BAC-WT - Bank of America Warrants

[ERICOPOLY]

From the Fed's point of view, if the economy goes south and banks have to build huge loss reserves, the only thing this can come from is earnings power.

 

You're probably right on with regulators' thinking - but isn't this what required capital ratios are supposed to be for?

 

I think the capital ratios are probably established assuming a healthy earnings state.  So basically if 8.5% is where they want a healthy bank to be maintaining during good times, they might want to pad it with additional buffer if the bank is not yet healthy (earnings wise) to begin with.

 

How to quantify it though?  Well, say that LAS is burning through 10b a year of earnings and maybe over the next two years it will be a total of 15b burned before LAS is all sorted out.  Well that's comparable to a 100 bps capital buffer.

 

 

[Parsad]

From the Fed's point of view, if the economy goes south and banks have to build huge loss reserves, the only thing this can come from is earnings power.

 

You're probably right on with regulators' thinking - but isn't this what required capital ratios are supposed to be for?

 

I think the capital ratios are probably established assuming a healthy earnings state.  So basically if 8.5% is where they want a healthy bank to be maintaining during good times, they might want to pad it with additional buffer if the bank is not yet healthy (earnings wise) to begin with.

 

How to quantify it though?  Well, say that LAS is burning through 10b a year of earnings and maybe over the next two years it will be a total of 15b burned before LAS is all sorted out.  Well that's comparable to a 100 bps capital buffer.

 

I think BAC's capitalization is fine.  They've got a half percent buffer...which is probably closer to 0.75% by December 31st. Regulators believe that they only needed a 1% systemic buffer relative to their peers, so there must be a reason behind that decision...I'm guessing it's the amount of liquidity in the deposit base they have and the amount of work they are doing on the loan and cost-cutting side.

 

Here's my guess...I think they will be allowed to return $6-7B in capital for 2013...$3-3.5B in buybacks and $3-3.5B in dividends.  Cheers! 

[ERICOPOLY]

Well anyways, their buffer will likely be 100bps by the end of Q1, bringing them to 9.5% B3.

 

Then if they only return $7b in 2013, they'll probably be running at over 10% B3 going into 2014.  Given the stated goal of 9% (including a 50 bps) buffer, perhaps one year out in the future they could flush the 100 bps excess in a special dividend or tender offer.

 

[berkshiremystery]

BofA’s Moynihan Said to Have Blocked Proposal to Cut Broker Pay (at Merrill Lynch)

2012-12-19

 

http://www.bloomberg.com/news/2012-12-19/bofa-s-moynihan-said-to-have-blocked-proposal-to-cut-broker-pay.html?cmpid=yhoo

 

Bank of America Corp. Chief Executive Officer Brian T. Moynihan blocked a proposal to cut the main component of most brokers’ pay as part of a new bonus plan, a person with direct knowledge of the matter said.

The proposal would have reduced the so-called grid payout for Merrill Lynch financial advisers by two percentage points, the person said, requesting anonymity because that plan wasn’t made public. The changes would have affected advisers generating less than $1 million in commissions.

[alertmeipp]

I think last year C tries to return 8 billion and get rejected. I hope they do more buyback than dividends.

[Liberty]

Seems like the ideal scenario would be for the fed to keep the dividend payout very low but be more generous on buybacks (since they can more easily be stopped). If Mr. Market is disappointed by a low dividend and this keeps the stock price low, they'll have more time to buy back under book (or even under TBV), and it'll create more value for remaining share/warrant holders in the long run.

[FCharlie]

I'll stick my  neck out there and say I think BAC will return more than most people expect.  I see no reason for regulators to be overly cautious here. BAC is already overcapitalized and if they don't return 150% of net income, they will be even more overcapitalized by the end of 2013.

 

I'm expecting $8+ billion in capital returned in 2013. Hopefully they will request most of that as share repurchase.

 

 

 

 

[finetrader]

Seems like the idea scenario would be for the fed to keep the dividend payout very low but be more generous on buybacks (since they can more easily be stopped).

 

That is what I expect. 0.04-0.05$ quaterly dividend and 6-8B$ in buyback for 2013.

[vinod1]

BAC would have to meet a tier 1 common capital ratio of at least 5 percent under the severely adverse scenario. This has to be met under the assumption that BAC did not reduce the capital distribution even if the severely adverse scenario has come to pass. So more than earnings the capital distribution would be dependent upon how BAC assets perform under the severely adverse scenario. Given its higher exposure to delinquent mortgages compared to its peers, I would not be surprised if BAC had much lower ability to return capital compared to its actual earnings capacity for next year.

 

I am thinking a capital return of 4-5 billion is all that could be expected.

 

Vinod

[Kraven]

I think that people are focused solely on the numbers - capital ratios, etc.  That's fine, but only tells part of the story.  There are politics, optics, etc.  I think it's impossible to come up with an exact figure based solely on the numbers that one can see in their financials and such.  In my view, whatever amount "should" be distributed haircut that by some percentage to come up with what it really will be.  The haircut will be based on intangible factors.  Hope for the best, expect the worst.

[ECCO]

My expectation for 2013 are a 0.04$/quaterly dividend and a 2 billions $ buyback. Dont forget that they will ask for someting that will be approved. Begin with someting low and once its approved and things works well ask for much more (next year). 

[obtuse_investor]

Am I the only one that hasn't sold anything yet?

 

You aren't the only one, mate. I am sitting on my A warrants with average cost below $3.

[fareastwarriors]

http://www.bloomberg.com/news/2012-12-19/banks-see-biggest-returns-since-03-as-employees-suffer.html

 

 

Banks See Biggest Returns Since ’03 as Employees Suffer

 

[mankap]

I hope BAC is working to speed up the foreclosure/modification process.According to Bloomberg, in some case BAC is taking 3 times longer to foreclose as compared to Competition.

Has BAC given out any plan to improve the process.

 

http://www.bloomberg.com/news/2012-12-19/bank-of-america-delinquent-loans-mean-losses-mortgages.html

[alertmeipp]

While return of capital is important, there are few legacy items that I hope BAC can clear up next year.

[ERICOPOLY]

I hope BAC is working to speed up the foreclosure/modification process.According to Bloomberg, in some case BAC is taking 3 times longer to foreclose as compared to Competition.

Has BAC given out any plan to improve the process.

 

http://www.bloomberg.com/news/2012-12-19/bank-of-america-delinquent-loans-mean-losses-mortgages.html

 

 

The article offers an explanation that sounds plausible:

 

Delays are also occurring because Countrywide loans are getting scrutinized in foreclosure cases for documentation problems such as missing promissory notes and chain-of-title discrepancies, said Tony Plath, a professor of finance at the University of North Carolina in Charlotte who follows Bank of America.

 

“Bank of America knows that whenever possible, defendants are likely to mount a judicial challenge at foreclosure hearings, so before they can initiate the foreclosure process they have to make sure the loans in question can withstand judicial challenge in court,” Plath said. “The large number of 180-day delinquencies relative to the other big servicers give a good indication of the magnitude of the problems that face BAC as it tries to clean up the Countrywide mess.”

[biaggio]

I hope BAC is working to speed up the foreclosure/modification process.According to Bloomberg, in some case BAC is taking 3 times longer to foreclose as compared to Competition.

Has BAC given out any plan to improve the process.

 

http://www.bloomberg.com/news/2012-12-19/bank-of-america-delinquent-loans-mean-losses-mortgages.html

 

 

The article offers an explanation that sounds plausible:

 

Delays are also occurring because Countrywide loans are getting scrutinized in foreclosure cases for documentation problems such as missing promissory notes and chain-of-title discrepancies, said Tony Plath, a professor of finance at the University of North Carolina in Charlotte who follows Bank of America.

 

“Bank of America knows that whenever possible, defendants are likely to mount a judicial challenge at foreclosure hearings, so before they can initiate the foreclosure process they have to make sure the loans in question can withstand judicial challenge in court,” Plath said. “The large number of 180-day delinquencies relative to the other big servicers give a good indication of the magnitude of the problems that face BAC as it tries to clean up the Countrywide mess.”

 

I conveniently forgot the magnitude of this problem. I can t imagine the paper work on 900,000 files - impressive that it is down from ~1.5 million.

 

FWIW, I don t really care about the short term capital return. I would rather see some closure on the law suits and further progress on these delinquincies.

 

I don t have a problem them building reserves/cash. Should I? Does it signal that there is a problem with legacy issues or other lawsuits?

 

 

[Kraven]

I don t have a problem them building reserves/cash. Should I? Does it signal that there is a problem with legacy issues or other lawsuits?

 

In my opinion it signifies both the magnitude of the issues they've dealt with and still need to deal with and how that impacts the decisions of regulators.  No regulator ever got a promotion, a bonus, the key to the executive washroom or the secret handshake by letting one of their charges pay out additional funds.  People seem to think that it's burdensome somehow that reserves are building.  They don't care about the shareholders, their job is to protect the system, depositors, etc.  It is what it is.  Someday, assuming when that day comes they still have piles of cash stuffed in the drawers and such, they will be able to pay a bunch out.  That could be 2013, 2014, or some other time.

[alertmeipp]

I don t have a problem them building reserves/cash. Should I? Does it signal that there is a problem with legacy issues or other lawsuits?

 

In my opinion it signifies both the magnitude of the issues they've dealt with and still need to deal with and how that impacts the decisions of regulators.  No regulator ever got a promotion, a bonus, the key to the executive washroom or the secret handshake by letting one of their charges pay out additional funds.  People seem to think that it's burdensome somehow that reserves are building.  They don't care about the shareholders, their job is to protect the system, depositors, etc.  It is what it is.  Someday, assuming when that day comes they still have piles of cash stuffed in the drawers and such, they will be able to pay a bunch out.  That could be 2013, 2014, or some other time.

 

Why bother setting up capital rule when capital above what's required cannot be distributed to shareholders?

Understood that BAC is a unique scenario due to its legal issues.

[Kraven]

I don t have a problem them building reserves/cash. Should I? Does it signal that there is a problem with legacy issues or other lawsuits?

 

In my opinion it signifies both the magnitude of the issues they've dealt with and still need to deal with and how that impacts the decisions of regulators.  No regulator ever got a promotion, a bonus, the key to the executive washroom or the secret handshake by letting one of their charges pay out additional funds.  People seem to think that it's burdensome somehow that reserves are building.  They don't care about the shareholders, their job is to protect the system, depositors, etc.  It is what it is.  Someday, assuming when that day comes they still have piles of cash stuffed in the drawers and such, they will be able to pay a bunch out.  That could be 2013, 2014, or some other time.

 

Why bother setting up capital rule when capital above what's required cannot be distributed to shareholders?

Understood that BAC is a unique scenario due to its legal issues.

 

I understand what you're saying, but you're not thinking like a regulator.  It doesn't have to make sense.  There are rules and then there is what actually occurs.  Their job is to set up parameters for all, but require specific approvals.  Kind of like when you're driving and the speed limit is 65 but in bad weather you know you can only drive 45 or something.  It's hard to come up with rules that fit all scenarios.  BAC is doing everything right, but still has a lot of issues to work through.  We kind of all assume they will and likely they do.  But a regulator's job isn't to hope, but to work with what it's front of them and then be conservative with that.  Just my views.

 

 

[vinod1]

I don t have a problem them building reserves/cash. Should I? Does it signal that there is a problem with legacy issues or other lawsuits?

 

In my opinion it signifies both the magnitude of the issues they've dealt with and still need to deal with and how that impacts the decisions of regulators.  No regulator ever got a promotion, a bonus, the key to the executive washroom or the secret handshake by letting one of their charges pay out additional funds.  People seem to think that it's burdensome somehow that reserves are building.  They don't care about the shareholders, their job is to protect the system, depositors, etc.  It is what it is.  Someday, assuming when that day comes they still have piles of cash stuffed in the drawers and such, they will be able to pay a bunch out.  That could be 2013, 2014, or some other time.

 

Why bother setting up capital rule when capital above what's required cannot be distributed to shareholders?

Understood that BAC is a unique scenario due to its legal issues.

 

They have an additional rule which a bank has to meet: bank has to be able to have a tier 1 common capital ratio of at least 5 percent under the severely adverse scenario. The capital distribution should be able to meet this requirement also.

 

Vinod

[Guest Dazel]

 

 

how much do you think adverse lawsuits and putbacks ($6 billion form the GSE's..i believe was their worst case scenario)...regulators will not like any

thought that capital could be lost here...this is unique to BAC because of the size of their lawsuits.

 

I believe as all of you do that this in the stock...but how will regulators look at it? or will they at all?

 

dazel.

[ERICOPOLY]

how much do you think adverse lawsuits and putbacks ($6 billion form the GSE's..i believe was their worst case scenario)...regulators will not like any

thought that capital could be lost here...this is unique to BAC because of the size of their lawsuits.

 

I believe as all of you do that this in the stock...but how will regulators look at it? or will they at all?

 

dazel.

 

Not sure, but there is at BAC already a 50 bps ($7.5b) buffer for legal settlements (that's $7.5b in excess of reserves).

 

Their worst case putback estimate is:

$5b from monolines above reserves

$1b from GSE's above reserves

[Parsad]

how much do you think adverse lawsuits and putbacks ($6 billion form the GSE's..i believe was their worst case scenario)...regulators will not like any

thought that capital could be lost here...this is unique to BAC because of the size of their lawsuits.

 

I believe as all of you do that this in the stock...but how will regulators look at it? or will they at all?

 

dazel.

 

Not sure, but there is at BAC already a 50 bps ($7.5b) buffer for legal settlements (that's $7.5b in excess of reserves).

 

Their worst case putback estimate is:

$5b from monolines above reserves

$1b from GSE's above reserves

 

They've also got about another $10B coming in 2013 from excess cash flows, including what I've already estimated for buyback/dividends, partly boosted because of cost-cutting, efficiencies and reductions in staffing.  That $10B is another layer of reserves if required, without affecting their capital ratios one iota, payouts, operations or anything else related to their business.  That number increases in 2014 by another $4B or so.  As long as the world doesn't blow up, they will be able to handle their legacy issues without much difficulty and maintain their capital ratios.  Cheers!

[mankap]

BAC has almost 1m 60+ deliquent mortgages.Assuming it costs them 10,000/yr to have mortgage on their books,( house tax, maintenance, loss of interest, legal cost, handling cost etc.).The cost is $10B/year.This is the LAS cost in addition to writedown. If BAC cannot speed up the process , they will see this cost for probably next 2 years.

 

Average mortgage = 70,000 ( $64B for 920 k mortgage).

Assuming 30% write down for these mortgages =$21B ( I hope BAC has reserves to cover this).

Yearly expense to manage these deliquent mortgages for next 2 years = $20B

 

SO the country wide could cost them another $40B in future.This is not counting putback cost from GSE and monolines.

 

Countryside acquisition should be among the worst acquisitions in the history.

I am looking at the picture in 2015 when all this mess is gone .BAC should be able to earn >$2/share.