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Bruce Berkowitz on BAC


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Berkowitz is completely correct.  BAC today reminds me of Fairfax 2005.  Midst of a turnaround...the pig half-digested...investors underestimating earning power and improvements in the balance sheet. 

 

I also like Moynihan.  It was his predecessor who made the Country-wide deal, while attempting to stabilize the system at the behest of Paulson and Geithner.  Moynihan is doing alot of the right things!  Cheers!

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I like how Moynihan is taking responsibility and running the company with an eye to creating a long-term sustainable profit machine instead of milking the next earnings report for a pop in the stock price. It is the same thing that I like about Google's current strategy, which basically ignores the short term and is making a solid bet on the long term.

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He's also really cleaning up the culture...both at BAC and Countrywide.  When the economy recovers, the engine at BAC is going to surprise everyone! 

 

You have a weak economy and weak housing market, while they are still turning around their operations and shrinking their business.  Excluding the 2nd Q charges, you have a bank that can earn almost $16B net annually with current spreads...and they have less than half their assets in loans! 

 

In a couple of years, you will see a leaner, meaner bank that will earn net profits north of $20B...or about five times earnings based on its current market capitalization.  Cheers! 

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I love BB's BAC analysis, and I would put money (literally and figuratively) on it that he ends up right in the long run. However, I have a question that continues to dog me as I look at this company...

 

How do we know within reason what is on BAC's balance sheet? For example, in the line "Other Assets" on its balance sheet, BAC dumps over $100MM of assets and does not disclose very succinctly what is in that line...I was able to find in a note that one of the assets in their is their China Construction Bank investment that is currently carried at roughly $19B. There is very little information regarding what else is in that bucket, and if for some reason that entire bucket was wiped out, shareholder equity would be gone.

 

Just the CCB investment alone is worrisome - they've had that on the block for awhile now, and with China's real estate mess only getting worse, who know what that is truly worth.

 

 

All that to say - Parsad, it sounds as if you potentially are in BAC...if so, how do you get comfortable with what is on BAC's balance sheet outside of the Bruce argument that BAC earnings $45 to $50B PTPP and can earn their way out of it? If in fact BAC is forced to write down fluffy assets in the next couple of years, that is not enough time to "earn" their way out of it due to limited profitability over the near term.

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I love BB's BAC analysis, and I would put money (literally and figuratively) on it that he ends up right in the long run. However, I have a question that continues to dog me as I look at this company...

 

How do we know within reason what is on BAC's balance sheet? For example, in the line "Other Assets" on its balance sheet, BAC dumps over $100MM of assets and does not disclose very succinctly what is in that line...I was able to find in a note that one of the assets in their is their China Construction Bank investment that is currently carried at roughly $19B. There is very little information regarding what else is in that bucket, and if for some reason that entire bucket was wiped out, shareholder equity would be gone.

 

Just the CCB investment alone is worrisome - they've had that on the block for awhile now, and with China's real estate mess only getting worse, who know what that is truly worth.

 

 

All that to say - Parsad, it sounds as if you potentially are in BAC...if so, how do you get comfortable with what is on BAC's balance sheet outside of the Bruce argument that BAC earnings $45 to $50B PTPP and can earn their way out of it? If in fact BAC is forced to write down fluffy assets in the next couple of years, that is not enough time to "earn" their way out of it due to limited profitability over the near term.

 

I love his analysis as well and would and have put money on it.  I have answered the question about the balance sheet before.  The answer is simple, but perhaps not satisfactory.  In terms of how you get comfortable with it . . . you just do.  You have to take a leap of faith.  Banks are a black box in that way.  You will never be able to analyze their assets in a way that will give you 100% comfort.  But at the end of the day, how is this so different from other companies that are non-financials? 

 

Take FFH or BRK, for example.  You have a list of assets and you think you know what they are worth.  But all you know is what is listed on a piece of paper.  They both have countless subsidiaries, etc.  What is an insurance company really worth?  You think you know and you do, so long as the numbers on the piece of paper are correct.  Are you actually going to various insurance companies and doing an audit on their figures?  Even if you had that kind of access, would it even be possible to do?  Is one capable of doing it?  Then, in BRK's case, there are all the operating companies both wholly owned and the investments.  What is KO really worth?  They tell you they have operations all over the world.  Have people been to Nepal to analyze their exposure there?  What about China?  What about all their bottling companies? 

 

At the end of the day as with any investment, all we know is what is listed on a piece of paper in the 10-K.  Either you take the numbers at face value with your own bit of analysis built in, or you don't.  I'm not saying that one shouldn't discount or whatever, as appropriate, but if you think BAC is playing games, don't invest.  I can assure you that no one knows exactly what any of these banks is truly worth in the sense of putting an exact valuation on it.  Buffett doesn't really know what WFC is worth.  Berkowitz doesn't really know what BAC is worth.  The structured assets alone, even if you had a list of each and every one is impossible to value accurately.  But you don't need precision to know that at the current price BAC is undervalued.  As they used to say on an old tv show, believe it . . . or not.

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What do you think of the "A" warrants as opposed to the common stock? The warrants capture a future dividend and allow you to leverage your position.  I got interested in them when I watched Francis Chou buying them for his fund.

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I completely agree regarding the black box issue. I would guess Buffett does as well, and that's why he chooses to own WFC, which fully discloses its "Other Asset" category, does not make dumb acquisitions and has a relatively simple business model.

 

All I ask before buying BAC is to have some idea of what those assets are. Investors got smoked back in 2008 and 2009 buying AIG, Fannie, Freddie, BAC and C based on perceived "earnings power" and assuming the risk of a black box.

 

I would contend as well that this period of time is NOT akin to the early 1990s. We are in the process of unwinding a massive credit bubble, which will take much longer to unwind than the 1990s banking crisis. I say that to say there is a very big risk bank balance sheets are inflated due to accounting shenanigans (read any of John Hussman's commentary since the recession started), and thus investors must not simply "have faith" in BAC's ability to fairly account for its "Other Asset" category.

 

 

 

 

 

 

I love BB's BAC analysis, and I would put money (literally and figuratively) on it that he ends up right in the long run. However, I have a question that continues to dog me as I look at this company...

 

How do we know within reason what is on BAC's balance sheet? For example, in the line "Other Assets" on its balance sheet, BAC dumps over $100MM of assets and does not disclose very succinctly what is in that line...I was able to find in a note that one of the assets in their is their China Construction Bank investment that is currently carried at roughly $19B. There is very little information regarding what else is in that bucket, and if for some reason that entire bucket was wiped out, shareholder equity would be gone.

 

Just the CCB investment alone is worrisome - they've had that on the block for awhile now, and with China's real estate mess only getting worse, who know what that is truly worth.

 

 

All that to say - Parsad, it sounds as if you potentially are in BAC...if so, how do you get comfortable with what is on BAC's balance sheet outside of the Bruce argument that BAC earnings $45 to $50B PTPP and can earn their way out of it? If in fact BAC is forced to write down fluffy assets in the next couple of years, that is not enough time to "earn" their way out of it due to limited profitability over the near term.

 

I love his analysis as well and would and have put money on it.  I have answered the question about the balance sheet before.  The answer is simple, but perhaps not satisfactory.  In terms of how you get comfortable with it . . . you just do.  You have to take a leap of faith.  Banks are a black box in that way.  You will never be able to analyze their assets in a way that will give you 100% comfort.  But at the end of the day, how is this so different from other companies that are non-financials? 

 

Take FFH or BRK, for example.  You have a list of assets and you think you know what they are worth.  But all you know is what is listed on a piece of paper.  They both have countless subsidiaries, etc.  What is an insurance company really worth?  You think you know and you do, so long as the numbers on the piece of paper are correct.  Are you actually going to various insurance companies and doing an audit on their figures?  Even if you had that kind of access, would it even be possible to do?  Is one capable of doing it?  Then, in BRK's case, there are all the operating companies both wholly owned and the investments.  What is KO really worth?  They tell you they have operations all over the world.  Have people been to Nepal to analyze their exposure there?  What about China?  What about all their bottling companies? 

 

At the end of the day as with any investment, all we know is what is listed on a piece of paper in the 10-K.  Either you take the numbers at face value with your own bit of analysis built in, or you don't.  I'm not saying that one shouldn't discount or whatever, as appropriate, but if you think BAC is playing games, don't invest.  I can assure you that no one knows exactly what any of these banks is truly worth in the sense of putting an exact valuation on it.  Buffett doesn't really know what WFC is worth.  Berkowitz doesn't really know what BAC is worth.  The structured assets alone, even if you had a list of each and every one is impossible to value accurately.  But you don't need precision to know that at the current price BAC is undervalued.  As they used to say on an old tv show, believe it . . . or not.

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I completely agree regarding the black box issue. I would guess Buffett does as well, and that's why he chooses to own WFC, which fully discloses its "Other Asset" category, does not make dumb acquisitions and has a relatively simple business model.

 

All I ask before buying BAC is to have some idea of what those assets are. Investors got smoked back in 2008 and 2009 buying AIG, Fannie, Freddie, BAC and C based on perceived "earnings power" and assuming the risk of a black box.

 

I would contend as well that this period of time is NOT akin to the early 1990s. We are in the process of unwinding a massive credit bubble, which will take much longer to unwind than the 1990s banking crisis. I say that to say there is a very big risk bank balance sheets are inflated due to accounting shenanigans (read any of John Hussman's commentary since the recession started), and thus investors must not simply "have faith" in BAC's ability to fairly account for its "Other Asset" category.

 

 

I agree which is why I dont own banks. At some point you just have to place your chips on the table or not. Banking is in the too hard pile until the age of deleveraging is over. Thats my plan.

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I completely agree regarding the black box issue. I would guess Buffett does as well, and that's why he chooses to own WFC, which fully discloses its "Other Asset" category, does not make dumb acquisitions and has a relatively simple business model.

 

All I ask before buying BAC is to have some idea of what those assets are. Investors got smoked back in 2008 and 2009 buying AIG, Fannie, Freddie, BAC and C based on perceived "earnings power" and assuming the risk of a black box.

 

I would contend as well that this period of time is NOT akin to the early 1990s. We are in the process of unwinding a massive credit bubble, which will take much longer to unwind than the 1990s banking crisis. I say that to say there is a very big risk bank balance sheets are inflated due to accounting shenanigans (read any of John Hussman's commentary since the recession started), and thus investors must not simply "have faith" in BAC's ability to fairly account for its "Other Asset" category.

 

 

I agree which is why I dont own banks. At some point you just have to place your chips on the table or not. Banking is in the too hard pile until the age of deleveraging is over. Thats my plan.

 

 

My point, which perhaps I didn't make clearly, is that while banks are a black box in a way, so is everything else.  Banks are no more a black box than a retailer or an insurance company or a restaurant.  That is, if a bank tells you they have $X in loans, securities, etc., how is that so different from a retailer telling you they have $Y in inventory (which let's say is tshirts and jeans)?  Investors have a false sense of security that since tshirts and jeans are tangible - they could theoretically touch and feel them - that is so much better than loans, for example.  But when a retailer tells you they have $100 mil in inventory, what does that mean?  Can you go see it?  Even if you could, what is it worth?  I could sell a loan book faster than a retailer could sell a warehouse of tshirts and jeans.  If BAC wanted to offload a bunch of financial assets there would be countless bidders shortly.  Put out a BWIC and bids come in quickly.  Put out an offer to sell tshirts and jeans and . . . crickets most likely.  Yet, most investors would say an Aeropostale or a American Eagle is transparent, while BAC is not.  I don't believe it is true.  BAC is a complicated entity.  They have tons of things that are difficult to value and perhaps their "other" category isn't as well disclosed as WFC, for example. 

 

I do agree though that we all decide what "bets" we are willing to take and we either put our chips on the table or we don't.  Nothing wrong with that.

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Yet, most investors would say an Aeropostale or a American Eagle is transparent, while BAC is not.

 

The fact that American Eagle is leveraged 1.37X versus 10.2X for BAC is where I would derive my comfort, not in my analysis of how many bids I would receive if auctioning off t-shirts. If AE wrote-off 100% of its $300MM of inventory, leverage would go to 1.8X, whereas if BAC wrote-off 100% of its "Other Asset", leverage would jump to 18.5X.

 

 

 

I completely agree regarding the black box issue. I would guess Buffett does as well, and that's why he chooses to own WFC, which fully discloses its "Other Asset" category, does not make dumb acquisitions and has a relatively simple business model.

 

All I ask before buying BAC is to have some idea of what those assets are. Investors got smoked back in 2008 and 2009 buying AIG, Fannie, Freddie, BAC and C based on perceived "earnings power" and assuming the risk of a black box.

 

I would contend as well that this period of time is NOT akin to the early 1990s. We are in the process of unwinding a massive credit bubble, which will take much longer to unwind than the 1990s banking crisis. I say that to say there is a very big risk bank balance sheets are inflated due to accounting shenanigans (read any of John Hussman's commentary since the recession started), and thus investors must not simply "have faith" in BAC's ability to fairly account for its "Other Asset" category.

 

 

I agree which is why I dont own banks. At some point you just have to place your chips on the table or not. Banking is in the too hard pile until the age of deleveraging is over. Thats my plan.

 

 

My point, which perhaps I didn't make clearly, is that while banks are a black box in a way, so is everything else.  Banks are no more a black box than a retailer or an insurance company or a restaurant.  That is, if a bank tells you they have $X in loans, securities, etc., how is that so different from a retailer telling you they have $Y in inventory (which let's say is tshirts and jeans)?  Investors have a false sense of security that since tshirts and jeans are tangible - they could theoretically touch and feel them - that is so much better than loans, for example.  But when a retailer tells you they have $100 mil in inventory, what does that mean?  Can you go see it?  Even if you could, what is it worth?  I could sell a loan book faster than a retailer could sell a warehouse of tshirts and jeans.  If BAC wanted to offload a bunch of financial assets there would be countless bidders shortly.  Put out a BWIC and bids come in quickly.  Put out an offer to sell tshirts and jeans and . . . crickets most likely.  Yet, most investors would say an Aeropostale or a American Eagle is transparent, while BAC is not.  I don't believe it is true.  BAC is a complicated entity.  They have tons of things that are difficult to value and perhaps their "other" category isn't as well disclosed as WFC, for example. 

 

I do agree though that we all decide what "bets" we are willing to take and we either put our chips on the table or we don't.  Nothing wrong with that.

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All that to say - Parsad, it sounds as if you potentially are in BAC...if so, how do you get comfortable with what is on BAC's balance sheet outside of the Bruce argument that BAC earnings $45 to $50B PTPP and can earn their way out of it? If in fact BAC is forced to write down fluffy assets in the next couple of years, that is not enough time to "earn" their way out of it due to limited profitability over the near term.

 

They may have more in write-downs, but I don't think it will be nearly as significant as the current discount to book.  Meaning, the stock is so hated right now that investors are ignoring all of the fundamentals, and it is discounted extraordinarly low relative to earning power and potential write-offs. 

 

Financial institutions in the United States today are stronger than financial institutions in any other country in the world presently.  People are going to throw out Tier 1 and tangible equity ratios of Chinese banks, but why do you think they are so high?  Because the Chinese know that they have a shitload of bad loans on the book. 

 

Presently, it is night and day in loan quality in U.S. banks from 2007.  Credit quality is better, you don't have risky reset products, higher down payments, shorter amortizations in many cases, and house prices have fallen 50% or more in many areas.  Many bank's loan provisions will be found to be high relative to the actual loan losses...think in terms of insurance underwriting, and institutions having surpluses.  Requirements for small business and commercial loans are much tighter as well.  Banks are doing what they were always supposed to do...take deposits and make quality loans!

 

On top of all of this, you have more regulatory oversight than there ever has been in banking...far greater than there was after the Savings & Loan scandal or the Great Depression.  The best way to buy is to use the warrants.  You probably will never see a product like that again! 

 

How do you get comfortable with it?  Like any investment...how do you get comfortable with Fairfax, Berkshire, Leucadia, Google, etc.  There is always some risk, but which side of the equation are you on and what is the probability that you may fall on the wrong side?  If you trust your analysis, that's all that matters.  Cheers!

 

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I love his analysis as well and would and have put money on it.  I have answered the question about the balance sheet before.  The answer is simple, but perhaps not satisfactory.  In terms of how you get comfortable with it . . . you just do.  You have to take a leap of faith.  Banks are a black box in that way.  You will never be able to analyze their assets in a way that will give you 100% comfort.  But at the end of the day, how is this so different from other companies that are non-financials? 

I thought this was supposed to be a value investing forum?

 

I can assure you, when Warren Buffett invests in a financial, he certainly does not take any leaps of faith. The numbers are all out there, if you're diligent enough, you will find them.

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How does anyone know whether Moynihan is changing the culture of BAC?

 

This is a 100,000+ person organization.  Perhaps he is changing the incentive structure for most/all of the company.  But that does change the culture.  IMO, that change takes years and years not months.

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I love his analysis as well and would and have put money on it.  I have answered the question about the balance sheet before.  The answer is simple, but perhaps not satisfactory.  In terms of how you get comfortable with it . . . you just do.  You have to take a leap of faith.  Banks are a black box in that way.  You will never be able to analyze their assets in a way that will give you 100% comfort.  But at the end of the day, how is this so different from other companies that are non-financials? 

I thought this was supposed to be a value investing forum?

 

I can assure you, when Warren Buffett invests in a financial, he certainly does not take any leaps of faith. The numbers are all out there, if you're diligent enough, you will find them.

 

 

Amusing.  I didn't say the numbers weren't there.  You have misunderstood my point which was that all investments entail a leap of faith in that all we know are the numbers that have been provided us.  So yes, the numbers for a financial are out there.  My further point was that many believe that the numbers for a financial are somehow not trustworthy while they are for an industrial for example.  Many on this board don't question the numbers for an insurance company, but do for a bank.  There's no difference.  I assure you that even Buffett takes a leap of faith on certain of the assets in a bank like WFC.  I know their desks and their products.  Certain of them are impossible to value even if you had the deal documents in front of you.  I doubt anyone is reading the deal documents on thousands upon thousands of different securities.  So yes, the numbers are there and one can take the macro values and discount or do whatever you think is appropriate, but the best one can do is be approximately right rather than precisely wrong.  But again my point is that is the case with any investment and not just banks.  The leap of faith we take is that the numbers we are provided are true and correct.  I didn't mean to imply otherwise.  Hope this makes more sense.

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I thought this was supposed to be a value investing forum?

 

I can assure you, when Warren Buffett invests in a financial, he certainly does not take any leaps of faith. The numbers are all out there, if you're diligent enough, you will find them.

 

How is this not a "value" discussion?

 

Buffett certainly does take a leap of faith when he buys a Wells Fargo. They have 1 and a quarter trillion in assets. That's with a T. Buffett thinks the culture at WFC is good, and he trusts, err, has faith in the company to sensibly loan money. But he couldn't possibly analyze each asset. This is a company that is so big, that they once accidentaly sued themselves over a disagreement between the first and second lien holders of a property, where WFC ended up owning both liens. WFC doesn't even know what they own. How can you say with a straight face that a diligent analyst can?

 

Any huge money centered bank requires a leap of faith. When you have trillions in assets, you have a lot of things that you don't know you own. You also have a lot of hard to value assets and off balance sheet stuff. As Parsad said though, lending has been strict since 2007, and the loan book has taken a bath and is much cleaner. But in the end the only thing you can do is analyze the macro of it all, as there is too much micro to wrap ones head around

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I thought this was supposed to be a value investing forum?

 

I can assure you, when Warren Buffett invests in a financial, he certainly does not take any leaps of faith. The numbers are all out there, if you're diligent enough, you will find them.

 

How is this not a "value" discussion?

 

Buffett certainly does take a leap of faith when he buys a Wells Fargo. They have 1 and a quarter trillion in assets. That's with a T. Buffett thinks the culture at WFC is good, and he trusts, err, has faith in the company to sensibly loan money. But he couldn't possibly analyze each asset. This is a company that is so big, that they once accidentaly sued themselves over a disagreement between the first and second lien holders of a property, where WFC ended up owning both liens. WFC doesn't even know what they own. How can you say with a straight face that a diligent analyst can?

 

Any huge money centered bank requires a leap of faith. When you have trillions in assets, you have a lot of things that you don't know you own. You also have a lot of hard to value assets and off balance sheet stuff. As Parsad said though, lending has been strict since 2007, and the loan book has taken a bath and is much cleaner. But in the end the only thing you can do is analyze the macro of it all, as there is too much micro to wrap ones head around

 

Lol I agree word for word, and I remember when they sued themselves.

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Look guys, if you seriously think that Warren Buffet looks at the balance sheet of Wells Fargo, his second largest investment and says "I can't make any sense out of this, let's hope that everything works out for the best" then you're completely wrong. Of course Buffett can't track down every single asset, but I guarantee you that he is doing his due diligence. We know from Alice Schroeder that Buffett is absolutely paranoid above risk control, there is simply no way in the world that he is going into his second largest investment in the blind. I would suspect he is talking to managers, talking to customers, I bet he is even reading those hundred page mortgage securitisation prospectuses that Michael Burry used to short the mortgage market a few years back.

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I bet he is even reading those hundred page mortgage securitisation prospectuses that Michael Burry used to short the mortgage market a few years back.

 

LOL.  All of them?  There are thousands upon thousands of them and that's just the RMBS.  What about their CMBS, CDOs, CLOs, CDO squareds, structured notes, credit default swaps and other derivatives, etc.?  What about their OREO spread throughout the world? And this is just a small percentage of things.  Buffett is a genius, don't get me wrong.  Truly the smartest investor ever and I would bet every penny I have he can't provide an accurate value on these assets. 

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If Buffett really read all of that stuff, why didn't he sell a few years back? I don't think Buffett really reads like he used to back in the day. I think he uses his memory and huge knowledge base more than just about anything. There are stories that he'll buy a company after one conversation with an seller...without having much knowledge of the company before hand. I think he did something like that with clayton.

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They're bulldozing houses now?

 

http://www.bloomberg.com/news/2011-07-27/bank-of-america-donates-then-demolishes-houses-to-get-rid-of-foreclosures.html

 

Next they'll throw money from helicopters..

 

If they are in that bad of shape, they aren't going to get any money out of it anyway.  Cheaper to rebuild on the plot, and probably easier to sell that way.  When houses are abandoned, they go bad pretty quickly, so this is not unexpected that a significant portion of the idle housing stock may simply disappear.

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