Leaner, Meaner Bank of America

[twacowfca]

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?

 

The probability of Whalen's scenario coming to pass is beyond my competence to assess.  What I am laying out is a theoretical basis for what he thinks is a credible risk.  In other words, if he isn't completely out to lunch, this is how his scenario could play out, given the legal constraints.  Liquidity at the Holdco is apparently very important to management that raised capital at about the current price from Uncle Warren.

 

If management disputes a legal claim, I don't thank they have to set up a reserve for it.  Also, I don't think the banks have to mark their bad assets strictly to market.  These are just thoughts.  I don't know what's realistic.  Whalen says BAC's subs other than countrywide and the debt issued by it are solvent.  He's not a short seller with an axe to grind.  We know about the legal issues.  What about the countrywide debt?  How much is outstanding, including any quasi debt like TPS? When does it have to be paid off?

[wescobrk]

Twacfa,

Would you still make an investment in BAC (through b warrants or other equity tied component) if it dropped close to the price of Dec like you did last year? Or are you concerned enough about this potential capital raise to avoid BAC equity investment in the future? Or, stated another way, did you think about this in Dec but the probability was de minimus and thus you were still comfortable with the investment?

Thanks for posting this thread. I think it is valuable to raise concerns for a popular i

Security (at least on this board)

 

Ericopoly, do you have any concerns on this issue?

 

Thanks.

[alertmeipp]

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?

 

I am not even sure what cfa was trying to say. Does he mean to take a static snapshot of all BAC's subsidiaries and net out their assets and liabilities and that will lead to more capital raise?

 

But we all know BAC is building billions of capital while working through legacy issues as we speak and they just passed the stress test?

[twacowfca]

Twacfa,

Would you still make an investment in BAC (through b warrants or other equity tied component) if it dropped close to the price of Dec like you did last year? Or are you concerned enough about this potential capital raise to avoid BAC equity investment in the future? Or, stated another way, did you think about this in Dec but the probability was de minimus and thus you were still comfortable with the investment?

Thanks for posting this thread. I think it is valuable to raise concerns for a popular i

Security (at least on this board)

 

Ericopoly, do you have any concerns on this issue?

 

Thanks.

 

Last December, I overlooked the possibility of a big pinch at the Holdco.  Instead, I saw the slow progress of working through everything on a consolidated balance sheet.  I would like to find out a lot more about the potential magnitude of what Whalen sees.  If it looks like they might have to raise an amount of capital that was manageable,  I would still be very interested, especially if the price goes lower.

[bmichaud]

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?

 

The probability of Whalen's scenario coming to pass is beyond my competence to assess.  What I am laying out is a theoretical basis for what he thinks is a credible risk.  In other words, if he isn't completely out to lunch, this is how his scenario could play out, given the legal constraints.  Liquidity at the Holdco is apparently very important to management that raised capital at about the current price from Uncle Warren.

 

If management disputes a legal claim, I don't thank they have to set up a reserve for it.  Also, I don't think the banks have to mark their bad assets strictly to market.  These are just thoughts.  I don't know what's realistic.  Whalen says BAC's subs other than countrywide and the debt issued by it are solvent.  He's not a short seller with an axe to grind.  We know about the legal issues.  What about the countrywide debt?  How much is outstanding, including any quasi debt like TPS? When does it have to be paid off?

 

According to Capital IQ, there is less than $10 billion of Countrywide debt out - $2 billion is due June 2012 and the next $1 billion tranche isn't due until 2016. This includes roughly $2 billion of TPS.

[twacowfca]

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?

 

The probability of Whalen's scenario coming to pass is beyond my competence to assess.  What I am laying out is a theoretical basis for what he thinks is a credible risk.  In other words, if he isn't completely out to lunch, this is how his scenario could play out, given the legal constraints.  Liquidity at the Holdco is apparently very important to management that raised capital at about the current price from Uncle Warren.

 

If management disputes a legal claim, I don't thank they have to set up a reserve for it.  Also, I don't think the banks have to mark their bad assets strictly to market.  These are just thoughts.  I don't know what's realistic.  Whalen says BAC's subs other than countrywide and the debt issued by it are solvent.  He's not a short seller with an axe to grind.  We know about the legal issues.  What about the countrywide debt?  How much is outstanding, including any quasi debt like TPS? When does it have to be paid off?

 

According to Capital IQ, there is less than $10 billion of Countrywide debt out - $2 billion is due June 2012 and the next $1 billion tranche isn't due until 2016. This includes roughly $2 billion of TPS.

 

Then, how does Whalen come up with $100 billion?  Is there perhaps some quasi debt there?

[bmichaud]

As of June 30, 2008, Countrywide had $86 billion of total debt out including TPS - so not entirely sure where $100B comes from since it hasn't had that much since the acquisition.

 

If you look at page 210 of the annual report (see: http://media.corporate-ir.net/Media_Files/IROL/71/71595/AR2011.pdf), long-term debt is broken down as follows:

 

Bank of America Corporation                        $181.4 billion

Merrill Lynch                                                $104.1

Bank of America N.A. and Other Subs          $14.9

 

Unless Countrywide is somehow included in BAC Corporation, I'm assuming it is included in "Other Subs".

[PlanMaestro]

Then, how does Whalen come up with $100 billion?  Is there perhaps some quasi debt there?

 

Whalen is talking about the private label putbacks (mp3)

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/9/2_Chris_Whalen.html

http://finance.yahoo.com/blogs/daily-ticker/whalen-bofa-survive-file-bankruptcy-202956404.html;_ylt=AiL.4EAWL00tvWy2EnlgXZ27YWsA;_ylu=X3oDMTFjNGoxYjM4BHBvcwM1BHNlYwNGUERhaWx5VGlja2VyQmxvZwRzbGsDd2hhbGVuYm9mYXdp

 

the ones where the settlement is for $8.5 billion (pending on article 77 litigation)and that is probably already reserved

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-newsArticle&ID=1580643&highlight

 

He assumes 100B instead of 8.5B, and that Countrywide isn't ring-fenced with the bankruptcy veil ... particular point of view but it grabs headlines and invitations to the Blodget show.

[twacowfca]

Then, how does Whalen come up with $100 billion?  Is there perhaps some quasi debt there?

 

Whalen is talking about the private label putbacks (mp3)

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/9/2_Chris_Whalen.html

http://finance.yahoo.com/blogs/daily-ticker/whalen-bofa-survive-file-bankruptcy-202956404.html;_ylt=AiL.4EAWL00tvWy2EnlgXZ27YWsA;_ylu=X3oDMTFjNGoxYjM4BHBvcwM1BHNlYwNGUERhaWx5VGlja2VyQmxvZwRzbGsDd2hhbGVuYm9mYXdp

 

the ones where the settlement is for $8.5 billion (pending on article 77 litigation)and that is probably already reserved

http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-newsArticle&ID=1580643&highlight

 

He assumes 100B instead of 8.5B, and that Countrywide isn't ring-fenced with the bankruptcy veil ... particular point of view but it grabs headlines and invitations to the Blodget show.

 

FIRREA precludes the normal, potential ring fencing of the subsidiaries with the bankruptcy veil.  But the Holdco isn't going to have to cough up $86B for the private label obligations if those have already been negotiated down to $8.5B.

 

What about the Holdco debt? It looks like 90%+ of the total debt is in the Holdco.  When does this come due?  Also, the best stress test for insolvency is to see how much a company's debt is discounted in the market.  Is BAC's debt trading below stated value?  Is debt that comes due sooner than later trading at a greater discount?  If so, how much?

[PlanMaestro]

FIRREA precludes the normal, potential ring fencing of the subsidiaries with the bankruptcy veil.  But the Holdco isn't going to have to cough up $86B for the private label obligations if those have already been negotiated down to $8.5B.

FIRREA protects the depositors and the FDIC, not other claimants. In case of a capital deficiency the FDIC follows a standard procedure that I posted in a previous link that "prescribes a specific course of action" and that "strips regulators of much of their supervisory discretion".  That course action for a Group 5 bank, that would be the case here for Countrywide, is to appoint a receiver or conservator within 90 days, and that is what they HAVE to do. After that, I do not see how this other claimants have other resource that put in line behind the depositors and the FDIC that would be the only beneficiaries of the cross guarantee benefits of FIRREA.

 

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

 

There are several examples of how this works that I posted also in a previous link. I am open to other interpretation based on other examples but I had not seen them.

 

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

 

What about the Holdco debt? It looks like 90%+ of the total debt is in the Holdco.  When does this come due?  Also, the best stress test for insolvency is to see how much a company's debt is discounted in the market.  Is BAC's debt trading below stated value?  Is debt that comes due sooner than later trading at a greater discount?  If so, how much?

 

This has been discussed in other threads. Bank of America is swimming in liquidity, with loans to deposits around 70%. Bank of America NOT ONLY CAN pay all their debt, but WANTS to pay all their debt.It is swimming in liquidity.  Debt is expensive when you can fund with deposits a closed to zero interest rate ... Moynihan has been open about this.

[PlanMaestro]

I am stopping myself short of calling Chris Whalen a loony, but he assumes that:

 

1. the 8.5B settlement will fall in litigation.

2. the other parties will score record setting wins in subsequent litigation worth 100B

3. this new litigation will succeed in a short a amount of time,

4. if they win or settle that it will have to be paid instantaneously

5. that FIRREA will not only protect the FDIC but also this new claimants.

 

None of these steps is probable and if anyone fails Bank of America survives w/o dilution. Actually, I think some of these steps are close to impossible. But CW, the person not the bank, goes on television and says not only that it is a possibility, but that is THE most probable scenario and that Bank of America should be restructured NOW.

 

As I said, I am stopping myself of calling CW a loony. He has been right on other issues, like denouncing the FDIC-reserves-running-out headlines. Maybe he has other incentives like starting a new hedge fund.

[ERICOPOLY]

18 months ago Chris Whalen said the top 4 banks are insolvent and should be restructured.

 

http://dailybail.com/home/chris-whalen-we-understand-bank-of-americas-problem-they-are.html

 

[ERICOPOLY]

More tabloid worthy information from Chris Whalen -- this time about Wells Fargo and written a couple of weeks ago:

 

http://www.theburningplatform.com/?p=33943

 

One former Wells banker said to me at the HousingWire REthink conference: “At Wells you do the business first, then figure out the issues later. They are the most aggressive lender in the U.S. and have been for some time.”

 

The only significant business line that Wells can use to support its earnings and balance sheet is real estate lending.

 

Like all of the largest banks, Wells has been dragging its feet on resolving bad assets because delay is the only option.

 

Since the start of the crisis, Wells has made an art form out of failure to disclose, particularly when it comes to the credit loss, doubtful and past-due experience on the bank’s retained loan portfolio and related loss reserves. While Wells’ peers among the largest banks have increased written and oral disclosure regarding loan losses and related data during the past three years, Wells consistently has stonewalled the investment and analyst communities. Most recently, Wells has even defied a subpoena from the SEC, failing to produce documents for a formal investigation regarding possible fraud in the creation of residential mortgage backed securities that the bank sees as “inappropriate.”

 

 

A representative of one of the largest buy-side mortgage conduits in the U.S. told Institutional Risk Analytics that the accounting treatment of “customer relationships” by Wells is allowing the bank to take market share from all other lenders, large and small, but that the medium-term impact on the bank’s balance sheet and earnings could be decidedly negative when the bank eventually is forced to moderate its aggressive sales tactics.

[Uccmal]

Look, there are multiple ways for BAC to address theoretical shortfalls at holdco

 

- issue bonds - they are a regular issuer of tranches ranging from a few hundred million to over a billion

- issue bonds at sub levels

- sell some of CWs MBS tranches

- sell assets at holdco - I recall them selling something in the hundreds of millions last week.

- sell assets at subs

- delay payment of lawsuits through endless appeals and delaying tactics - so far they haven't really done this with management preferring to Clean up rather than delay.  As Brian gets them closer to Tier 1 I expect they will do more of this.

 

My favourite:

Arrange a switcheroo with Fairfax - with IRS approval of course - FFH loans them the money but not really

 

 

[Dorsia1]

Look, there are multiple ways for BAC to address theoretical shortfalls at holdco

 

- issue bonds - they are a regular issuer of tranches ranging from a few hundred million to over a billion

- issue bonds at sub levels

- sell some of CWs MBS tranches

- sell assets at holdco - I recall them selling something in the hundreds of millions last week.

- sell assets at subs

- delay payment of lawsuits through endless appeals and delaying tactics - so far they haven't really done this with management preferring to Clean up rather than delay.  As Brian gets them closer to Tier 1 I expect they will do more of this.

 

My favourite:

Arrange a switcheroo with Fairfax - with IRS approval of course - FFH loans them the money but not really

 

Thanks for this, Uccmal. You always have a very solid way of putting things back into perspective.

[onyx1]

I am stopping myself short of calling Chris Whalen a loony, but he assumes that:

 

1. the 8.5B settlement will fall in litigation.

2. the other parties will record setting wins in subsequent litigation worth 100B

3. this new litigation will succeed in a short a amount of time,

4. if they win or settle that it will have to be paid instantaneously

5. that FIRREA will not only protect the FDIC but also this new claimants.

 

None of these steps is probable and if anyone fails Bank of America survives w/o dilution. Actually, I think some of these steps are close to impossible. But CW, the person not the bank, goes on television and says not only that it is a possibility, but that is THE most probable scenario and that Bank of America should be restructured NOW.

 

As I said, I am stopping myself of calling CW a loony. He has been right on other issues, like denouncing the FDIC-reserves-running-out headlines. Maybe he has other incentives like starting a new hedge fund.

 

Allow me to add a few to your list:

 

6. BAC failed to address this scenario, despite being instructed to do so by the Federal Reserve during the recent stress test:

 

“BHCs will be expected to estimate losses associated with requests by mortgage investors, including both GSEs and private-label securities holders, to repurchase loans deemed to have breached representations and warranties, or with investor litigation that broadly seeks compensation from BHCs for losses. Firms should consider not only how the macro scenarios could impact repurchase losses, but also how a range of legal process outcomes, including worse than expected resolutions of the various contract claims or threatened or pending litigation against the BHC and against various industry participants. Firms should provide appropriate support of the adverse outcomes considered in their analysis.

 

7.  BAC, despite being aware of its likely insolvency, agreed to conspire among management, internal counsel, external counsel & auditors not to disclose this scenario as a risk item in the recent SEC filings.

 

I find the entire scenario loony and exaggerated, but maybe I shouldn’t be surprised since it is comes from a guy who claims "I never pay attention to anything Warren Buffett says or does."

[biaggio]

FWIW agree with thinking here.

 

Allowing BAC to earn its way over time the most likely scenerio as it seems to be the least painful + good for confidence for the economy, financial markets etc.

 

CW scenerio unlikely --can you imagine the financial armegedon. I can t see government allowing that to happen. 

 

I dont think CW has any special insight here- he is suppose to be an expert but is it really possible for anyone to know.

 

What you guys are saying makes more sense to me.

 

Time will tell.

[Rabbitisrich]

 

 

What about the Holdco debt? It looks like 90%+ of the total debt is in the Holdco.  When does this come due?  Also, the best stress test for insolvency is to see how much a company's debt is discounted in the market.  Is BAC's debt trading below stated value?  Is debt that comes due sooner than later trading at a greater discount?  If so, how much?

 

Looking at the debt schedules from the AR and the liquidity at holdco + upstreaming potential (last year $17B, this year $4.5B + statutory net), there is no way that Whalen is talking about debt maturities. He must be referring to a surprise legal development or something similarly abrubt...

 

 

[ERICOPOLY]

Maybe he has other incentives like starting a new hedge fund.

 

Some Bank Stocks Are So Cheap, That Even Christopher Whalen Can't Resist Running A Bank Fund

 

http://articles.businessinsider.com/2011-12-06/wall_street/30480966_1_bank-stocks-bank-fund-institutional-risk-analytics

 

My personal thoughts:  the reason why he continues to suggest that the big 4 banks are zombies is that it gets him on TV.  Getting on TV gets his name out there.  Getting his name out there gets him clients.  Last fall it was the absolute worst time for BofA in terms of public opinion.  So he gets on TV and says it needs to go bankrupt. 

 

He also said last fall that Bank of America doesn't need to close any branches or fire any employees -- that's also the popular thing to say.  Now, do you think that Bank of America, operationally, has absolutely nothing wrong with it as Chris Whalen contends?  Or is Moynihan the wiser man in righting the expense vs revenue equation?  Note that in December of 2010 Whalen said that the banks were in trouble because of their expense vs revenue issue.  He argues that declining NIM and regulation was crushing them -- so as BofA begins to address the expenses to bring them in line with the new revenues, Whalen then shifts his posturing and argues that firing employees and closing branches is not the right approach, but rather it's all about bankruptcy now because of legacy liabilities?  Would the bankruptcy option somehow fix the NIM and regulation? 

 

Whalen has stated that the top four banks are zombies.  That of course includes Wells Fargo.

[txlaw]

Maybe he has other incentives like starting a new hedge fund.

 

Some Bank Stocks Are So Cheap, That Even Christopher Whalen Can't Resist Running A Bank Fund

 

http://articles.businessinsider.com/2011-12-06/wall_street/30480966_1_bank-stocks-bank-fund-institutional-risk-analytics

 

My personal thoughts:  the reason why he continues to suggest that the big 4 banks are zombies is that it gets him on TV.  Getting on TV gets his name out there.  Getting his name out there gets him clients.  Last fall it was the absolute worst time for BofA in terms of public opinion.  So he gets on TV and says it needs to go bankrupt. 

 

He also said last fall that Bank of America doesn't need to close any branches or fire any employees -- that's also the popular thing to say.  Now, do you think that Bank of America, operationally, has absolutely nothing wrong with it as Chris Whalen contends?  Or is Moynihan the wiser man in righting the expense vs revenue equation?  Note that in December of 2010 Whalen said that the banks were in trouble because of their expense vs revenue issue.  He argues that declining NIM and regulation was crushing them -- so as BofA begins to address the expenses to bring them in line with the new revenues, Whalen then shifts his posturing and argues that firing employees and closing branches is not the right approach, but rather it's all about bankruptcy now because of legacy liabilities?  Would the bankruptcy option somehow fix the NIM and regulation? 

 

Whalen has stated that the top four banks are zombies.  That of course includes Wells Fargo.

 

Interesting.  From the article:

 

Christopher Whalen has joined Tagent Capital Partners, where he will be a senior managing director and run an investment fund focused on small and mid-cap banks . . .  “I want to focus on the part of the industry that never dropped out of the ‘A’ category during the crisis,” but hasn’t attracted interest from investors, Mr. Whalen said in an interview.

[ERICOPOLY]

Oh, and I don't just discard people who are bearish.  This other guy is a world-class doofus as well:

 

http://www.thestreet.com/story/10766588/citigroup-bofa-to-sextuple-by-2015.html

 

Assuming the same price-to-book ratio for Bank of America in 2015, Bove believes the bank's shares will be worth $99.37 in 2015, well over six times Monday's closing price of $15.40. Bank of America currently trades at 0.73 times book value.

 

The common thread between Bove and Whalen?  They both know that grandiose and ridiculous claims get you on the news, because news of course is really entertainment.  You have to be entertaining to get invited back on the show.

 

Getting on the show earns you visibility.  Being visible is valuable.

 

Then there is "Bad Boy" Mike Mayo too.  I saw that guy in a photo where he had his sleeves rolled up, arms folded, rippled veins and showing muscles.  I mean, it's completely absurd (he isn't really a big guy, but when you hold a fish you've caught right up to the lens it looks like a trophy).  Works for Dennis Rodman, but this is supposed to be boring financial bank analysts.  Not this persona where lone wolf bad boy analyst takes on the big banks like a fabled giant slayer.

 

That's entertainment.

 

 

 

[PlanMaestro]

Just a reminder of all the recent purchases, that never were really integrated.

http://online.wsj.com/article/SB10001424052970204409004577156881098606546.html#project%3DBOFA011312%26articleTabs%3Dinteractive

 

NationsBank  43B 1998

FleetBoston    47B 2004

MBNA            35B  2005

LaSalle          21B  2007

US Trust          3B  2007

Countrywide    4B  2008

Merril Lynch  19B  2009