BAC

[wescobrk]

I just started buying BAC at $6.60 yesterday. I'm very aware it can drop further (and significantly so) but I don't see tangible book dropping more than $65 billion. BAC has $40 billion in loan loss reserves. They can write down another $70 billion to get to tangible equity of $65 billion. That is where the company is trading today.

 

Normalized earnings is probably $2 a share. I think that can materialize by 2013.

 

I know Wells is a better company but Wells isn't as cheap as BAC. I'm also not fond of management but I'm having a hard time of seeing how one doesn't make a lot of money if they buy at $6.50 and below. I'm thinking of buying a large chunk if it drops below $5.

 

I understand they may have to issue stock to raise capital but they still have the China Construction asset plus dilution probably wouldn't lower the upside by much more than $2 a share.

 

Feel free to disagree or argue any of the above isn't what will happen in a probable scenario.

[DCG]

http://blogs.barrons.com/stockstowatchtoday/2011/11/03/bank-of-america-exploring-issuing-common-stock/

 

Bank of America Exploring Issuing Common Stock

Posted by Avi Salzman

 

Bank of America (BAC) said in a regulatory filing that it is exploring the idea of issuing common stock that it would exchange for preferred shares and trust preferred capital debt securities in private transactions. BAC shares fell 1.7% after hours.

 

The announcement is on page 10 of the the company’s 10-Q that it just released.

 

“The uncertainty in the market evidenced by, among other things, volatility in credit spread movements, makes it economically advantageous at this time to consider retirement of issued junior subordinated debt and preferred stock. As a result of these matters, we intend to explore the issuance of common stock and senior notes in exchange for shares of preferred stock and, subject to any required amendments to the applicable governing documents, certain trust preferred capital debt securities (Trust Securities) issued by unconsolidated trust companies, in privately negotiated transactions. If we pursue the exchange of Trust Securities, we would immediately use the purchased Trust Securities to retire a corresponding amount of our junior subordinated debt that we previously issued to the unconsolidated trust companies. These transactions would increase Tier 1 common capital and, on an after-tax basis, reduce the combined level of interest expense and dividends paid on the combined junior subordinated debt and preferred stock. The senior notes and common stock would be recorded at fair value at issuance, which is expected to be less than the par and carrying value of the preferred stock and/or junior subordinated debt, which would result in the exchanges being accretive to earnings per common share for the period in which completed. The ultimate impact on earnings per common share is not expected to be significant for periods subsequent to the exchange and will not be known until the level of earnings per common share for the period and the exact combination of exchanged preferred stock and Trust Securities are known. We will not issue more than 400 million shares of common stock or $3 billion in new senior notes in connection with these exchanges.”

[tombgrt]

Market won't like it but probably makes sense.

[twacowfca]

I just started buying BAC at $6.60 yesterday. I'm very aware it can drop further (and significantly so) but I don't see tangible book dropping more than $65 billion. BAC has $40 billion in loan loss reserves. They can write down another $70 billion to get to tangible equity of $65 billion. That is where the company is trading today.

 

Normalized earnings is probably $2 a share. I think that can materialize by 2013.

 

I know Wells is a better company but Wells isn't as cheap as BAC. I'm also not fond of management but I'm having a hard time of seeing how one doesn't make a lot of money if they buy at $6.50 and below. I'm thinking of buying a large chunk if it drops below $5.

 

I understand they may have to issue stock to raise capital but they still have the China Construction asset plus dilution probably wouldn't lower the upside by much more than $2 a share.

 

Feel free to disagree or argue any of the above isn't what will happen in a probable scenario.

 

BAC will probably survive, but there is an elephant in their kitchen that won't go away.  That elephant is piled high with the credible claims of everyone who held their stock during the crisis.  Those stockholders lost much more than the current market cap of the stock after management rushed the acquisition of ML while covering up the huge MTM losses in their portfolio. 

 

Their misconduct in the coverup was blatant.  Lewis actually fired one of his high level managers for standing up at that time and saying, "This is wrong!"

[Uccmal]

Its pretty minor as dilutions go.  The stock fluctuates more than that every day.

 

Twacowcfa, are you thinking class action?

[twacowfca]

Its pretty minor as dilutions go.  The stock fluctuates more than that every day.

 

Twacowcfa, are you thinking class action?

 

There is already a class action lawsuit that is well into discovery.  What they have dug up is overwhelmingly in favor of the plaintiffs.  It will eventually be settled probably for low double digit billions of dollars, but that will be cents on the dollar of what their shareholders lost.  Therefore, some shareholders will likely opt out of the settlement and persue separate claims.

 

And on and on it will go.

[ERICOPOLY]

but that will be cents on the dollar of what their shareholders lost.

 

I'm trying to figure out what the shareholders might have lost because of Merrill.  You have to admit, they were going to suffer some pretty radical stock declines in early 2009 just by virtue of not only being a bank, but by having Countrywide to boot!  Even WFC lost 33% in the first two weeks of 2009.  Thus it's not too instructive to look at the stock drop alone for BAC over the first two weeks of 2009 -- but rather look at how much further it dropped once the "bomb" was dropped on shareholders regarding the Merrill losses.

 

A few dates in 2009:

1)  Jan 1:  Merrill deal closes

2)  Jan 2:  BAC closes at $14.33 (same as the range before shareholders approved Merrill purchase) 

3)  Jan 15:  BAC closes at $8.32  (the day before Merrill loss is disclosed)

4)  Jan 16:  BAC closes at $7.18 after Merrill loss of $15.31b is disclosed 

5)  Jan 28:  BAC closes at $7.39

 

Alright, you could have sold your shares for about 15% less after you found out about the loss.  $50b in damages?  That's ridiculous. 

 

 

 

 

 

 

[ERICOPOLY]

Shareholders collectively held $65 billion worth of BAC (that was the entire market cap) before voting on the Merrill acquisition.

 

But they are suing to recover $50b?  Huh? 

 

In other words, they argue that the Merrill deal left them with only 23% of their prior value (they measure value in terms of share price).  It destroyed 77% of shareholder value... huh?

 

But then again I don't decide these things -- who knows what the judge will be talked into.

[Uccmal]

Nice work Eric....

 

Lawsuits are nearly always far larger than settlements.  This seems pretty far fetched.  They have to prove knowing negligence.  Given what I have read about Lewis a case could be made for incompetence on the part of Bac rather than deliberate misleading.  But then what do I know.  US litigation practices always baffle me.

[Munger]

BAC will probably survive, but there is an elephant in their kitchen that won't go away.  That elephant is piled high with the credible claims of everyone who held their stock during the crisis and lost much more than the current market cap of the stock after management rushed the acquisition of ML while covering up the huge MTM losses in their portfolio.  Their conduct in the coverup was blatant.  Lewis actually fired one of his high level managers for standing up at that time and saying, "This is wrong!"

 

 

I am highly skeptical that anyone can have an informed, bullish opinion on BAC common stock -- too opaque.  Any long or short position in the stock at this point is essentially speculative, in my opinion.  And I do believe BAC as an institution will survive in some form but that doesn't mean the common stock will prove a good investment.

 

However, to be fair, any litigation against BAC re the acquisition of ML is completely bogus and I don't believe will lead to any meaningful, negative consequences for BAC or even Lewis.  While Lewis was foolish (understatement) to initially agree to buy ML and did wrongly fire a subordinate who voiced opposition, Lewis did try to back out of the deal when it became apparent to even him that ML was a house of cards -- the MAC clause was a legitimate out.  Paulson/Bernanke/Geithner literally forced Lewis/BAC to complete the deal under the threat of severe retribution -- this fact has been reported in The End of Wall Street (Roger Lowenstein), Sellout (Gasparino), and Too Big To Fail (Sorkin).  The litigation trail will ultimately lead to Paulson/Bernanke/Geithner -- I think any litigation would be shut down at that point, with BAC/Lewis agreeing to a modest settlement at worst.   

 

I would recommend reading each of those books.  I would also recommend Reckless Endangerment (Gretchen Morgenson and Josh Rosner) -- another fantastic book.  While the bank executives deserve enormous blame for their role in the financial crisis/real estate bubble, Reckless Endangerment shows that James Johnson (Fannie Mae CEO)/Franklin Raines (Fannie CEO following Johnson)/Angelo Mozilo (Countrywide) are the primary culprits, with great help from Barney Frank/Chris Dodd and to a lesser extent, Cuomo/Cisneros of HUD during the Clinton admin -- without their collective actions, the real estate bubble could have never lifted off.  As Josh Rosner and New York Times reporter Gretchen Morgenson show in Reckless Endangerment, the system (US housing policy) became totally corrupt. 

 

Banks (as well as other mortgage originators)  operated under the cover of Fannie/Freddie/Countrywide and no doubt helped push the bubble to levels that could not have otherwise been reached without their actions. 

 

[twacowfca]

but that will be cents on the dollar of what their shareholders lost.

 

I'm trying to figure out what the shareholders might have lost because of Merrill.  You have to admit, they were going to suffer some pretty radical stock declines in early 2009 just by virtue of not only being a bank, but by having Countrywide to boot!  Even WFC lost 33% in the first two weeks of 2009.  Thus it's not too instructive to look at the stock drop alone for BAC over the first two weeks of 2009 -- but rather look at how much further it dropped once the "bomb" was dropped on shareholders regarding the Merrill losses.

 

A few dates in 2009:

1)  Jan 1:  Merrill deal closes

2)  Jan 2:  BAC closes at $14.33 (same as the range before shareholders approved Merrill purchase) 

3)  Jan 15:  BAC closes at $8.32  (the day before Merrill loss is disclosed)

4)  Jan 16:  BAC closes at $7.18 after Merrill loss of $15.31b is disclosed 

5)  Jan 28:  BAC closes at $7.39

 

Alright, you could have sold your shares for about 15% less after you found out about the loss.  $50b in damages?  That's ridiculous.

 

A good summary of the defense.  Your third career may be as a member of the bar!  :) 

 

But plaintiffs don't have to prove that covering up ML's MTM losses was the only thing that caused the loss in the stock. They just have to show that shareholders could have avoided the loss by selling their stock in a timely fashion as they might have done if BAC had not covered up ML's losses before rushing the acquisition.  Or the plaintiffs could show that shareholders likely would not have approved the disastrous acquisition that precipitated the cratering of the price of their shares if they had known about ML's huge losses.

 

Also, when conduct is egregious, punitive damages may be awarded.  :-\

[ERICOPOLY]

Or the plaintiffs could show that shareholders likely would not have approved the disastrous acquisition that precipitated the cratering of the price of their shares if they had known about ML's huge losses.

 

So if this is all about the impact on the share price from the Merrill deal then I'm left wondering what the heck?

 

They knew about the BAC stock price drop and were happy with it -- happy enough to vote YES anyhow.

 

That is the perplexing part -- they had a really good idea of how the market would value BAC with Merrill and they went along with it.  Not much changed in that regard when the loss was disclosed.  Actually, in the week after the Merrill loss was reported WFC dropped another 30%.  That's actually more than the 29% drop that BAC suffered.  Then over the next week they both fully recovered to the level seen before the Merrill loss report.

 

 

 

 

[tooskinneejs]

"That elephant is piled high with the credible claims of everyone who held their stock during the crisis."

 

Are you suggesting that equity holders should bear no downside risk to their investments?

[ERICOPOLY]

Anyways, how far along are we with the putbacks?

 

Last year Goldman estimated $25b total costs for BAC, including the $7b already reserved for and charged off.

 

BAC added $1b to reserves in Q1 and $14b in Q2.

 

That brings the total to $22b right?  By Goldman's stale estimate we're at 90% of target.

 

How close are we to getting that one behind us?

 

 

[Uccmal]

An aside to the lawsuit topic.  Although i dont like to admit it, I was shareholder of Washington Mutual just before it went down in fall of 2008.  I just got paperwork the other day for the shareholder lawsuit against WM - 3 years.  So any lawsuits against Bac for the ML deal will take years to work out. 

 

I am not thinking that  moynihan will settle these ones unless he gets away with only a few cents on the dollar.  I say he fights.  Since every large company is endlessly in one lawsuit or another it will just be a normal cost od doing business.

 

Kill all the lawyers.... Cept: txlaw

[moore_capital54]

Eric, I am 100% with you on BAC, it is an 8% position in our fund. One thing that worried me last week, was when they reversed the debit card fee. I hope this was not due to a silent bank run that was gaining traction. Even if it was the case, I trust moynihan has already gotten it contained, but it just struck me as a little unmoynihan like to change course on something.

 

 

[txlaw]

Haha, thanks for sparing me, Uccmal. ;D

 

I'm not too worried about the debit card fee reversal.  The goal of getting rid of high cost accounts has pretty much worked out -- a lot of accounts that left for credit unions on Bank Transfer Day aren't necessarily the most desirable accounts to have.  And by caving, it throws a bone to the folks who really believe that they made a difference by protesting, it indicates that the big banks are at least paying heed to public sentiment (most importantly, Congressional rhetoric), and it gets the media to stop talking about the big banks being so powerful and TBTF that they can essentially ignore their customers.

[shalab]

The disconcerting thing for me regarding debit card fee was the way it was rolled out by BAC - they misjudged the sentiment of their customers bigtime. Since they had planned to roll it out in the new year, a couple of pilots wouldnt have hurt.

[txlaw]

The disconcerting thing for me regarding debit card fee was the way it was rolled out by BAC - they misjudged the sentiment of their customers bigtime. Since they had planned to roll it out in the new year, a couple of pilots wouldnt have hurt.

 

It is true that they could have done a pilot program like WFC.  On the other hand, if they really were going to roll out the fees in order to get rid of low value/negative value accounts, then it made sense to say flat out that they were going to do it while they were the whipping boy of the financial sector.  They were going to get flak for the decision no matter what, so you might as well take the pain all at once.  I'm sure they figured that a pilot program announcement would have done little to spare BAC the fury of the press and general public.

 

However, I do think that they misjudged how negatively the move would be viewed across the entire media in light of OWS and escalating rhetoric by Congressional Dems and the Administration.  I mean, this was headline news.  In normal circumstances, it would never have been covered the way it was.

 

They and others probably got some pressure put on them by the regulators because of the fact that it blew up the way it did.

[ERICOPOLY]

Reasons for not putting Countrywide into BK:

 

http://blogs.wsj.com/deals/2011/11/08/why-bofa-decided-against-a-countrywide-bankruptcy-for-now/?mod=yahoo_hs

 

[Baoxiaodao]

Problems in the US is no longer about financial institutions; it is about the political systems.

 

And Munger, thanks for pointing out any short or long position is just speculative.

 

BAC will probably survive, but there is an elephant in their kitchen that won't go away.  That elephant is piled high with the credible claims of everyone who held their stock during the crisis and lost much more than the current market cap of the stock after management rushed the acquisition of ML while covering up the huge MTM losses in their portfolio.  Their conduct in the coverup was blatant.  Lewis actually fired one of his high level managers for standing up at that time and saying, "This is wrong!"

 

 

I am highly skeptical that anyone can have an informed, bullish opinion on BAC common stock -- too opaque.  Any long or short position in the stock at this point is essentially speculative, in my opinion.  And I do believe BAC as an institution will survive in some form but that doesn't mean the common stock will prove a good investment.

 

However, to be fair, any litigation against BAC re the acquisition of ML is completely bogus and I don't believe will lead to any meaningful, negative consequences for BAC or even Lewis.  While Lewis was foolish (understatement) to initially agree to buy ML and did wrongly fire a subordinate who voiced opposition, Lewis did try to back out of the deal when it became apparent to even him that ML was a house of cards -- the MAC clause was a legitimate out.  Paulson/Bernanke/Geithner literally forced Lewis/BAC to complete the deal under the threat of severe retribution -- this fact has been reported in The End of Wall Street (Roger Lowenstein), Sellout (Gasparino), and Too Big To Fail (Sorkin).  The litigation trail will ultimately lead to Paulson/Bernanke/Geithner -- I think any litigation would be shut down at that point, with BAC/Lewis agreeing to a modest settlement at worst.   

 

I would recommend reading each of those books.  I would also recommend Reckless Endangerment (Gretchen Morgenson and Josh Rosner) -- another fantastic book.  While the bank executives deserve enormous blame for their role in the financial crisis/real estate bubble, Reckless Endangerment shows that James Johnson (Fannie Mae CEO)/Franklin Raines (Fannie CEO following Johnson)/Angelo Mozilo (Countrywide) are the primary culprits, with great help from Barney Frank/Chris Dodd and to a lesser extent, Cuomo/Cisneros of HUD during the Clinton admin -- without their collective actions, the real estate bubble could have never lifted off.  As Josh Rosner and New York Times reporter Gretchen Morgenson show in Reckless Endangerment, the system (US housing policy) became totally corrupt. 

 

Banks (as well as other mortgage originators)  operated under the cover of Fannie/Freddie/Countrywide and no doubt helped push the bubble to levels that could not have otherwise been reached without their actions.