BAC-WT - Bank of America Warrants

[obtuse_investor]

I'm reading 'crash of titan', I'm getting a different picture of Moynihan -- he was always following orders (e.x. shutdown of investment research), not sure that he has any vision -- though I'm not complaining about the job that he is doing at the moment.

 

I think we need someone who does some heads-down, boring, unsexy work. I think it doesn't take much vision to do that.

 

I feel that Moynihan is doing exactly that.

[Kraven]

I'm reading 'crash of titan', I'm getting a different picture of Moynihan -- he was always following orders (e.x. shutdown of investment research), not sure that he has any vision -- though I'm not complaining about the job that he is doing at the moment.

 

I think we need someone who does some heads-down, boring, unsexy work. I think it doesn't take much vision to do that.

 

I feel that Moynihan is doing exactly that.

 

I always find these comments about Moynihan's "vision" and such to be extremely misguided.  He was a subordinate.  He worked for a very demanding and controlling boss in Lewis and before that Murray at Fleet.  If he had shown vision, we likely wouldn't even know who he is now and certainly not be talking about him.  He clearly is never going to be nominated Sexiest and Most Charismatic Banking Chief, but he has 2+ years of taking care of business.  I am not sure anything tells us how he will be in the future or in a better (i.e. frothier) banking environment, but in my view the past 2 years of being chief carries more weight than his career as a subordinate.  Just my view.

[tooskinneejs]

Moynihan was just interviewed on Bloomberg TV.  Here is a link to several video clips of the interview...

 

http://search1.bloomberg.com/search/?content_type=video&page=1&template=tv&q=moynihan

 

 

[Parsad]

I'm reading 'crash of titan', I'm getting a different picture of Moynihan -- he was always following orders (e.x. shutdown of investment research), not sure that he has any vision -- though I'm not complaining about the job that he is doing at the moment.

 

I think we need someone who does some heads-down, boring, unsexy work. I think it doesn't take much vision to do that.

 

I feel that Moynihan is doing exactly that.

 

I always find these comments about Moynihan's "vision" and such to be extremely misguided.  He was a subordinate.  He worked for a very demanding and controlling boss in Lewis and before that Murray at Fleet.  If he had shown vision, we likely wouldn't even know who he is now and certainly not be talking about him.  He clearly is never going to be nominated Sexiest and Most Charismatic Banking Chief, but he has 2+ years of taking care of business.  I am not sure anything tells us how he will be in the future or in a better (i.e. frothier) banking environment, but in my view the past 2 years of being chief carries more weight than his career as a subordinate.  Just my view.

 

People also have to remember that he was not the first choice for any of those subordinate jobs by the people who hired him.  But in each one, he went and got things turned around in a hurry.  Sometimes visionaries aren't seen as visionaries until they've been given a chance to prove themselves as the leader. 

 

It was just over a decade ago that Steve Jobs was considered a petulant, has-been brat.  He risked his own personal fortune to create opportunities that were taken away from him at Apple.  No one was giving him a chance.  He then developed NEXT, then Pixar and then they brought him back to Apple.  Today, he's considered a "visionary" and without a doubt, perhaps the best marketer of the last fifty years!

 

Moynihan just needed the chance.  When he was given it, he's in there turning things around and changing the culture.  We'll only know if there is any "visionary" in him in a decade or so.  So far, he's just a great CEO who has orchaestrated one of the best turnarounds in the last decade...the guy with the best turnaround ahead of him was Steve Jobs...not too shabby company!  Cheers!

[Parsad]

Moynihan was just interviewed on Bloomberg TV.  Here is a link to several video clips of the interview...

 

http://search1.bloomberg.com/search/?content_type=video&page=1&template=tv&q=moynihan

 

In the long interview, I love how the journalists are just looking for that one sound-bite, and Moynihan keeps regurgitating facts, figures and achievements, and screwing up the sound-bite.  Cheers!

[Uccmal]

It's freaking banking for christ sakes... who needs a visionary.  Its the same business it was 5000 yrs ago.  Visionaries are the ones who got us in trouble in the first place.

 

[zippy1]

It's freaking banking for christ sakes... who needs a visionary.  Its the same business it was 5000 yrs ago.  Visionaries are the ones who got us in trouble in the first place.

Ha! Ha! Great line! :)

[Parsad]

It's freaking banking for christ sakes... who needs a visionary.  Its the same business it was 5000 yrs ago.  Visionaries are the ones who got us in trouble in the first place.

 

That's about right.  Cheers!

[Uccmal]

Uccmal or others,

 

How would you calculate the capital gain for the CRA on warrants adjustment terms before selling these warrants? Say the warrants are now exercisable for 1.2 shares vs 1 and that the exercise price is now dropped to $13 vs $13.30. Just an hypothetical scenario. The traded price of the warrants would likely go up, but there is no sale. It is kind of like retained earnings within a company.

 

For the income trusts, you would receive a payment which is then broken down by the company in a filing as to what portion is dividend, capital gains, return of capital, etc. and then you would use that to adjust your cost base or your income.

 

It is an "issue" that I had not thought about yet. Now wondering how we would be treating that.

 

Cardboard

 

The more I look at this from a taxation perspective the more convoluted it can start to look.

 

With the warrants no dividend is ever actually received.  From a market perspective your .30 adjustment should be reflected in the units trading for 0.30 more, immediately, assuming market efficiency.  If 2 is paid out over 3 years the units should be trading at about $2 more.  For a conversion adjustment I would guess it would be treated the same as a stock split - the number of warrants is increased by 1/5, or whatever, as the case may be.

 

I would think that the CRA will treat the warrants as if they are a stock, same as any option would be treated.  I think we are going to have to wait for one of these sets of warrants to actually be subject to a dividend increase beyond its threshold to see what is actually decided, and how the market reacts.

 

I suspect there is some obscure piece of our tax code that already deals with stock options issued by employers that have embedded adjustment features.

 

This is an awfully long way of saying I am not sure.... :-).

 

When push comes to shove with the CRA I tend to be aggressive, but honest, in my claims.

 

 

[ERICOPOLY]

Assuming you guys are right... assuming the warrant is mechanism by which dividends can be converted to capital gains...

 

Then why all this struggle over taxation of dividends?  Why don't corporations offer to swap 100 yr warrants to their shareholders in exchange for their common shares?

 

That way the shareholders who want the dividend can refuse to do the swap, and the shareholders who want to shelter their dividends can just swap their common for warrants.

 

Surely the IRS would have a rule to eliminate this kind of tax sheltering. 

 

Maybe not, but this falls in my too good to be true pile.

[Uccmal]

Eric, I think there is differences between tax rates in each country for each type of "income". 

 

I think Berkshire Hathaway common meets your requirement for an extreme long term warrant. 

 

What I have said above is that your warrant costs $4 today.  There is 2$ of dividends over the next 3 years.  The stock rises by 5$ and the warrant rises to 4+2+5=11 - ignoring time value and other inefficiencies.

 

Tax owing would be on the gain which is 7$ x 50% (capital gains rate in Canada) x 25% (personal income tax rate in Canada)= 0.88 cents in tax.  Hardly the free lunch you are envisioning.

 

Sorry.

[ERICOPOLY]

Eric, I think there is differences between tax rates in each country for each type of "income". 

 

I think Berkshire Hathaway common meets your requirement for an extreme long term warrant. 

 

What I have said above is that your warrant costs $4 today.  There is 2$ of dividends over the next 3 years.  The stock rises by 5$ and the warrant rises to 4+2+5=11 - ignoring time value and other inefficiencies.

 

Tax owing would be on the gain which is 7$ x 50% (capital gains rate in Canada) x 25% (personal income tax rate in Canada)= 0.88 cents in tax.  Hardly the free lunch you are envisioning.

 

Sorry.

 

 

Here is how I would design the taxation of the warrant for the United States IRS:

 

1)  Each strike reduction is taxed at the dividend rate (and of course multiplied by the number of shares the warrant was previously converted to)

2)  Each strike reduction is added to the $4 cost basis of the warrant (to eliminate a double taxation situation)

3)  When the number of shares it converts to is increase, this in itself is not taxable as it merely simulates the dividend being reinvested in the stock (just like a DRIP plan)

 

Reason why it may not be that way in this case of TARP warrants:

The warrants were not issued by choice, and they were done by design of the Treasury itself.  Thus, any old corporation may not be allowed to replicate them willy nilly.

 

Separately but on the same topic,

There is precedent for the idea of taxing an adjustment even though no cash is disbursed.  Look at how TIPS are taxed.  The "gain" on annual adjustment of the TIPS due to inflation is actually taxed as regular income.  It doesn't matter that you haven't yet sold the TIPS, you owe the tax each year anyhow.  Your "gain" is not a cash gain, but nonetheless it is taxed as regular "income".

 

 

But seriously, I really want to know why more companies don't issue these things.  They're awesome.  One of my biggest problems is being able to get a mortgage.  I don't want to borrow on margin against my stocks, and I don't want to part with them either.  Long term warrants issued with high strikes implying embedded interest rates that are comparable to jumbo mortgages are an awesome asset!  I mean, they are so damned awesome!  So one thing I'm doing in my taxable account is I have these warrants and I also have some common and calls for leverage.  Once the stock pops a bit say in a year or so I'm going to liquidate the common and calls and just keep the warrants.  Then I'll have the cash to purchase a house in full if I need to, while still retaining my upside in the stock through non-recourse leverage.

 

For example, if they issued 1 warrant to every share outstanding, for one thing it would drive down the cost of your common share.  You could then sell the common share (saving tax on capital gains because it would be driven down in price by the dilution) and hold onto the warrant.  And if it's the way you describe, then the dividends would be compounding tax-deferred.  And you don't need the cash anyhow, because you got all that liquidity from selling your common.

[ERICOPOLY]

Quit your jibber jabber fool.

 

Looks like Mr. T had a few words with the ISI analysts and they relented  8)

 

BofA Seen Doling Out $10 Billion for Dividends, Buybacks

http://www.bloomberg.com/news/2012-11-20/bofa-seen-doling-out-10-billion-for-dividends-buybacks.html?cmpid=yhoo

[Parsad]

Quit your jibber jabber fool.

 

Looks like Mr. T had a few words with the ISI analysts and they relented  8)

 

BofA Seen Doling Out $10 Billion for Dividends, Buybacks

http://www.bloomberg.com/news/2012-11-20/bofa-seen-doling-out-10-billion-for-dividends-buybacks.html?cmpid=yhoo

 

With the analysts jumping in like this, the dumb money is going to start flowing...hail, hail the institutions and pension funds!  ;D  You guys laugh, but I still say it hits $12 before this Christmas.  It goes over $10 tomorrow.  Cheers! 

[20ppy]

Quit your jibber jabber fool.

 

Looks like Mr. T had a few words with the ISI analysts and they relented  8)

 

BofA Seen Doling Out $10 Billion for Dividends, Buybacks

http://www.bloomberg.com/news/2012-11-20/bofa-seen-doling-out-10-billion-for-dividends-buybacks.html?cmpid=yhoo

 

With the analysts jumping in like this, the dumb money is going to start flowing...hail, hail the institutions and pension funds!  ;D  You guys laugh, but I still say it hits $12 before this Christmas.  It goes over $10 tomorrow.  Cheers! 

 

You were right not long ago with Overstock, so I don't want to doubt you! I bet heavily on BAC, so I think you are right:)

 

[meiroy]

Shadow Banking Grows to $67 Trillion Industry, Regulators Say

http://www.bloomberg.com/news/2012-11-19/shadow-banking-grows-to-67-trillion-industry-regulators-say.html

 

"“Appropriate monitoring and regulatory frameworks for the shadow banking system needs to be in place to mitigate the build-up of risks,” the FSB said in the report published on its website."

 

1. $67 Trillion Industry. Ouch.

2. If there is going to be any real regulation of the dark side, should we expect it to benefit those TBTF banks?

[Kraven]

Quit your jibber jabber fool.

 

Looks like Mr. T had a few words with the ISI analysts and they relented  8)

 

BofA Seen Doling Out $10 Billion for Dividends, Buybacks

http://www.bloomberg.com/news/2012-11-20/bofa-seen-doling-out-10-billion-for-dividends-buybacks.html?cmpid=yhoo

 

A Mr. T reference is always a winner, always.  The best Mr. T appearance ever was when he was on Silver Spoons and they asked him his name and he said first name Mr, middle name that little period there and last name T.  Here's to more 70s and 80s pop culture references.

[Uccmal]

Quit your jibber jabber fool.

 

Looks like Mr. T had a few words with the ISI analysts and they relented  8)

 

BofA Seen Doling Out $10 Billion for Dividends, Buybacks

http://www.bloomberg.com/news/2012-11-20/bofa-seen-doling-out-10-billion-for-dividends-buybacks.html?cmpid=yhoo

 

A Mr. T reference is always a winner, always.  The best Mr. T appearance ever was when he was on Silver Spoons and they asked him his name and he said first name Mr, middle name that little period there and last name T.  Here's to more 70s and 80s pop culture references.

 

I saw him in the dwarf throwing contest that launched his stardom.  lol. 

[Uccmal]

Even Cramer weighed in a day or two ago with a "buy, buy, buy, booyah", on his lightening round.

 

No, I dont watch his show - google alerts told me.

 

On the other hand this is maybe not such a good thing.

[Cardboard]

On the taxation issue, I think that I will simply declare a capital gain whenever they are sold. This thing about the impact from larger dividends on strike price and convertibility is just making the value of the warrants go up earlier. The government will still collect in full its share of taxes on whatever appreciation is made. It is just the timing on when they will get paid: one payment at the end or small ones along the way with a big one at the end. However, it may mean a different or higher taxation rate if some of that is considered dividend.

 

I think that we should be able to answer the question with some certainty by looking at what happens to call options when a company issues a large special dividend. Once the dividend is paid, the stock price will come down hence the option as well if no adjustment is made. Although, I know that adjustments are made sometimes by the OCC. It happened to me with some LVLT call options when they did their 15:1 reverse stock split. I received cash in lieu of the 0.6667 fractional shares since the original individual contract for 100 shares was now exercisable into 6.6667 shares. This impacted my cost basis. Maybe that reading the prospectus of the warrants too could answer my question.  ::)

 

But again, when you think about a company that pays a special dividend and assuming that this declaration makes the stock go up say 15%, the holder of the stock will pay taxes on the dividend when received. The one who sells the stock before it is paid will pay a capital gain on the appreciation created by the special dividend or at a different taxation rate. I think it is the same treatment for derivatives or warrants since their price is simply impacted by what happens to another entity. 

 

Cardboard

[ERICOPOLY]

On the taxation issue, I think that I will simply declare a capital gain whenever they are sold. This thing about the impact from larger dividends on strike price and convertibility is just making the value of the warrants go up earlier. The government will still collect in full its share of taxes on whatever appreciation is made. It is just the timing on when they will get paid: one payment at the end or small ones along the way with a big one at the end. However, it may mean a different or higher taxation rate if some of that is considered dividend.

 

I think that we should be able to answer the question with some certainty by looking at what happens to call options when a company issues a large special dividend. Once the dividend is paid, the stock price will come down hence the option as well if no adjustment is made. Although, I know that adjustments are made sometimes by the OCC. It happened to me with some LVLT call options when they did their 15:1 reverse stock split. I received cash in lieu of the 0.6667 fractional shares since the original individual contract for 100 shares was now exercisable into 6.6667 shares. This impacted my cost basis. Maybe that reading the prospectus of the warrants too could answer my question.  ::)

 

But again, when you think about a company that pays a special dividend and assuming that this declaration makes the stock go up say 15%, the holder of the stock will pay taxes on the dividend when received. The one who sells the stock before it is paid will pay a capital gain on the appreciation created by the special dividend or at a different taxation rate. I think it is the same treatment for derivatives or warrants since their price is simply impacted by what happens to another entity. 

 

Cardboard

 

Agreed on the fact that it will eventually be taxed as a capital gain when sold if not previously taxed along the way as dividens.

 

In the US it makes a massive difference because the tax rate on dividends is probably about to go from 15% to the 40+% range (you've got to throw in the Obama care tax).

 

Without the deferral, one has to sell of chunks of warrants along the way to pay the tax bill.  This drive the cost of that tax even higher (opportunity cost) -- tax deferral is a wonderful thing.

[Parsad]

Quit your jibber jabber fool.

 

Looks like Mr. T had a few words with the ISI analysts and they relented  8)

 

BofA Seen Doling Out $10 Billion for Dividends, Buybacks

http://www.bloomberg.com/news/2012-11-20/bofa-seen-doling-out-10-billion-for-dividends-buybacks.html?cmpid=yhoo

 

With the analysts jumping in like this, the dumb money is going to start flowing...hail, hail the institutions and pension funds!  ;D  You guys laugh, but I still say it hits $12 before this Christmas.  It goes over $10 tomorrow.  Cheers! 

 

You were right not long ago with Overstock, so I don't want to doubt you! I bet heavily on BAC, so I think you are right:)

 

I'm going to give all you guys an early Christmas present.  I'm going start eating lunch out of the office regularly like I used to during the old Fairfax days...apparently directly attributable to Fairfax's stock rise of 5% or greater on many days because of my dining habits. 

 

So I'm in the office this year until December 21st, then I'm going to go skiing that weekend and I won't be back till January the 3rd.  Between now and then, I promise to try and eat out at least twice a week...which is alot, because I honestly prefer to eat at my desk during market hours...that should provide 8 days of 5% gains, or a 40% increase from today...tangible book before Christmas. 

 

You guys don't have to thank me...I view it as a personal responsibility for everyone's welfare, and I want you all to have a Merry Christmas.  So starting next week, two days a week, you should start to see days of 5% gains or better!  ;D  Cheers!

[Alekbaylee]

Thanks for your generosity, Sanjeev.

I might be wrong but I think with the usual end of the year sell off (for tax purposes) we won't see any material increase in the coming days/weeks. But then watch out in January!!!

 

[Parsad]

Thanks for your generosity, Sanjeev.

I might be wrong but I think with the usual end of the year sell off (for tax purposes) we won't see any material increase in the coming days/weeks. But then watch out in January!!!

 

Maybe, but I'm betting that institutions will start cleaning house in December, and alot of them will be buying BAC instead, because the market is really starting to figure out that the likelihood of a poor stress test and no return of capital in the new year is now approaching zero.  Cheers!

[vinod1]

I think there are two different things at work at year end

 

1. Tax loss selling in which losers for the year lose more.

 

2. Window dressing where winners win some more and losers lose some more at the year end as managers try to make their portfolios look good. 

 

BAC clearly was impacted by #1 last year and we would see if it would benefit from #2 this year since I think it is the best performing Dow stock for this year so far.

 

Vinod