As BAC stock continues to fall, interesting perspective

[txlaw]

It's amazing how it's gone from BAC needs to raise capital immediately to BAC is going bankrupt.

 

I'd like to hear the thesis on why BAC is going to have to file for BK.

 

Look at the stock price. I think I've made my point.

 

Haha ;D

[Ross812]

Sorry here is the same chart comparing Warrants and Common with various Puts. I switched it to percentages. It makes a lot more sense.

[Munger]

"Were there any good investors in Lehman before bankruptcy(not a couple years before hand or anything crazy, of course)?"

 

Interesting to note that Hank Greenberg and Blackrock were part of an investor group that bought $6B of LEH common and pfd shares in the spring of 2008.

[rranjan]

rranjan -- you (like other bulls) never come to grips with the reality that you have zero insight into the assets and the assumptions that underlie tangible book value estimates.  To say otherwise is pure self delusion.  Given this reality and the leverage, investing in BAC based on some assumption of "downside protection" ludicrous.  There is no foundation to your "asymmetric risk/reward" assertion.

 

And how could you have blind faith in management assertions re BV when the only sample we have of those assumptions (FHLB -- see earlier post) are completely unrealistic?  And what happens to BAC's own calc of BV if home prices decline next year instead of going up? -- there is no margin of safety in BAC's own assumptions in this regard...if you listened to the Berk conf call management acknowledged that their assumptions do not cosider a further decline in home prices or even a recession...crazy.

 

I did not asked you to take only tangible book value. In fact I did not even talked about tangible book value in previous post so i am wondering why you are using ONLY tangible book value to answer my post. I am assuming you simply ignored everything I pointed out and decided not to do any home work regarding current cash flow, current bad loan rates, bad loan reserve etc. Suite yourself. I thought you were genuinly interested.

 

If all you have to say is - don't trust the management, not going to look into any 10-q/10-k due to not trusting the management and Current cash flow is irrelevent then I have absolutely no point to poresent to you. Yes, I did listen to conference call and their assumptions( check which assumptions, go back and check again) were not based on double dip recession. If those assumptions are not true then take some hair cut and then see what do you get? They persented one scenario only.

 

Assymtric risk/reward is simply based on doing some analysis which you simply fail to get involved in. Assymtric risk reward does not mean that you can not lose under any scenario.

 

Your argument of not having insight of every single loan and banks veing leveraged etc are true for all banks in all environments. If thats the only thing you have to say then you should not be discussing banks with anyone because no one is going to refute those points.

[Parsad]

The comparison to Lehman is ridiculous.  Lehman was leveraged 30-1, was in the midst of a credit crisis and did not have enough cash to provide liquidity.  BAC is leveraged 9.5-1, is not in the midst of a credit crisis and not only has enough cash to provide liquidity, but earns $40-50B in free cash a year to continue to meet its liabilities, financing needs and lending/deposit operations. 

 

After the sale of the Canadian credit card business, half the stake in CCB and smaller asset sales they will be close to 9% Tier 1 Capital, which is exactly where they were after the government injected $20B during the credit crisis.  Their future legal liabilites can be administered through just the next two years of cash flows.  This is all rubbish...they aren't going down anytime soon unless you see a massive collapse in European banks and a domino effect ensues.  Cheers! 

[rranjan]

rranjan -- you (like other bulls) never come to grips with the reality that you have zero insight into the assets and the assumptions that underlie tangible book value estimates.  To say otherwise is pure self delusion.  Given this reality and the leverage, investing in BAC based on some assumption of "downside protection" ludicrous.  There is no foundation to your "asymmetric risk/reward" assertion.

 

And how could you have blind faith in management assertions re BV when the only sample we have of those assumptions (FHLB -- see earlier post) are completely unrealistic?  And what happens to BAC's own calc of BV if home prices decline next year instead of going up? -- there is no margin of safety in BAC's own assumptions in this regard...if you listened to the Berk conf call management acknowledged that their assumptions do not cosider a further decline in home prices or even a recession...crazy.

 

I did not asked you to take only tangible book value. In fact I did not even talk about tangible book value in previous post so I am wondering why you are using ONLY tangible book value to answer my post. I am assuming you simply ignored everything I pointed out and decided not to do any home work regarding current cash flow, current bad loan rates, bad loan reserve etc. Suite yourself. I thought you were genuinly interested.

 

If all you have to say is - don't trust the management, not going to look into any 10-q/10-k due to not trusting the management and Current cash flow is irrelevent then I have absolutely no point to present to you. Yes, I did listen to conference call and their assumptions( check which assumptions, go back and check again) were not based on double dip recession. If those assumptions are not true then take some hair cut and then see what do you get? They persented one scenario only. It's your job to think what other scenario will look like.

 

Assymtric risk/reward is simply based on doing some analysis which you simply fail to get involved in. Assymtric risk reward does not mean that you can not lose under any scenario.

 

Your argument of not having insight of every single loan and banks being leveraged etc are true for all banks in all environments. If thats the only thing you have to say then you should not be discussing banks with anyone because no one is going to refute those points.

 

Anyway, I realize that I have wasted enough time today so this will be my last post replying to you on this.

 

[Munger]

Rranjan -- glad you acknowledge that you have zero insight into tangible book value...this would be a problem for most value investors.  Based on the absurdity highlighted by FHLB and BAC's single scenario expectation for rising home prices/no recession on the Berk cc (which I listened to), I believe there is legitmate reason to question their assumptions re tangible BV.  Although I see that you believe your "homework" has provided you with special insights into future operating results...gotcha.

 

And I agree -- no reason to continue debating this topic further.

 

 

 

[Munger]

I haven't seen anyone compare BAC to LEH.  I personally was just answering a question, which was interesting.

 

Bulls on this board write that a 9.5:1 leverage ratio is somehow evidence of a fortress balance sheet.

 

What happens to shareholder value if the value of the assets simply decline by 10-11%?  It's game over.  So you are basically hoping the value of the assets are not currently mismarked by 10% and/or hoping there is no future decline in value.  True value investor would never take these odds unless "loaded" 

 

I have no idea if this hope will come true but the margin of safety is not as great as some bulls would suggest.

 

 

[Munger]

I may not have done my homework:) but seems there is a HUGE difference the $40-50B in FCF Parsad expects and the $25B future annual net income (which sould be a reasonable proxy for BAC FCF) Moynihan expects. Just making the observation.

 

"Moynihan plans to return all earnings to investors in dividends or share buybacks -- we're talking about $25 billion a year, all stuffing shareholders' pockets"

 

http://finance.fortune.cnn.com/2011/07/07/can-brian-moynihan-fix-americas-biggest-bank/

 

And I agree w others -- the article presents Moynihan in a favorable light...will be interesting to see if he lives up to his words in this article.

[BargainValueHunter]

The comparison to Lehman is ridiculous.  Lehman was leveraged 30-1, was in the midst of a credit crisis and did not have enough cash to provide liquidity.  BAC is leveraged 9.5-1, is not in the midst of a credit crisis and not only has enough cash to provide liquidity, but earns $40-50B in free cash a year to continue to meet its liabilities, financing needs and lending/deposit operations. 

 

After the sale of the Canadian credit card business, half the stake in CCB and smaller asset sales they will be close to 9% Tier 1 Capital, which is exactly where they were after the government injected $20B during the credit crisis.  Their future legal liabilites can be administered through just the next two years of cash flows.  This is all rubbish...they aren't going down anytime soon unless you see a massive collapse in European banks and a domino effect ensues.  Cheers! 

 

Well put.

 

One aspect of value investing that a lot of people just don't seem to get is that Armageddon talk is a GREAT opportunity for investors.

 

It means that either:

 

1. The world is ending and no investment matters

 

or

 

2. The Doom and Gloom is BS and the sure fire bankruptcy actually turns out to be a 10 bagger in three years. 

[AZ_Value]

The comparison to Lehman is ridiculous.  Lehman was leveraged 30-1, was in the midst of a credit crisis and did not have enough cash to provide liquidity.  BAC is leveraged 9.5-1, is not in the midst of a credit crisis and not only has enough cash to provide liquidity, but earns $40-50B in free cash a year to continue to meet its liabilities, financing needs and lending/deposit operations. 

 

After the sale of the Canadian credit card business, half the stake in CCB and smaller asset sales they will be close to 9% Tier 1 Capital, which is exactly where they were after the government injected $20B during the credit crisis.  Their future legal liabilites can be administered through just the next two years of cash flows.  This is all rubbish...they aren't going down anytime soon unless you see a massive collapse in European banks and a domino effect ensues.  Cheers!

 

I completely agree with Sanjeev... I cannot even begin to wrap my mind around any comparison to 2008 unless I'm living in a completely different dimension than everybody else. We can talk about BAC's balance sheet, their earning power and Moynihan's skill set as a banker and come up with a value to compare to the current mkt price, that's fine, but wherever we land (i.e. over or undervalued) I cannot understand waking up in August 2011 to find out that the market is pricing CDS protection on BAC bonds at the same level as 2008  (or even higher); To me it's just Mr. Market gone on tangent again;

Can someone explain the logic behind that to me?

It almost feels like Ajit Jain and Prem's team should be selling that insurance and collecting those premiums given how mispriced those CDS are.

Here's what I remember from 2008 (and I'll skip the gradual awakening to the mortgage mess and start with just Bear Stearns):

 

March 16:            Bear fails and Dimon gets it for a happy meal

July 11:                IndyMac fails and is placed into receivership by the government

Sept 7:                  Freddie and Fannie are also taken over and placed into receivership

Sept 15:                Lehman gone… bye bye

Sept 15:                Merrill essentially fails also and is sold to BAC

Sept 16:                Money market funds freeze as $140B is withdrawn that week (vs $7B the prior week)  and the best America has to offer (i.e. JNJ, PG, GE etc…) can’t even roll their commercial paper forcing Bernanke to come out and say the Fed Reserve’s balance sheet will guarantee money market funds so people can calm the F down.

Sept 17:                Fed Reserve lends $85B to AIG to avoid failure and financial collapse

Sept 25:                WAMU fails, is seized by FDIC and assets sold to Dimon

Sept 29:                Wachovia fails and is bought by Wells Fargo.

All along the Economy was in freel fall and losing between 500K and 800K jobs per month.

 

Now, can someone please tell me who out there feels like something similar is going on? Am I living under a rock? I'm really genuinely asking to understand where the fear that BAC is in a 2008 type of situation is coming from? Europe Debt? Stupid Congressmen willing to risk our credit standing for political points? Seriously what gives?

 

I am neither long nor short BAC but I would love to hear a serious rationale to the 2008 comparisons. Thanks.

 

[Parsad]

I may not have done my homework:) but seems there is a HUGE difference the $40-50B in FCF Parsad expects and the $25B future annual net income (which sould be a reasonable proxy for BAC FCF) Moynihan expects. Just making the observation.

 

"Moynihan plans to return all earnings to investors in dividends or share buybacks -- we're talking about $25 billion a year, all stuffing shareholders' pockets"

 

http://finance.fortune.cnn.com/2011/07/07/can-brian-moynihan-fix-americas-biggest-bank/

 

And I agree w others -- the article presents Moynihan in a favorable light...will be interesting to see if he lives up to his words in this article.

 

How is my number any different than the same one Moynihan gives in that very article?  Why do you edit out the parts you do not want people to see and only put in what you want them to see?

 

In March, at a presentation to investors in the baroque ballroom of New York's Plaza Hotel, Moynihan unveiled his audacious goal of earning as much as $40 billion before taxes by the middle of the decade. That translates into $25 billion in net income, far more than any non-oil company in America made in 2010.

 

Cheers!

[PlanMaestro]

I may not have done my homework:) but seems there is a HUGE difference the $40-50B in FCF Parsad expects and the $25B future annual net income (which sould be a reasonable proxy for BAC FCF) Moynihan expects. Just making the observation.

 

"Moynihan plans to return all earnings to investors in dividends or share buybacks -- we're talking about $25 billion a year, all stuffing shareholders' pockets"

 

Munger, there is no contradiction there. Sanjeev's number is pre-provisions (non-cash), includes excess D&A over capex (non-cash), and is before interests (that BAC is not paying). Yes, BAC is cash flow positive today.

[Parsad]

Now, can someone please tell me who out there feels like something similar is going on? Am I living under a rock? I'm really genuinely asking to understand where the fear that BAC is in a 2008 type of situation is coming from? Europe Debt? Stupid Congressmen willing to risk our credit standing for political points? Seriously what gives?

 

Actually it is happening, but in places where they never took care of the problem in the first place - Europe.  But it is not happening here in the U.S.  And that's the problem.  People think that the system here will get take down, but we are nowhere near what was happening in 2008. 

 

Money market funds were having liquidity issues!  There was a run on a bank or some other institution every few days!  There was a ton of counterparty risk that had not been even looked at.  There were massive portfolios of bad debts on the books.  Banks had little liquidity unlike now.  Leverage was significantly higher.  Credit was contracting at a rapid pace and fear wasn't just rampant in the stock market but through every facet of the securities industry. 

 

Right now, are we even remotely near the spreads we saw in corporate bonds in 2008/2009?  No, not even close!  It was a different animal altogether, and truth be told if it wasn't for a few people who suddenly had to make some quick decisions, it would be God-awful right now.  But that's not what happened, and that's not what is happening.  There is plenty of work to do, but we are a world away from 2008!  Cheers! 

 

[PlanMaestro]

Tearing apart the Mungers of the world is a self-indulgence. If your brain isn't burning calories to answer the opposing thesis, it's wiser to seek out a better "opponent".

 

Guilty but ... who?

 

I have not seen a credible short thesis and been trying to find one. There is a lot innuendo moving from one thing to the next w/o being convincing in the previous one (CRE, Option ARMs, Europe, putbacks, ...). If there is one, I would love to read it.

[Parsad]

Actually we owe Munger a debt of gratitude, because he helps us dissect our ideas further.  I'm actually more convinced that my argument is correct on BAC than before I started debating with him.  I think that's a good thing.  Time will tell who was right.  Cheers!

[ERICOPOLY]

They give us figures such as PTPP every quarter, we know when reserves are built and released.  We know the net result after taking in revenues and loan losses. 

 

I guess if you take an unlabeled can of paint, shake it up well, then punch a hole in it... You can pretty well tell the color of the paint in the can even though you can't see all of the contents.

 

So some assets may be marked too low, but one should be roughly able to understand the tangible value based on what those assets in the aggregate are generating.

[Munger]

How is my number any different than the same one Moynihan gives in that very article?  Why do you edit out the parts you do not want people to see and only put in what you want them to see?

 

"In March, at a presentation to investors in the baroque ballroom of New York's Plaza Hotel, Moynihan unveiled his audacious goal of earning as much as $40 billion before taxes by the middle of the decade. That translates into $25 billion in net income, far more than any non-oil company in America made in 2010."

 

Cheers!

 

 

Parsad wrote -- "but earns $40-50B in free cash a year to continue to meet its liabilities"

 

 

Well excuuuuuse me for employing basic English language grammar rules to interpret EARNS in the present tense not an audacious mid decade goal.  And also please forgive me for assuming that when Parsad used the term free cash he meant free cash not pre tax earnings:)  C'mon guys -- let's not be so uptight...I wasn't trying to hold the dicrepancy against you just trying to ensure the right numbers were in the dialogue.

[Munger]

I guess if you take an unlabeled can of paint, shake it up well, then punch a hole in it... You can pretty well tell the color of the paint in the can even though you can't see all of the contents.

 

 

No -- you're being shown the paint can and the label describing the contents but you haven't seen an ounce of what's inside.

[Munger]

Parsard writes -- "Time will tell who was right."

 

I share the spirit of the post but it's misguided in relation to me.

 

My primary assertion is that none of the bulls have any ability to accurately determine the margin of safety in this investment or intrinsic value.  I have no doubt I'm right in this regard although I've tried hard to prove myself wrong by attempting to flesh out the bullish case.

 

I have no clue if the stock is going higher or lower from here because it is impossible to accurately measure the intrinsic  equity value of the company.  I'm honestly hoping the stock goes higher for those who own -- I would gain no satisfication from a BAC BK. 

[ERICOPOLY]

I guess if you take an unlabeled can of paint, shake it up well, then punch a hole in it... You can pretty well tell the color of the paint in the can even though you can't see all of the contents.

 

 

No -- you're being shown the paint can and the label describing the contents but you haven't seen an ounce of what's inside.

 

That's just not the case.  They report quarterly.  Given the current economy, you can see the results.  You can see the positive trend.  It still isn't at "normalized" yet, neither should it be -- they still have a significant amount of 2007 & 2008 loans on the books.

 

The unknown part is how much their put back liability will ultimately be.

[Munger]

PlanMaestro writes -- I have not seen a credible short thesis and been trying to find one.

 

I agree -- impossible for an outside investor to determine.  No one on the outside can accurately analyze the assets and the assumptions underlying the company's book value esimate.

[Munger]

The unknown part is how much their put back liability will ultimately be.

 

True this is one part of the unknown.  I can also guarantee that you and all other outside investors have ZERO insight into asset quality and the assumptions underlying the company's book value estimate.

 

Just look at the absurdity highlighted by NHLB (which is the closest you'll come to seeing any "paint") -- no way any on the outside could have understood the complete absurdity unless publicly filed as part of the court case.  In the SEC filings, you get the label describing the contents and that's all.

[PlanMaestro]

PlanMaestro writes -- I have not seen a credible short thesis and been trying to find one.

 

I agree -- impossible for an outside investor to determine.  No one on the outside can accurately analyze the assets and the assumptions underlying the company's book value esimate.

 

Munger, banking is one of the most regulated industries in existence and they disclose more information than any other. I have not seen you using numbers as 30-89, NPLs, NPAs, TDRs, restructured loans. And they are provided by type of loan in painful detail.

 

That information is what me and others have been using to discard nonsense. For example, I personally posted in VariantPerceptions about how this "CRE is the next shoe to drop" was nonsense. So no, you do not have to know each single loan to know how good was their u/w, especially 4y into a recession.

 

BAC has 6 lines of businesses and 5 of them are profitable. The only one with negative earnings (but positive FCF) is Home Loans. Mortgages have a half life of 4 years ... is it really that difficult to do a little arithmetic and estimate a range of when BAC will become earnings  profitable (they are already FCF positive)?

[ERICOPOLY]

I can also guarantee that you and all other outside investors have ZERO insight into asset quality and the assumptions underlying the company's book value estimate.

 

I am focusing on what they are capable of earning in a "normalized" year, absent the put-back charges which will be behind them in a few years.

 

For FY13, the lowest estimate out of 10 analysts is 1.53, the highest estimate is 2.15.  "Consensus" is 1.78.

 

Do you think that is not achievable?  If so, why?

 

$1.78 would be a reasonable return on what tangible book value?  It would be exceedingly good on a $10 tangible book value, so that would be too low of a guess.  So I'd guess more than $10 based on that.

 

This is why I'm saying it's reasonable to look at the color of the paint oozing from the can -- you can look at what they currently earn TTM absent the putback costs.  But that TTM number includes some bad vintage loans that won't be around in two more years, replaced by much more profitable ones.

 

Anyways, I think a seasoned hand can make a reasonable guess on the tangible book value based on what it actually produces.

 

But it's sort of immaterial anyhow -- the value of the stock to the investor will be the returns, not the static present tangible value.  The market will likely put a 10x multiple on those returns at some point not too long after earnings normalize.  There will be nothing to be afraid of after a long period of solid vanilla lending.