.  Which is kinda what he seems to be doing. 

 

What the guy is saying about DTAs is, it represents an offset to your income tax.  So if you're at a 33% tax rate, $1 of DTAs shields $3 of earnings (because you'd be paying $1 of tax on the $3 of earnings).  So the guy replying to you is saying, it's the DTA/(tax rate) that is the number BB was handing out.  The number is complicated because the DTAs are in different jurisdictions (countries, states, etc) with different tax rates and rules. 

 

 

 

 

 

 

DTA is calculated by adding up various loss carryfowards, primarily net operating losses. Take a look at page 224 of the '10 10k.

 

this is my understanding of how DTAs are calculated:

if a company loses 10,000 in year 2000, it has a net operating loss of 10,000. DTA = 10,000 (from what I can tell NOLs are NOT multiplied by an effective tax rate to record it as a DTA)

then if it earns 15,000 in 2001, it can use its DTA of 10,000 to offset its taxable income down to 5,000

 

this is how im reading it from various 10ks. is this incorrect?

 

DTAs are one of those things where it's better to just understand the gist rather than try and figure out an exact number.  Especially on something as complex as BAC.  DTAs are essentially the difference between taxes paid or accrued (as in the case of NOLs or something) on a tax basis vs what has been "paid" from an accounting standpoint.  But the numbers are just estimates of what may be owed in the future based on approximations of tax rates, etc.  In addition, there is a present value component as well so amounts listed as DTAs will be discounted to reflect what will be paid in the future.  So many estimates, it's impossible to know if it's "right" or exact.  So that would likely be the difference between the $80B that Berkowitz refers to and the $50B listed.  Because the entire amount is not likely to be used at once, it must be discounted on some basis.  Don't key in on exact numbers.  Just know that it's a big number and they can make a lot of money before owing taxes.  The exact amount, if you want to call it that, is determined on a rolling basis as income is earned and taxes are paid based on then current tax rates.  Hope this helps.

[xazp]

That is not my understanding of DTA's on the balance sheet. 

 

You'll see this quarter that BAC is reducing their DTAs because tax law changed in the U.K.  - it will be a few hundred million of losses on that.  The corporate tax rate is going down, and so, they have to reduce their DTA's.  In fact, you should worry about both AIG and C (and to a lesser extent BAC) if the U.S. corp tax rate goes down, it will be a very large write-down of their DTA. 

 

DTA is an asset - you are finding it on the balance sheet.  $1 in DTA should be worth the same as $1 in cash or $1 of manufacturing equipment or whatever.  That would only hold true were it to be an offset to the cash you paid for taxes (rather than the gross losses). 

 

I didn't find BB talking much about litigation exposure, put-back exposure, Europe, cost-cutting, and only peripherally about capital return.  Those are among the top-5 issues with BAC

 

 

I have mixed feelings about BB.  On a conference call he held to discuss his large (and then-rapidly-losing-value) position in BAC, someone asked if BAC paid a dividend.  He replied "no."  I find his analysis fairly simplistic and I don't know if that's how he thinks or if he's talking down to his audience.  His 10% ROE = 1% ROA = stock should trade at book value contains no details on why he thinks BAC will generate 10% ROE.  In the absence of any reasoning if you just assert a 10% ROE, then you should buy any bank below BV.  Which is kinda what he seems to be doing. 

 

What the guy is saying about DTAs is, it represents an offset to your income tax.  So if you're at a 33% tax rate, $1 of DTAs shields $3 of earnings (because you'd be paying $1 of tax on the $3 of earnings).  So the guy replying to you is saying, it's the DTA/(tax rate) that is the number BB was handing out.  The number is complicated because the DTAs are in different jurisdictions (countries, states, etc) with different tax rates and rules. 

 

 

 

 

 

 

DTA is calculated by adding up various loss carryfowards, primarily net operating losses. Take a look at page 224 of the '10 10k.

 

this is my understanding of how DTAs are calculated:

if a company loses 10,000 in year 2000, it has a net operating loss of 10,000. DTA = 10,000 (from what I can tell NOLs are NOT multiplied by an effective tax rate to record it as a DTA)

then if it earns 15,000 in 2001, it can use its DTA of 10,000 to offset its taxable income down to 5,000

 

this is how im reading it from various 10ks. is this incorrect?

[kevin4u2]

I have mixed feelings about BB.  On a conference call he held to discuss his large (and then-rapidly-losing-value) position in BAC, someone asked if BAC paid a dividend.  He replied "no."  I find his analysis fairly simplistic and I don't know if that's how he thinks or if he's talking down to his audience.  His 10% ROE = 1% ROA = stock should trade at book value contains no details on why he thinks BAC will generate 10% ROE.  In the absence of any reasoning if you just assert a 10% ROE, then you should buy any bank below BV.  Which is kinda what he seems to be doing. 

 

Banking isn't a hard business.  They make money off the yield curve.  They borrow short and lend long.  If a bank can't make a 1% spread (ROA), then they got a real problem.  Then given 10x leveraging of the balance sheet gives a 10% ROE.  This isn't magically stuff BB is talking about, in fact it's quite easy. 

 

Take a look at WFC, for instance.  They are much better run and iin Q2 their ROA was 1.41%.  They should be able to achieve ROE's in the mid teens.  WFC is able to do this because they are one of the most efficient operators.  They have the lowest cost deposit base to fund their lending.  BAC has the second lowest cost deposit base.  BAC's earnings are masked by losses right now but the losses are non-reoccuring.

[biaggio]

it sounds like they are making more than 1% recently

 

http://www.cnbc.com/id/49249106

 

“For banks which are mortgage originators this [QE3] was some of the best news they could possibly have heard,” said Steven Abrahams, mortgage strategist at Deutsche. “They will continue originating loans and selling them into the market at a significant premium.”

 

The interest banks pay on mortgage bonds has dropped from 2.36 percent on September 12, the day before the Fed announced its program, to as low as 1.65 percent last week. It edged up to 1.85 percent on Monday.

 

That means the profit, or spread, banks earn from creating new mortgages for homeowners paying around 3.4 percent and selling the loans into the secondary market has risen to around 1.6 percent. That is higher than the 1.44 percent spread they pocketed before QE3 and significantly greater than the 0.5 percent they earned on average in the decade between 2000 and 2010.

[MYDemaray]

Thought this was interesting, perhaps relevant here: http://dealbreaker.com/2012/10/to-be-fair-bear-stearns-never-told-investors-that-its-rmbs-deals-werent-shit-breathers/

[Rabbitisrich]

BB provided alot more details about his WFC investment in OID. He seems to be just dumbing things down for a wider audience, but still, he hasnt defended his position very well IMO. He doesnt address their litigation risk at all, for example.

 

Yeah, but his MBIA position implies that he holds a more nuanced view of BAC's litigation risks. MBIA was a huge position in his income fund the last time that I checked.

[Parsad]

BAC sells 12 building complex in  New Jersey for $375-400M.  Cheers!

 

http://www.bloomberg.com/news/2012-10-03/bofa-agrees-to-sell-12-building-new-jersey-office-campus.html?cmpid=yhoo

[Guest Dazel]

 

 

Sanjeev,

 

 

The Christmas tangible book at Bank of America clock is ticking...are we still on schedule? It would be a very nice Xmas gift!

 

 

Dazel.

[racemize]

 

 

Sanjeev,

 

 

The Christmas tangible book at Bank of America clock is ticking...are we still on schedule? It would be a very nice Xmas gift!

 

 

Dazel.

 

While I'm not discounting it as a possibility, it seems like the biggest catalyst will be next March on the 2013 capital plans.

[txlaw]

BAC announces redemption of $5.133 Billion of Trust Securities.

 

http://www.marketwatch.com/story/bank-of-america-announces-the-redemption-of-5133-billion-of-trust-securities-2012-10-04

 

Pretty awesome.

[nkp007]

BAC announces redemption of $5.133 Billion of Trust Securities.

 

http://www.marketwatch.com/story/bank-of-america-announces-the-redemption-of-5133-billion-of-trust-securities-2012-10-04

 

Pretty awesome.

 

$BAC is on the verge of collapse. This is akin to rearranging the chairs on the deck of the Titanic.

 

 

 

 

 

 

 

 

 

 

 

 

.... said everyone on CNBC a year ago.

[Parsad]

 

 

Sanjeev,

 

 

The Christmas tangible book at Bank of America clock is ticking...are we still on schedule? It would be a very nice Xmas gift!

 

 

Dazel.

 

You never know with these things...market sentiment...but I'm still saying we get close.  Unless the NY Attorney General comes out with a $50B lawsuit against BAC and Countrywide, which seems likely since everyone is out for a piece of the pie and looking good in front of voters and the populace...they'll eventually settle for 5-10 cents on the dollar. 

 

Maybe banks should sue consumers for taking out mortgages they couldn't afford or lying on their applications.  How about we finally string Angelo Mozillo up...this guy is like frickin' Bin Laden...oops he's gone!  What about Barney Frank?  How about Greenspan?  ;D  Cheers!

[Parsad]

BAC announces redemption of $5.133 Billion of Trust Securities.

 

http://www.marketwatch.com/story/bank-of-america-announces-the-redemption-of-5133-billion-of-trust-securities-2012-10-04

 

Pretty awesome.

 

Another article:

 

http://www.bloomberg.com/news/2012-10-04/bofa-sees-savings-in-redeeming-5-1-billion-in-trust-notes-1-.html?cmpid=yhoo

 

All the right little things they are doing...will add up over time.  Cheers!

[Kraven]

Maybe banks should sue consumers for taking out mortgages they couldn't afford or lying on their applications. 

 

This is on its face a faulty premise.  The average consumer is never wrong.  If the banks don't make a mortgage, the banks are wrong.  If the banks do make a mortgage, the banks are wrong.  I guess you haven't heard that the banks are greedy.  I liken it to fast food.  The greedy fast food establishments are forcing people to eat their tasty fare.  They have no choice but to gain weight.  It's a terrible thing.

[LC]

Maybe banks should sue consumers for taking out mortgages they couldn't afford or lying on their applications. 

 

This is on its face a faulty premise.  The average consumer is never wrong.  If the banks don't make a mortgage, the banks are wrong.  If the banks do make a mortgage, the banks are wrong.  I guess you haven't heard that the banks are greedy.  I liken it to fast food.  The greedy fast food establishments are forcing people to eat their tasty fare.  They have no choice but to gain weight.  It's a terrible thing.

 

I wouldn't go that far. The fault lies with each party's responsibility. If a bank gives me a mortgage and I default, am I at fault for the bank's lost profits? Of course not. They agreed to lend me the money. Likewise, are the banks at fault for giving me a mortgage I can't afford and repossessing my house? Of course not, I freely entered into the mortgage agreement in the first place.

[Parsad]

Maybe banks should sue consumers for taking out mortgages they couldn't afford or lying on their applications. 

 

This is on its face a faulty premise.  The average consumer is never wrong.  If the banks don't make a mortgage, the banks are wrong.  If the banks do make a mortgage, the banks are wrong.  I guess you haven't heard that the banks are greedy.  I liken it to fast food.  The greedy fast food establishments are forcing people to eat their tasty fare.  They have no choice but to gain weight.  It's a terrible thing.

 

I wouldn't go that far. The fault lies with each party's responsibility. If a bank gives me a mortgage and I default, am I at fault for the bank's lost profits? Of course not. They agreed to lend me the money. Likewise, are the banks at fault for giving me a mortgage I can't afford and repossessing my house? Of course not, I freely entered into the mortgage agreement in the first place.

 

I agree.  I think Kraven was just using a bit of sarcasm with all of the negative media around banks right now.  Like these lawsuits that investors who purchased MBS's and are now suing the banks because the loans turned sour...do your own diligence...you made the investment, now accept the risk.  Too much talk of fraudulent behavior by the banks...why don't investors sue these companies for making such poor choices in investments!  The only people getting rich at the end of the day aren't the banks...it's the lawyers!  Cheers!

[nkp007]

Maybe banks should sue consumers for taking out mortgages they couldn't afford or lying on their applications. 

 

This is on its face a faulty premise.  The average consumer is never wrong.  If the banks don't make a mortgage, the banks are wrong.  If the banks do make a mortgage, the banks are wrong.  I guess you haven't heard that the banks are greedy.  I liken it to fast food.  The greedy fast food establishments are forcing people to eat their tasty fare.  They have no choice but to gain weight.  It's a terrible thing.

 

I wouldn't go that far. The fault lies with each party's responsibility. If a bank gives me a mortgage and I default, am I at fault for the bank's lost profits? Of course not. They agreed to lend me the money. Likewise, are the banks at fault for giving me a mortgage I can't afford and repossessing my house? Of course not, I freely entered into the mortgage agreement in the first place.

 

I agree.  I think Kraven was just using a bit of sarcasm with all of the negative media around banks right now.  Like these lawsuits that investors who purchased MBS's and are now suing the banks because the loans turned sour...do your own diligence...you made the investment, now accept the risk.  Too much talk of fraudulent behavior by the banks...why don't investors sue these companies for making such poor choices in investments!  The only people getting rich at the end of the day aren't the banks...it's the lawyers!  Cheers!

 

The bolded is literally the most powerful incentive scheme in the modern era.