twacowfca

The question was asked at the AGM. Brian Bradstreet answered the question, and he said it was a good question. It is a real risk with the CPI derivatives, but he said there will be some work out solution if the Euro dissolves itself. If I remember correctly he said there may be a weighted measurement of the CPI across various countries. He mentioned that the TIPS market in the Euro is big as well and they'll need a solution if the Euro dismantles. The security is who their counterparties are. Brian's answer implies that their counterparties are outside the Euro zone and should be solvent if the Euro breaks up. If they can't reach a suitable adjustment, the issue may then go to arbitration.

;) LOL This thread is a riot. Hey, this site isn't just about making money, but how to spend it and live your life too! We seem to have one of these threads every year. I remember last year's was on groceries and people's buying habits! I believe that was the thread where Ericopoly said his wife had just choked the chicken...literally! She had broken the neck of a hen bare-handed, and that was that night's dinner! ;D Cheers! Yeah, that brings back memories. The best way to dispatch the chicken and drain the blood without getting it on anything other than the ground is to grab the chicken by the back of the head, pinching the neck with the thumb and forefinger, swing the chicken around the wrist once or twice, then suddenly stop the motion of the forearm and pop the wrist (this is called wringing the chicken's neck). The head and neck will then come off the chicken, and the headless chicken will flop around on the ground and actually get up and run around flapping its wings while spurting blood onto the ground through the headless opening for about a minute before expiring. Cheers! (for all but the chicken and the other birds in the flock that will not be pleased by this activity)

A farsighted thinker. He points out that the patch job to the international financial system is starting to unravel. There is more notional naked CDS derivative exposure among the big, international banks now than in 2008. He says that $300B in subprime losses over the last few years spun out of control through counterparties and collateral requirements to over $6B in losses in that house of cards that is still being propped up. Meanwhile, interest rate swaps, the new achilles heel between the banks have grown enormously. If one domino falls, all the Ben's horses and all the Ben's men will have quite a task putting Humpty together again.

Good to have a deadline. It's always worth waiting for. :)

Whalen is talking about the private label putbacks (mp3) http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/9/2_Chris_Whalen.html http://finance.yahoo.com/blogs/daily-ticker/whalen-bofa-survive-file-bankruptcy-202956404.html;_ylt=AiL.4EAWL00tvWy2EnlgXZ27YWsA;_ylu=X3oDMTFjNGoxYjM4BHBvcwM1BHNlYwNGUERhaWx5VGlja2VyQmxvZwRzbGsDd2hhbGVuYm9mYXdp the ones where the settlement is for $8.5 billion (pending on article 77 litigation)and that is probably already reserved http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-newsArticle&ID=1580643&highlight He assumes 100B instead of 8.5B, and that Countrywide isn't ring-fenced with the bankruptcy veil ... particular point of view but it grabs headlines and invitations to the Blodget show. FIRREA precludes the normal, potential ring fencing of the subsidiaries with the bankruptcy veil. But the Holdco isn't going to have to cough up $86B for the private label obligations if those have already been negotiated down to $8.5B. What about the Holdco debt? It looks like 90%+ of the total debt is in the Holdco. When does this come due? Also, the best stress test for insolvency is to see how much a company's debt is discounted in the market. Is BAC's debt trading below stated value? Is debt that comes due sooner than later trading at a greater discount? If so, how much?

twa, Assuming this is a realistic risk, how would you explain the complete lack of disclosure regarding this issue in the two most recent 10-Q's and the last 10-K? The probability of Whalen's scenario coming to pass is beyond my competence to assess. What I am laying out is a theoretical basis for what he thinks is a credible risk. In other words, if he isn't completely out to lunch, this is how his scenario could play out, given the legal constraints. Liquidity at the Holdco is apparently very important to management that raised capital at about the current price from Uncle Warren. If management disputes a legal claim, I don't thank they have to set up a reserve for it. Also, I don't think the banks have to mark their bad assets strictly to market. These are just thoughts. I don't know what's realistic. Whalen says BAC's subs other than countrywide and the debt issued by it are solvent. He's not a short seller with an axe to grind. We know about the legal issues. What about the countrywide debt? How much is outstanding, including any quasi debt like TPS? When does it have to be paid off? According to Capital IQ, there is less than $10 billion of Countrywide debt out - $2 billion is due June 2012 and the next $1 billion tranche isn't due until 2016. This includes roughly $2 billion of TPS. Then, how does Whalen come up with $100 billion? Is there perhaps some quasi debt there?

Last December, I overlooked the possibility of a big pinch at the Holdco. Instead, I saw the slow progress of working through everything on a consolidated balance sheet. I would like to find out a lot more about the potential magnitude of what Whalen sees. If it looks like they might have to raise an amount of capital that was manageable, I would still be very interested, especially if the price goes lower.

twa, Assuming this is a realistic risk, how would you explain the complete lack of disclosure regarding this issue in the two most recent 10-Q's and the last 10-K? The probability of Whalen's scenario coming to pass is beyond my competence to assess. What I am laying out is a theoretical basis for what he thinks is a credible risk. In other words, if he isn't completely out to lunch, this is how his scenario could play out, given the legal constraints. Liquidity at the Holdco is apparently very important to management that raised capital at about the current price from Uncle Warren. If management disputes a legal claim, I don't thank they have to set up a reserve for it. Also, I don't think the banks have to mark their bad assets strictly to market. These are just thoughts. I don't know what's realistic. Whalen says BAC's subs other than countrywide and the debt issued by it are solvent. He's not a short seller with an axe to grind. We know about the legal issues. What about the countrywide debt? How much is outstanding, including any quasi debt like TPS? When does it have to be paid off?

Isn't FIRREA about protecting depositors and the FDIC, not other claimants? Ally, a bank holding company since 2008, is showing it is possible as we speak. http://online.wsj.com/article/SB10001424052702304192704577403782887891126.html Allowing Ally to put its residential mortgage subsidiary into bankruptcy is very different because bank depositors don't have to be protected as is required in BAC's case. In what sense is different if the depositors and the FDIC are protected? The Countrywide lawsuits are by other claimants in a junior position to the depositors. FIRREA is not about protecting all claimants, it is about protecting the FDIC An important element of FIRREA was its cross-guarantee provisions. These were intended to protect the deposit insurance funds by establishing that insured financial institutions were liable for losses incurred by the FDIC (and for losses that the FDIC reasonably anticipates incurring) in connection with either (1) the default of a commonly controlled insured depository institution or (2) any assistance provided by the FDIC to any commonly controlled depository institution in danger of default. For example, healthy affiliates of a bank holding company (BHC) that controlled a failed institution could be required to pay a share of the loss incurred by the FDIC in resolving the failed institution. The cross guarantee provisions applied to institutions controlled by the same BHC, or to one depository institution controlled by another. The FDIC could waive this liability if it determined that waiver was in the best interest of the BIF or the SAIF.48 http://www.fdic.gov/bank/historical/history/87_136.pdf The way it works is that the Holdco first must stream as much of its assets outside of other banking subsidiaries as possible to a troubled subsidiary to keep it solvent, not merely to keep the depositors whole. Then, if that's not sufficient, the regulator may require the Holdco to raise more capital. If that's not sufficient, the regulator will require that assets from the Holdco's other solvent bank subsidiaries be streamed to the insolvent subsidiaries. If that's not sufficient, the bank subsidiaries are placed in receivership and the Holdco in bankruptcy. BAC has solvent subsidiaries that should be worth more than the large amount required to pay off all the bad debt at Countrywide and settle the lawsuits. I think the most likely scenario is that BAC will have to raise a lot more capital at the Holdco. :)

Isn't FIRREA about protecting depositors and the FDIC, not other claimants? Ally, a bank holding company since 2008, is showing it is possible as we speak. http://online.wsj.com/article/SB10001424052702304192704577403782887891126.html At the most basic level, FIRREA is about a bank Holdco's doing whatever is necessary to keep its bank subsidiaries solvent. Then, the FDIC won't have to pay off the depositors. Allowing Ally to put its residential mortgage subsidiary into bankruptcy is very different because bank depositors don't have to be protected as is required in BAC's case.

A disturbing insight. Under FIRREA the BAC Holdco can't access the balance sheet of its subsidiaries to pay off the lawsuits against the Holdco. All it can access is whatever amount of dividends the regulators allow the subs to upstream to the Holdco. Also the Holdco is required to do what is necessary to to pay off the bad bonds of its Countrywide subsidiary when they come due. Looks like they could be between a rock and a hard place without a restructuring because the Feds want their bank subsidiaries to be as solvent as possible to be able to lend money freely. I hope I'm wrong about how this could work out.

Are you wanting confirmation of your bias toward BAC?!

Testimony this week in the Gupta trial describes a very similar scene in connection with the finalization of the deal to buy the GS preferreds, but Paulson wasn't described as being involved.

Yeah. Warren has said that he took a look at Lehman, but was not as much interested in Lehman as Lehman was interested in being rescued by BRK. As Lehman's condition deteriorated, Warren's interest cooled. This is a spin on old news.

Interestingly, the man who sold the tool and die shop took part of the proceeds of the sale and used that to open a pizza restaurant which lost that entire investment plus operating losses when it closed about a year and a half later.

Yes. I know someone just like what you describe. He had a small tool and die shop and made a good living making prototypes for a large soft drink company and other similar clients who appreciated his skill in turning their ideas into feasible products. He also had ISO certification to produce simple parts to exacting standards which provided intermittent work from companies that needed something in a hurry. He sold his business to an investor who ran it into the ground in less than a year. :-[

One would think it is easy to succeed in a successful, small business, but many acquisitions disappoint because the new owner doesn't know the ropes. It isn't uncommon that the supposed profit of the operation really isn't there. The previous owner's contacts and relationships may not be transferred easily, particularly if the new owner has different abilities than the original owner. Some businesses, such as restaurants or retailing, are graveyards. It's like buying stocks. The first key to success is realizing that the stock isn't merely a price that goes up or down, but a real company that may be a good business or a not so good business. Long term success means being able to separate the sheep from the goats and then being able to pick the prize winner from the herd or at least culling out diseased livestock and then buying a healthy animal at a bargain price. Unfortunately, if one makes a mistake buying a small business, it may take years to get out of it, unlike the stock market where you can exit sadder but wiser as soon as you realize what an idiot you were.

99% of successful, new businesses arise from the budding off and rerooting of experience, competence and insights gained in the same field or in a closely related field. I've never met anyone, other than the face in the mirror, who built a successful business from scratch in an unfamiliar field. There is a limited exception to this rule. Start ups based on a successful franchise are more likely than not to have modest success on a small scale.

I guess he doesn't have ratios for the hedges they hold. How shallow.

Yes Tom, I do agree. Especially if one pool of capital is permanent personal capital, and the other (in our case) is non-permanent, redeemable capital. You are willing to withstand a considerable amount of volatility, whereas I cannot guarantee that the constitution of our partners is as high on a collective basis. Thus I have to view the world through best case scenario and worst case scenario on a daily basis, and weigh that against the risk premium provided to us on investment opportunities. Cheers! Sanjeev, I think what you are doing as a manager of funds that don't have a lockup is wise. It reminds me of what Frank Martin of Martin Capital management has done very successfully to manage capital through the cycle and produce superior returns for his clients. My hat is off to you, and that opinion will not change regardless of the direction of the market in the next few months. :)

No, the puts are out of that calculation, although they do reduce the net long position significantly while they last. They are dated through August as a hedge in the event that the uncertainty in Europe or other events could affect the market in the US.

Actually, we hold very little cash and are about 150% long with non recourse leverage similar to very long dated leaps or total return leaps. This is balanced with the other end of a barbell that is potentially low downside volatility or negatively correlated with the market. We own FFH which has hedges. A big part of this is BRK and leaps on BRK. These have potential downside protection through the likely aggressive buyback if the price goes down. BRK could also be a source of cash if the market throws up some amazing bargains. Last month we bought some out of the money index puts including some that were way out of the money a la Nassim Taleb when volatility was low. These have recently increased in price as the market has declined. The other potential source of cash in a market decline is our largest, long term holding that typically pays large end of the year special dividends in years when they don't have large cat losses.

What's wrong with intelligent market timing? Obviously, selling a large position in a great business that isn't overvalued is apt to be penny wise and pound foolish for some short term protection. But Warren himself said It was a mistake to hold even great, mature businesses at 50 times earnings in the late 90's when he had seen the writing on the wall. What's wrong with going "all in" in March, 2009 when great businesses were selling at 20% to 30% normalized earnings yields? And what's wrong now with having cash available during a season that historically has poor returns to pick up bargains if things in Europe get ugly?

Albert I agree with you and respectfully take the exact opposite side to Sanjeev's position. In no way shape or form do I foresee a 2008/2009 style crisis. The fed would step in way before that. The probability of a financial crisis is almost certainly underestimated by most other than permabears. It's not a stretch to imagine a sovereign bank defaulting if that country exits the Euro. Suppose that bank decides to pay off its interest rate swaps in Drachmas or lira instead of Euros. Then, their counterparties are on the hook for the notional amount of the contracts instead of the net amount. Then the other Dominos start falling. The increased liability of those banks would then be not billions of dollars, but trillions of dollars. Real quick it's 2008 all over again -- or worse.

I think Eric said he was or had been working for Microsoft before he got control of his 401K. If so, he may not have met the income requirements for contributing to a Roth then. It is amazing what can happen when there is no tax on compounding returns. In late 2001, I was able to self direct a close relative's 401K. At that time the funds were in a money market account with a balance of about $250 plus some zeros. That year ended with a gain of less than 10%. The following February, there was a contribution to the 401K of about six percent of the balance, and the year end balance again rose about an additional 10% by the end of 2002. After that, it was off to the races with mostly mid double digit returns plus one triple digit return, except for 2008 which was about flat in that account. Since 2008, the balance in that account has about tripled. The current balance is about 38 times the balance around the end of Q3 of 2001 when active management began. These returns have been generally unlevered. For instance, this account did not purchase any of the FFH calls in 2006 that were such a coup in most of the other accounts. This account held long positions in common stocks generally for a few years until sold as full value was approached. One to three stocks have accounted for most of the balance in this account during most years. The contributions to the 401K did significantly increase the returns in the early years of active management, but added only a fraction of one percent to the returns in recent years. This account was recently converted to a Roth account. It now can compound tax free through the next generation. :) So you turned $250,000 into $9.5 million in 10 years, compounding the account at 44% annually, all I can say is wow. I'd be curious to know your strategy. Considering that only about $300k was ever contributed that would have been one heck of a tax bill at conversion, writing a check to the Gov for $2.7m would be killer, I guess it wasn't your money so it's not as bad. Here I am thinking if I follow the Graham & Dodd stuff I might have the chance to compound my money at 15% annually, and then I come on this board and it's as if everyone has these 20-40% annual returns for decades, it's very strange. I understand now why a lot of people around here are private investors, why work for someone else when you can double your money every other year. This thread has been eye-opening..I'd love to hear other people's experiences. My best guesstimate is that this account had returns in the high thirty percent per annum range because of the contributions to the account. There was a contribution of about 6% of the account balance in early 2002 and another contribution of about 5 1/2% of the account balance in early 2003. Then, the account balance accelerated in Q2 of 2003, which was the triple digit year for returns. After a couple of more years, the impact of contributions on the account balance was about 1%. Soon afterwards, even less. Five companies produced the great majority of the returns during the active management of this account ( and the other accounts as well ). At one time or another, each of these companies accounted for more than half the assets in the accounts. Four of these companies seemed to violate rules of prudent investing at the time their stocks were first purchased. Two of them were companies in Cpt. 11, normally a quick way to lose all your money. But these were companies that had become highly solvent while they were in Cpt11 with CEO's and major shareholders who were determined to fight for maximum value. Another was an insurance company with serious adverse reserve development and accusations of fraud leveled against it, normally two huge red flags for investing. However, those accusations were belied by the facts and the support of outstanding, ethical value investors who backed the company. It appeared that the reserves could be replentished, given time and good management which was the norm through most of that company's history. The fourth company was a recent IPO. IPO's are usually a graveyard for investors except in a bubble. However the CEO of the new company had had a Buffett like record of world class returns in his former job, and the IPO was launched into a sweet spot for returns for that industry subsector. This year, returns will probably be modest because of the defensive nature of much of the holdings, esp. FFH and BRK. Even so, returns could be satisfactory, although not spectacular, because they could be goosed a little bit by some leaps on BRK, a stock that won't shoot the lights out, but won't go down much either. And who knows how well FFH may do with its hedges if things in Europe get even uglier and if the US tax cuts are allowed to expire as scheduled? :)