Leaner, Meaner Bank of America

[Parsad]

I'm really starting to love this guy!  For a company that was pretty screwed up, he's doing a heck of a job taking this thing back to basics.  Cheers!

 

http://www.bloomberg.com/news/2011-09-08/moynihan-says-bank-of-america-to-be-smaller-more-focused-after-review.html

[ERICOPOLY]

I saw a video today where Blodgett got Whalen to say Bank of America is heading for bankruptcy. 

 

Here is a brief story about it:

http://www.businessinsider.com/chris-whalen-says-bank-of-america-should-declare-bankruptcy-2011-9

 

I don't trust Whalen.  Anyone else hold that opinion?  He was nothing but negative about the bank last year because he said they had a cash flow problem.  Now he's saying all of their banks are fine but that the holding company should file for bankruptcy because of the lawsuits (never at all mentioning there are offsetting earning and the potential losses in the suits aren't due immediately). 

[A_Hamilton]

I saw a video today where Blodgett got Whalen to say Bank of America is heading for bankruptcy. 

 

Here is a brief story about it:

http://www.businessinsider.com/chris-whalen-says-bank-of-america-should-declare-bankruptcy-2011-9

 

I don't trust Whalen.  Anyone else hold that opinion?  He was nothing but negative about the bank last year because he said they had a cash flow problem.  Now he's saying all of their banks are fine but that the holding company should file for bankruptcy because of the lawsuits (never at all mentioning there are offsetting earning and the potential losses in the suits aren't due immediately).

Wow. Two nutjobs speaking to one another. Maybe with Bartz out Yahoo will dump Blodgett.

[treasurehunt]

I saw a video today where Blodgett got Whalen to say Bank of America is heading for bankruptcy. 

 

Here is a brief story about it:

http://www.businessinsider.com/chris-whalen-says-bank-of-america-should-declare-bankruptcy-2011-9

 

I don't trust Whalen.  Anyone else hold that opinion?  He was nothing but negative about the bank last year because he said they had a cash flow problem.  Now he's saying all of their banks are fine but that the holding company should file for bankruptcy because of the lawsuits (never at all mentioning there are offsetting earning and the potential losses in the suits aren't due immediately).

 

I have the same opinion that you do about Whalen. He has been calling for a restructuring of all big banks for a while now. For example, here's a presentation where he says that the big banks are going to be overwhelmed by the amount of foreclosures that they will need to handle and will have to restructure soon: http://www.businessinsider.com/chris-whalens-foreclosure-crisis-2010-10#subprime-losses-have-been-hidden-by-bad-accounting-1

 

Whalen seems to be a smart and knowledgeable guy, but his arguments in favor of restructuring the banks are underwhelming, in my opinion. The numbers in his presentation don't even make sense. For example, slide 7 shows total noninterest income of 60 billion for US banks. But Wells Fargo alone had over 40 billion of noninterest income in 2010. Also, noninterest expenses have not gone up significantly this year like Whalen claimed they would (for the first six months of 2011, YoY comparisons are flat for Wells, up 6.5% for JP Morgan, up 8% for C, up 16% for BAC and up 5% for USB).

 

Anyway, we'll find out in the next couple of years if Whalen is right about the banks and foreclosure issues really are unmanageable. I am betting that he is not.

[ubuy2wron]

Blodget has been non stop for the past few weeks with his BAC bashing he mostly has been quoting anonymous analysts. My favorite quote of the tool who seems to be the go guy if you want a negative slant on the banking industry was I never listen to anything Warren Buffet has to say. I do not think Blodget is being controversial to boost ratings I think he has not changed his spots one bit. Why do I think of Ediie Haskell when ever I see Mr. Blodget.

[Santayana]

Do plans for a "smaller" BAC have any effect on anyone's thoughts about their upside from here?  Wouldn't  a smaller balance sheet mean the earnings potential isn't as great, although the tradeoff is that you would also have reduced risk?

[ERICOPOLY]

They will probably shrink by cutting their long term debt.  So cutting the least profitable part of the balance sheet.

[Junto]

They will probably shrink by cutting their long term debt.  So cutting the least profitable part of the balance sheet.

 

I would add assets that have been sold at the largest prices have been non-earning assets i.e. China Construction Bank and Blackrock*

 

Shrinking non-performing branches likely won't have a material effect on asset sizes because they still have a large footprint and customers will move to the more profitable branches that exist and/or continue doing their banking on-line and with ATMs.

[PlanMaestro]

http://seekingalpha.com/news-article/2970191-bank-of-america-enters-into-agreement-to-sell-remaining-interest-in-archstone?source=email_portfolio&ifp=0

 

Bank of America (BAC) announced today that it and Barclays Bank PLC have entered into an agreement with Equity Residential and Lehman Brothers Holdings Inc. pursuant to which Bank of America and Barclays will sell their remaining 26.5 percent interest in Archstone, a privately-held owner, operator and developer of multifamily apartment properties, for a purchase price of $1.58 billion to Lehman pursuant to Lehmans exercise of its right of first offer. Bank of America and Barclays will pay an $80 million break-up fee to Equity Residential if the sale to Lehman closes. Upon consummation of this transaction, which is anticipated to occur in the second quarter of 2012, Bank of America and Barclays will have sold a 53.0 percent controlling interest in Archstone in two steps for a total purchase price of $2.905 billion. Archstone has net debt and third-party preferred securities of approximately $10.5 billion.

 

Pursuant to the agreement, the parties have released each other from all claims relating to Archstone.

[BargainValueHunter]

An annoyingly biased article about Blodget that, nevertheless, has interesting information about his outfit:

 

http://www.slate.com/articles/technology/technology/2012/05/business_insider_a_terrific_news_source_.html

 

Whalen hearts bank preferreds:

 

http://media.bloomberg.com/bb/avfile/News/Surveillance/vb7HonaGPJTc.mp3

 

 

[premfan]

another bac post. welcome to the corner of berkshire and bank of america.

[moore_capital54]

Instead of complaining why don't you contribute some of your own ideas? There is a button you can click called "Start new Thread" I would love to see the gusher of wisdom flow from your fingers!

 

What we all see in BAC is an easy double or triple within 5 years or less, and the constant posting only helps verify and gauge the thesis in real-time. It in no way hinders your or others abilities to provide new ideas.

 

I for one have never seen a more obvious gap between price and value than BAC and am very happy to see other members agree.

[twacowfca]

Instead of complaining why don't you contribute some of your own ideas? There is a button you can click called "Start new Thread" I would love to see the gusher of wisdom flow from your fingers!

 

What we all see in BAC is an easy double or triple within 5 years or less, and the constant posting only helps verify and gauge the thesis in real-time. It in no way hinders your or others abilities to provide new ideas.

 

I for one have never seen a more obvious gap between price and value than BAC and am very happy to see other members agree.

 

Are you wanting confirmation of your bias toward BAC?!

[moore_capital54]

Instead of complaining why don't you contribute some of your own ideas? There is a button you can click called "Start new Thread" I would love to see the gusher of wisdom flow from your fingers!

 

What we all see in BAC is an easy double or triple within 5 years or less, and the constant posting only helps verify and gauge the thesis in real-time. It in no way hinders your or others abilities to provide new ideas.

 

I for one have never seen a more obvious gap between price and value than BAC and am very happy to see other members agree.

 

Are you wanting confirmation of your bias toward BAC?!

 

Not at all - I have been investing for over two decades as some of you know but these markets are not easy to navigate and we are truly in unprecedented times given the incredible amount of artificial support from the global central banks as well as historically low interest rates. Volatility, correlation and insane levels of debt make this not your grandfathers equity market. As such I find the real-time analysis and confirmation of the thesis on BAC quite refreshing, and really what the power of the internet is all about.

 

Over the last few days I have noticed some posters making these type of comments and I think Parsad's response was perfect which was basically that very few times in your career will you be given super large-caps at below tangible book value. That is why I believe most of us are focusing there.

 

Being in the small cap space today is like gambling, and the paper losses sustained while averaging down can exceed 50% very quickly. We specialize in those names and are having a hard time constructing a portfolio.

[twacowfca]

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.

 

 

 

 

[PlanMaestro]

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.

 

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

[Uccmal]

Instead of complaining why don't you contribute some of your own ideas? There is a button you can click called "Start new Thread" I would love to see the gusher of wisdom flow from

 

Not at all - I have been investing for over two decades as some of you know but these markets are not easy to navigate and we are truly in unprecedented times given the incredible amount of artificial support from the global central banks as well as historically low interest rates. Volatility, correlation and insane levels of debt make this not your grandfathers equity market. As such I find the real-time analysis and confirmation of the thesis on BAC quite refreshing, and really what the power of the internet is all about.

 

Over the last few days I have noticed some posters making these type of comments and I think Parsad's response was perfect which was basically that very few times in your career will you be given super large-caps at below tangible book value. That is why I believe most of us are focusing

there.

 

Being in the small cap space today is like gambling, and the paper losses sustained while averaging down can exceed 50% very quickly. We specialize in those names and are having a hard time constructing a portfolio.

 

Moore, well said... But as you know, value investing is a "get it or dont get it proposition".

 

Us financial megacaps are at mutli-generational lows in a recovery environment. 

 

 

[PlanMaestro]

FIRREA and bank holding companies: all about protecting the FDIC insurance. My understanding is that the BK veil is a completely separate issue but I would like to know if not.

 

http://12.35.11.68/PUBLICAT/ECONREV/EconRevArchive/1990/2q90keet.pdf

[twacowfca]

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.

 

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.

 

 

[PlanMaestro]

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.

 

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

 

[twacowfca]

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.

 

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.  :)

[PlanMaestro]

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.

 

twacowfca, do you have an example of a bank where "source of strength" was used in this context? It seems the "cross guarantee" is the tool used by the FDIC not the "source of strength". It has also been the main way that the FDIC has extorted recapitalizations of subs.  Check appendix at the end for a list of examples:

 

http://mpra.ub.uni-muenchen.de/14116/1/LossSharingRules.pdf

 

The FRB’s authority to exercise its source-of-strength policy outside the application process has been constrained by legal challenges. Moreover, FDICIA’s prompt corrective action provisions, while acknowledging a BHC’s responsibility to its banking subsidiaries, explicitly identify the circumstances in which a holding company is required to support its banking subsidiaries and set a limit on the amount of the BHC’s responsibilities.

 

In contrast, the FDIC’s cross-guarantee authority has survived legal challenges to its use and has emerged with its legal standing firmly established. And, in practice, the authority has proven to be an important regulatory tool for preventing and/or reducing losses to the deposit insurance fund. The FDIC has issued cross-guarantee assessments in nearly a dozen cases resulting in recovery of about a third of its estimated losses in those cases. The FDIC has also used its cross- guarantee authority to facilitate the sale or recapitalization (or both) of dozens of troubled banks.

 

[Rabbitisrich]

There is plenty of room for upstreaming, if necessary. Last year, the holdco received $17B in cash, and this year it's authorized to receive $4.5B + statutory income. The North American bank sub. has ~$160B in cash + equivalents + fed funds sold and repos. The holdco has $120B+ Tier 1 common equity (Basel I).

 

BAC handles the holdco problems you mention by focusing on "Global Excess Liquidity Sources", which are largely composed of government guaranteed securities and cash. Even if you impose a duration or stressed liquidity haircut, you still get a reasonable liquidity profile.

 

 

[PlanMaestro]

FDICIA's Prompt Corrective Action Provisions

http://www.clevelandfed.org/research/Commentary/1992/0901.pdf

 

This is how the FDIC works in case of the undercapitalization of a sub. I do not think it will get to this and BAC is very well capitalized and reserved anyway. But still, it would be nice to be completely sure that the Countrywide bankruptcy can be used as a negotiation card in extremis.

 

 

[onyx1]

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.  :)

 

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?