TARP Warrants

[ERICOPOLY]

Example: about half the recent earnings reported by big banks was from adjustments to their loan loss reserves.  Try "taking that to the bank"!

 

I saw that at Citi in the recent quarterly release -- however, despite a multi-billion dollar loan loss reserve release their reserving as a percentage of total assets actually increased.  They reduced Citi Holdings by $40b, which is largely responsible for the math.

 

So you could say their reserves actually increased, relative to their remaining asset size. 

[Guest]

The cats out of the bag now. :(

 

http://webcache.googleusercontent.com/search?q=cache:http://online.barrons.com/article/SB50001424053111903697804575574241608256292.html

[Vanshon]

Tim McElvaine was interviewed in the National Post on Nov 5th:

 

 

"The only thing I'm somewhat interested in the United States right now is some of the TARP warrants, which were sold by the U.S. government on a number of the banks," McElvaine says. "They are a relatively low-risk way to get leverage if there is any type of stabilization in the United States."

 

Not only do investors get a large seller in the United States, but the manager points out that pricing of these instruments isn't as fine-tuned as it could be since many investors aren't aware of them. They also have an eight-year life -- "a long time in the investment world."

 

 

Read more: http://www.financialpost.com/Looking+trouble/3780495/story.html#ixzz14VTeZpzB

[alpha231616967560]

Anyone else picking up more BAC.WS.A at this price? I think that Moynihan is doing some interesting things in his management of the MBS problems and long term vision. If he is even moderately successful, the A warrants are a screaming deal at current prices.

[Hawk4value]

Just recently bought Bac "A" warrants. At a recent $4.65/warrant the leverage factor vs. the equity was over 2x. In addition strike price is reduced by any dividend payment over $.01.

[king888]

Does the strike price adjusted when the banks has a share dilution from capital increase ?

[claphands22]

Does the strike price adjusted when the banks has a share dilution from capital increase ?

 

From what I read, no.

[PlanMaestro]

The link to the warrant spreadsheet is not working. Can somebody post it again?

[redskin]

Spreadsheet...

TARP_Warrants_021.xls

[PlanMaestro]

How many have actually read the prospectus fine print of these warrants? Has anyone noticed that some of these warrants, but not all,  have adjustments of not only the exercise price but also of the number of warrants? AIG's for example does not include this provision and might explain why they are priced "cheaper" when tested with a Black and Scholes..

 

This is a feature that I have always liked but never confirmed. Actually I did not even want to ask about it ... when you find something like this you do not want it to spread like wildfire. Berkowitz hinted at this feature in a recent letter so maybe it is time to have a more detailed discussion of the anti-dilution provisions.

 

Are there other non-standard features in the warrants worth noticing?

 

 

 

 

 

 

[Arden]

I think the WFC warrants are better than BAC's. Assuming 13% compund growth for WFC in the next 6.5 years, and a conservative (for WFC) multiple of 2 BV, the price should be around 120$ and this is my base case. If this happens, the stock will yield about 300%, the warrant will yield 850%.

 

For BAC, even if I ignore various risks, I  assume they will average compound BV at 7%, and that in the end they will trade for  1.2 BV.  The price should be about 45- 460% yield for the stock, 810% for the warrant.

 

As you can see, the difference between the stock and warrant in WFC is much greater than in BAC (in part because than the duration is a bit longer). Out of all of those,  WFC warrants seem to me as the best out of all of the above.

 

If you see a different scenario I'd honestly love to hear it.

 

On a side note, I think that by 2018 companies tax in the US , which is the second highest in the world, might be reduced to around 25%, which may help WFC- one of the biggest tax payers in the U.S. If this happens it will add 15% (10/65) to it's earnings. I'm not counting on it , but I sure hope this happens :)

[ECCO]

I think the WFC warrants are better than BAC's. Assuming 13% compund growth for WFC in the next 6.5 years, and a conservative (for WFC) multiple of 2 BV, the price should be around 120$ and this is my base case. If this happens, the stock will yield about 300%, the warrant will yield 850%.

 

For BAC, even if I ignore various risks, I  assume they will average compound BV at 7%, and that in the end they will trade for  1.2 BV.  The price should be about 45- 460% yield for the stock, 810% for the warrant.

 

WFC warrant's better than BAC warrants?  We will know at the end, but for sure if you expect growth twice higher at WFC and a book value of 2 insted of 1.2, WFC warrants will perform better for sure. But that's certainly not what the market expect now. The market might be wrong and you might be right, but I would certainly not take your expectation as cash. Your expectation about WFC seems to be quite high to me.

 

Anyway, I wish they both perform well as I have WFC stock and leaps and BAC.wta.

[Guest]

I still don't understand why FFBCW are so cheap.

[Kraven]

I think the WFC warrants are better than BAC's. Assuming 13% compund growth for WFC in the next 6.5 years, and a conservative (for WFC) multiple of 2 BV, the price should be around 120$ and this is my base case. If this happens, the stock will yield about 300%, the warrant will yield 850%.

 

For BAC, even if I ignore various risks, I  assume they will average compound BV at 7%, and that in the end they will trade for  1.2 BV.  The price should be about 45- 460% yield for the stock, 810% for the warrant.

 

As you can see, the difference between the stock and warrant in WFC is much greater than in BAC (in part because than the duration is a bit longer). Out of all of those,  WFC warrants seem to me as the best out of all of the above.

 

If you see a different scenario I'd honestly love to hear it.

 

On a side note, I think that by 2018 companies tax in the US , which is the second highest in the world, might be reduced to around 25%, which may help WFC- one of the biggest tax payers in the U.S. If this happens it will add 15% (10/65) to it's earnings. I'm not counting on it , but I sure hope this happens :)

 

Your assumptions for WFC as opposed to BAC are a bit on the rosy side in my view.  Maybe it will happen, but a lot would need to work out right for WFC as opposed to BAC simply keeping a pulse.

 

Just as an aside, I believe that people overstate the competitive advantages that WFC actually has.  Call it falling into the Buffett trap if you will.  Don't get me wrong, it's a fine bank, but banking is a commodity.  What can be done better than someone else in the banking world is at the margins.  For the regular customer, they couldn't give a crap whether they use BAC, WFC, SunTrust or whatever.  They want low (no) fees, easy access branches, etc.  If they get pissed off enough, they will withdraw their $2800 from their savings and checking and move it to the bank across the street.  Someone could have their money at WFC and if BAC offers them a loan at 5 bp cheaper, they will take it.  The only thing slowing people down is some inertia.  Additionally, WFC's squeaky clean image is a bit overstated as well.  They didn't fall into the mud the way some of the others did, but I have to laugh when I see it said that all they do is take deposits and make loans.  That would be news to the traders there, the bankers pumping out structured products and the teams in Charlotte and San Fran doing whatever they can to make a buck. 

[Uccmal]

Well articulated Kraven. 

 

I dont see why WFC would ultimately be worth more than BAC on a P/BV basis.  If BAC continues the way it is then the both should be equal in 7 years, no?  Imean, they do the same thing.  In fact with The ML franchise, which BAC could monetize at any time in that period, I could argue that BAC will do better going forward than WFC. 

 

After a certain point I am agnostic either way as I hold both and intend on holding portions of my positions into the indefinite future.

[Kraven]

I think too there are tons of biases at work here.  BAC is currently hated while WFC is more or less loved.  It hasn't always been that way, although people think it is.  It's amusing to see the projection of the past 3-4 years on both the time prior to the financial crisis and the future.  In fact, the banks are not even anywhere close to the institutions they were even 10 years ago.  WFC is essentially Norwest and isn't the same bank it was when Berkowitz and Buffett first invested almost 20 years ago.  BAC is too many different things to count, although it's bones are probably the old Nationsbank.  There is almost no reason why looking forward some period of time WFC should be worth a higher multiple than BAC.  Some day BAC will clean itself up and will then follow the "best practices" that arguably WFC at least tries to do.  If so, dollars are fungible and there's only so much one can do with them.

[Guest misterstockwell]

I still don't understand why FFBCW are so cheap.

 

Shhhhhh...let them keep talking about BAC and WFC while I scoop up all the FFBCW.

[MrB]

I still don't understand why FFBCW are so cheap.

 

Neither do I

[Rabbitisrich]

How many have actually read the prospectus fine print of these warrants? Has anyone noticed that some of these warrants, but not all,  have adjustments of not only the exercise price but also of the number of warrants? AIG's for example does not include this provision and might explain why they are priced "cheaper" when tested with a Black and Scholes..

 

This is a feature that I have always liked but never confirmed. Actually I did not even want to ask about it ... when you find something like this you do not want it to spread like wildfire. Berkowitz hinted at this feature in a recent letter so maybe it is time to have a more detailed discussion of the anti-dilution provisions.

 

Are there other non-standard features in the warrants worth noticing?

 

I haven't seen that provision. What language refers to a warrant adjustment?

 

Hmm, I must be reading this wrong, but the BAC A warrant seems to adjust not only the strike price down, following a dividend, but also the warrant shares up in proportion to the ratio of the pre-div strike to the post-div. This is in contrast to PlanMaestro's AIG hint, which not only does not protect against share issuance and divs below a 12 month hurdle, but also adjust warrant shares down.

 

My eyes are wonked out. It looks excessively favorable to warrant holders.

 

EDIT: The AIG warrant seems to also have an upward adjustment to shares issuable.

[PlanMaestro]

My eyes are wonked out. It looks excessively favorable to warrant holders.

 

Yep, that is how I read it. Double prize. Check the buyback provision too. Have not confirmed it though. Would be nice to know if someone has run this through a lawyer or one of the banks.

[Arden]

Banking should in theory be a commodity, but in practice it doesn't seem like it, otherwise everybody would move to a credit unions (some do, but not in droves as you might expect), so maybe it's not as commodified as you might think. I don't remember the  numbers (maybe one of you does), but in the last few years the 10 biggest banks increased their proportional size in relation to all banks by A LOT, esepcially in the last 4-5 years.

 

I think the problem will be maybe 5 years from now that there won't be enough people taking loans, and the winners will be the banks that find usage for their money and giving customers the greatest number of different services. WFC. I just think WFC will have plenty to do with its cash for longer than BAC, and seeing how beautifully they took over Wachovia and how they focus on cross selling to their new clients makes me think that maybe they do have a true advantage . The premium WFC has compared to other banks isn't something new. (Of course, I may be wrong and I truly hope that BAC jumps to 70 and we all make tons of money)

Edit: to elaborate a bit, if BAC or WFC have excess capacity, they can always do a buyback - but if they do, then, as we learn from BRK, they deserve a multiple not much better than 1*BV (unless, of course, they do it while they're undervalued compared to BV like BAC is now), so again- this game comes down to having a lot to do with your money for the next 10 years, because the stock price 7 years from now, will be determined by the guy looking 3 years to the future.

 

 

On a side note -I would love if someone could explain to me why BAC are firing 30,000 workers. In first glance it seems nice, cutting costs and etc.,but on further thought this is weird to me. I bet many of these workers have a lot of experience and are great workers, So what possible reason do they have for these massive layoffs? Did the work load on BAC diminish in the last few years? do they expect it to? are there less customers, or were the workers redundant in the first place?

 

 

[CONeal]

Banking should in theory be a commodity, but in practice it doesn't seem like it, otherwise everybody would move to a credit unions (some do, but not in droves as you might expect), so maybe it's not as commodified as you might think. I don't remember the  numbers (maybe one of you does), but in the last few years the 10 biggest banks increased their proportional size in relation to all banks by A LOT, esepcially in the last 4-5 years.

 

I think the problem will be maybe 5 years from now that there won't be enough people taking loans, and the winners will be the banks that find usage for their money and giving customers the greatest number of different services. WFC. I just think WFC will have plenty to do with its cash for longer than BAC, and seeing how beautifully they took over Wachovia and how they focus on cross selling to their new clients makes me think that maybe they do have a true advantage . The premium WFC has compared to other banks isn't something new. (Of course, I may be wrong and I truly hope that BAC jumps to 70 and we all make tons of money)

 

On a side note -I would love if someone could explain to me why BAC are firing 30,000 workers. In first glance it seems nice, cutting costs and etc.,but on further thought this is weird to me. I bet many of these workers have a lot of experience and are great workers, So what possible reason do they have for these massive layoffs? Did the work load on BAC diminish in the last few years? do they expect it to? are there less customers, or were the workers redundant in the first place?

 

There is alot of redundancy in the positions before the ML and CW acquisatios.  Now that those companies have been fully integrated and streamlined they are taking out some of the excess.

[Uccmal]

30000 workers have been dedicated to winding down the mortgage morass.  Some are probably in those divisions.  They seem to hire regularly as well.  Probably altering their geographic footprint to meet needs as well. 

[rranjan]

.....

 

This is a feature that I have always liked but never confirmed. Actually I did not even want to ask about it ... when you find something like this you do not want it to spread like wildfire. Berkowitz hinted at this feature in a recent letter so maybe it is time to have a more detailed discussion of the anti-dilution provisions.

 

Are there other non-standard features in the warrants worth noticing?

 

From AIG corporate site,

 

12. What type of event would cause an anti-dilution adjustment to the warrant?

 

 

The initial exercise price is subject to anti-dilution adjustment for certain events, including

 

(i) future stock dividends, distributions, subdivisions or combinations;

 

(ii) the issuance of below market rights, options or warrants entitling the holder to purchase AIG common stock for a period of sixty days or less;

 

(iii) dividends or other distributions of capital stock (other than AIG common stock); rights to acquire capital stock, debt or other assets (subject to certain exclusions);

 

(iv) per share cash dividends in excess of $0.675 in the aggregate in any twelve-month period; and

 

(v) certain above-market issuer tender offers for more than 30 percent of the then-outstanding AIG common stock.

 

http://www.aigcorporate.com/investors/warrants.html

[MrB]

How many have actually read the prospectus fine print of these warrants? Has anyone noticed that some of these warrants, but not all,  have adjustments of not only the exercise price but also of the number of warrants? AIG's for example does not include this provision and might explain why they are priced "cheaper" when tested with a Black and Scholes..

 

This is a feature that I have always liked but never confirmed. Actually I did not even want to ask about it ... when you find something like this you do not want it to spread like wildfire. Berkowitz hinted at this feature in a recent letter so maybe it is time to have a more detailed discussion of the anti-dilution provisions.

 

Are there other non-standard features in the warrants worth noticing?

 

I haven't seen that provision. What language refers to a warrant adjustment?

 

Hmm, I must be reading this wrong, but the BAC A warrant seems to adjust not only the strike price down, following a dividend, but also the warrant shares up in proportion to the ratio of the pre-div strike to the post-div. This is in contrast to PlanMaestro's AIG hint, which not only does not protect against share issuance and divs below a 12 month hurdle, but also adjust warrant shares down.

 

My eyes are wonked out. It looks excessively favorable to warrant holders.

 

EDIT: The AIG warrant seems to also have an upward adjustment to shares issuable.

 

This is the language right??

 

If AIG issues Common Stock as a dividend or distribution to all holders of Common Stock, or subdivides or combines

Common Stock, then the exercise price will be adjusted based on the following formula:

EP1 = EP0 x (OS0 / OS1)

where,

EP0 = the exercise price in effect at the close of business on the record date

EP1 = the exercise price in effect immediately after the record date

OS0 = the number of shares of Common Stock outstanding at the close of business on the record date prior to giving

effect to such event

OS1 = the number of shares of Common Stock that would be outstanding immediately after, and solely as a result

of, such event

 

I only see adjustments to the exercise price??