ERICOPOLY

The analysts will now feel confident raising their target prices too.

I believe it was Monsieur Cleo that was saying $9 by yesterday and $10 by the weekend.

The scenario the Fed tested for was for it to be happening right now. In a few years the results would be far less harmful when BAC has another $30 billion in capital under it's belt, when the liabilities regarding legal and R&W are settled, when they are done with the foreclosures... when the underwater mortgages are less underwater, etc... when they have their cost structure down... So the warrants I guess really aren't all that risky -- by the time those warrants expire the strength and earnings power of the bank will be formidable.

I'm also thinking, with regards to those $3 calls, they outperform the warrants up to a certain point. Beyond that point the warrants begin to outperform the calls. That's the only way to explain how they both wind up delivering similar returns out to about $33-36 per share. So once the leverage in the calls grinds down (stock price is much higher than here), one can sell the calls and use the proceeds to purchase the warrants. Like switching gears at the appropriate time to get optimal performance out of the engine. I'm contemplating this as I have some lowish strike calls in my tax-free Roth account. My calls are $4, mostly $5, and a few $7.

You need a price of 36.60 (including dividends) to make an additional 5x your money (from today's 4.60 price) in the BAC class A warrants. Alternatively, the $3 strike 2014 calls make 5x your money at $33. Strike price is $10 less. Back in December (lowest point for the stock) the calls were worth more than $2 and the warrants fell to $2. The calls might be better at this point. Take delivery when 2014 calls (using margin) and buy puts at $5 strike or $3 strike to hedge if margin makes you nervous. Your margin loan will be largely paid off by the dividends over time -- probably roughly by 2019. $3 puts will be so cheap that your dividend will easily cover it in addition to paying down your margin loan. With the warrants, you'd be stuck putting in more cash at $10-$11 (hopefully not more than that) if you wanted to keep BAC, or selling the warrants and paying taxes. EDIT: The calls carry a risk of being worthless if stock at or below $3 in 2014, and if the stock rebounds afterwards the warrants would have been the better bet. But then again in 2019 what if the stock is $10? I guess it comes down to how you feel about another big financial crisis in the next two years vs in 6-7 years time.

A couple of excerpts that I found interesting: WFC is the only money center bank that has to build reserves under the stress scenario, while the rest of the names experience reserve releases. Bank of America Bank of America has always been perceived to have the riskiest loan book, one that is most leveraged to the housing market as well as the consumer. We think the stress test should put this perception to rest; it is hard for any one to argue that Bank of America has significantly more losses on its loan book than Wells Fargo given the data from the stress test. We think management has been very prudent on capital, and these tests highlight the change that has taken place at Bank of America. One year, or even 6 months ago, Bank of America was generally considered to be the bank with the greatest capital challenges. After boosting Tier 1 common capital by 160bp over the past 2 quarter, it maintains a respectable 5.9% ratio through the stress period, putting it square in the middle of the range of other CCAR participants (Figure 2). However, Figure 1 highlights that BAC spread do not reflect this improvement. The name continues to trade much wider than peer banks that would do worse or as badly in a stressed environment, such as Citi, USB, PNC and WFC.

I admit to adding as well this morning.

I am thinking that if BofA gets to 7.5% Tier 1 Basel III as planned by the end of this year, they have already made it. The rest comes from the loan runoff and the monetization of the deferred tax thingy.

Did you miss the news? The experts at Jefferies say they may need to raise $50 billion! http://blogs.barrons.com/stockstowatchtoday/2011/08/22/bank-of-america-could-be-forced-to-raise-50-billion-analyst/ I wonder if the people who were shaken out by such articles are now going to get back in.

Citi would pass if you ran it again today using updated numbers. The test was run with 3Q11 financials.

Isn't 35-34 = 1 penny?

He was talking it up at $12 last June -- I think he paid a bit more than that.

Here is where the prices need to be to see 0.7x tangible book value per share BAC: $9.20 (coming soon to a screen near you) C: $35.20 (after hours' price right now) BAC has tons and tons of goodwill embedded in it's $20 book value. Had they grown organically rather than largely by acquisition we'd just be staring at the tangible numbers and not discussing the massive discount to book (although 30% discount is still quite large). However I feel like BAC has the steeper discount to intrinsic value. Only time will tell.

page 31 shows Citi with very high loan loss rates at what looks to be about 11%, vs what is roughly 8% loss rate at BofA.

Suffice it to say that there will be no more rumors about regulators pushing BAC towards raising capital.

1) regulators tell BAC last August that they are undercapitalized (presumably under the stress scenario) 2) BAC raises capital 3) ask for a return of capital? It doesn't fit the storyline if that rumor is indeed true about last summer.

I can only imagine you giggling! ;D I might joint you. Cheers! Yes, a joint and I'd be on the floor.

Might soon need a BAC giggling thread.

Orange County with a 13.2% rent increase: http://www.latimes.com/business/realestate/la-fi-rents-20120313,0,24204.story

http://online.wsj.com/article/SB10001424052970204653604577251232717986316.html?mod=WSJ_hp_LEFTTopStories Nearly 29% of homes sold last month went to buyers who indicated they planned to rent out the properties, according to the Cromford Report. That figure has been on the rise over the past two years. In mid-2010, the share stood near 15%. Competition from investors is frustrating for aspiring first-time buyers like Adam Brenner. "This does not feel like a buyer's market at all," says Mr. Brenner, a pharmacist who estimates that he has looked at 60 houses since last fall. "You hear and read about how there are so many homes for sale, but once you start looking, it's a pretty big shock." Many real-estate agents have reported more bidding wars in recent weeks, and some buyers are agreeing to escalation clauses, a bubble-era provision where they agree to pay a certain price above the highest offer.

Actually, the $5b estimate is for non-GSE claims. The vast majority of the repurchase requests are from the GSEs -- the percentage is stated on page 34 of the 4Q11 earnings presentation. From the 4Q11 earnings presentatio, page 34 "Estimated range of possible loss related to non-GSE representations and warranties exposure could be up to $5B over existing accruals at December 31, 2011" Yes, I'm more worried about the GSE reserves. I think they typically say they can't estimate it well so haven't fully reserved, which is worrisome to me. However, I still think the discount more than makes up for it. Anyhow, all parties (including GSE's) put together only requested a total of $17.33b last year. At a 30% loss rate, that's $5.2b per year pace even if 100% of them are repurchased. I think clearly 100% will not be repurchased. And with each passing year these loans get more seasoned and the credibility of the repurchase request deteriorates.

Actually, the $5b estimate is for non-GSE claims. The vast majority of the repurchase requests are from the GSEs -- the percentage is stated on page 34 of the 4Q11 earnings presentation. From the 4Q11 earnings presentatio, page 34 "Estimated range of possible loss related to non-GSE representations and warranties exposure could be up to $5B over existing accruals at December 31, 2011"

Except that Wells Fargo only needs a 1% SIFI buffer, whereas BofA needs a 2% buffer. That may change over time, but I think that's what is understood today.

I think I overstated the necessary tangible book per share and therefore understated the return on retained earnings. I think it's more like $16 per share and 16.25% return on retained earnings.

I believe tangible book per share will be somewhere around $18 to support those $2.60 in per share earnings -- this is when they are exceeding 9% Tier 1 capital ratio under fully phased in Basel III. 2.60 / 18 = 14.44% So the return on reinvested capital would be 14.44%. But I don't think they can reinvest 50% of their earnings -- where will the growth opportunities come from? Or am I incorrect about that $18 per-share figure (using 11b share count). I guess I'm using TCE of 9% as a proxy for Basel III of 9% (plus some cushion assuming TCE is more rigorous ratio than Basel III). I believe Moynihan said about $18 billion of capital for every 100 bps of Basel III. So with an 11 billion share count and a 9% target ratio the math is pretty easy -- about $18 per share.