Jump to content

Bank of America's real problem was dilution


FCharlie
 Share

Recommended Posts

I'm sure someone will respond by saying Bank of America's real problem was Countrywide, and that's very true, but consider this:

 

Bank of America, from 2009 through today, has recorded net charge offs of almost $100 Billion

 

Meanwhile, over this same time period, Bank of America has recorded a GAAP profit of over $8 billion.

 

The business, Bank of America, has absorbed enormous losses but at the end of the day, it has remained profitable. This $8 billion of profits include huge goodwill write downs.  The real pain to common shareholders comes from the massive dilution of their equity in the business.

 

As it appears the dilution is essentially over, and BAC approaches a point of achieving Basel III well ahead of schedule, the logical next step is a decade of share repurchases. There is no need for any acquisitions, no need for balance sheet growth, and there is a limit on dividends. My hope is that ten years from today, BAC's share count is back to the old, pre-crisis share count, and we are sitting here with a $60-70 book value. 

 

Is this what most on here envision?

 

When things finally begin to improve I'm going to have to constantly remind myself not to sell too early. I made an unfortunate mistake coming out of the 2009 crisis and sold too many companies purchased at dream prices after they had doubled, not holding on for the 300%-400% gains that would have followed. (Domino's Pizza at $6, Cheesecake Factory at $6, International Paper at $7, AutoNation at $7, Domtar at $20) 

Link to comment
Share on other sites

I'm sure someone will respond by saying Bank of America's real problem was Countrywide, and that's very true, but consider this:

 

Bank of America, from 2009 through today, has recorded net charge offs of almost $100 Billion

 

Meanwhile, over this same time period, Bank of America has recorded a GAAP profit of over $8 billion.

 

The business, Bank of America, has absorbed enormous losses but at the end of the day, it has remained profitable. This $8 billion of profits include huge goodwill write downs.  The real pain to common shareholders comes from the massive dilution of their equity in the business.

 

As it appears the dilution is essentially over, and BAC approaches a point of achieving Basel III well ahead of schedule, the logical next step is a decade of share repurchases. There is no need for any acquisitions, no need for balance sheet growth, and there is a limit on dividends. My hope is that ten years from today, BAC's share count is back to the old, pre-crisis share count, and we are sitting here with a $60-70 book value. 

 

Is this what most on here envision?

 

When things finally begin to improve I'm going to have to constantly remind myself not to sell too early. I made an unfortunate mistake coming out of the 2009 crisis and sold too many companies purchased at dream prices after they had doubled, not holding on for the 300%-400% gains that would have followed. (Domino's Pizza at $6, Cheesecake Factory at $6, International Paper at $7, AutoNation at $7, Domtar at $20)

 

 

That's the optimistic projection.  The pessimistic projection is that Basel III type requirements will constrain a lot of their holdings to Sovereign debt with low yield that will limit profits if the economy is stagnant without robust margins on loans.  This includes the potential loss of principal if interest rates increase a lot. 

 

Cheers.  :)

Link to comment
Share on other sites

I'm sure someone will respond by saying Bank of America's real problem was Countrywide, and that's very true, but consider this:

 

Bank of America, from 2009 through today, has recorded net charge offs of almost $100 Billion

 

Meanwhile, over this same time period, Bank of America has recorded a GAAP profit of over $8 billion.

 

The business, Bank of America, has absorbed enormous losses but at the end of the day, it has remained profitable. This $8 billion of profits include huge goodwill write downs.  The real pain to common shareholders comes from the massive dilution of their equity in the business.

 

As it appears the dilution is essentially over, and BAC approaches a point of achieving Basel III well ahead of schedule, the logical next step is a decade of share repurchases. There is no need for any acquisitions, no need for balance sheet growth, and there is a limit on dividends. My hope is that ten years from today, BAC's share count is back to the old, pre-crisis share count, and we are sitting here with a $60-70 book value. 

 

Is this what most on here envision?

 

When things finally begin to improve I'm going to have to constantly remind myself not to sell too early. I made an unfortunate mistake coming out of the 2009 crisis and sold too many companies purchased at dream prices after they had doubled, not holding on for the 300%-400% gains that would have followed. (Domino's Pizza at $6, Cheesecake Factory at $6, International Paper at $7, AutoNation at $7, Domtar at $20)

 

 

That's the optimistic projection.  The pessimistic projection is that Basel III type requirements will constrain a lot of their holdings to Sovereign debt with low yield that will limit profits if the economy is stagnant without robust margins on loans.  This includes the potential loss of principal if interest rates increase a lot. 

 

Cheers.  :)

 

A few weeks ago your pessimistic projection was that they still need to raise more equity, so it feels to me like you are actually getting more bullish.

Link to comment
Share on other sites

 

The pessimistic projection is that Basel III type requirements will constrain a lot of their holdings to Sovereign debt with low yield that will limit profits if the economy is stagnant without robust margins on loans.  This includes the potential loss of principal if interest rates increase a lot. 

 

Cheers.  :)

 

As it relates to US banks, this is a risk I am willing to bear.  There is a wealth of empirical information from the financial crisis of 2008 that can be used to review the reasonableness of the Basel 3 LCR requirements that, as currently written, would require banks to hold large amounts of Sovereign Debt.  For example, US agency MBS are not considered as high quality liquid assets for purposes of the LCR test despite evidence that this market operated with depth and liquidity surpassing all markets except for US Treasuries.  No one can predict the future (especially when it comes to bureaucrats), but the evidence is compelling for those seeking a review of the LCR as currently proposed for 2015 under Basel 3.

 

 

More detail here:

 

 

http://www.theclearinghouse.org/index.html?f=073043

Link to comment
Share on other sites

I'm sure someone will respond by saying Bank of America's real problem was Countrywide, and that's very true, but consider this:

 

Bank of America, from 2009 through today, has recorded net charge offs of almost $100 Billion

 

Meanwhile, over this same time period, Bank of America has recorded a GAAP profit of over $8 billion.

 

The business, Bank of America, has absorbed enormous losses but at the end of the day, it has remained profitable. This $8 billion of profits include huge goodwill write downs.  The real pain to common shareholders comes from the massive dilution of their equity in the business.

 

As it appears the dilution is essentially over, and BAC approaches a point of achieving Basel III well ahead of schedule, the logical next step is a decade of share repurchases. There is no need for any acquisitions, no need for balance sheet growth, and there is a limit on dividends. My hope is that ten years from today, BAC's share count is back to the old, pre-crisis share count, and we are sitting here with a $60-70 book value. 

 

Is this what most on here envision?

 

When things finally begin to improve I'm going to have to constantly remind myself not to sell too early. I made an unfortunate mistake coming out of the 2009 crisis and sold too many companies purchased at dream prices after they had doubled, not holding on for the 300%-400% gains that would have followed. (Domino's Pizza at $6, Cheesecake Factory at $6, International Paper at $7, AutoNation at $7, Domtar at $20)

 

 

That's the optimistic projection.  The pessimistic projection is that Basel III type requirements will constrain a lot of their holdings to Sovereign debt with low yield that will limit profits if the economy is stagnant without robust margins on loans.  This includes the potential loss of principal if interest rates increase a lot. 

 

Cheers.  :)

 

A few weeks ago your pessimistic projection was that they still need to raise more equity, so it feels to me like you are actually getting more bullish.

 

 

Actually, I'm a optimist.  I do think, however, that BAC and many other TBTF banks could take a lot longer to work out than many assume because the world is in a super credit cycle crunch.  There is no way out other than stagnation, default, or inflation ( default by a thousand cuts ).  For the US, my bet is stagnation followed by stagflation.  That's more optimistic than what Europe may experience.

 

:)

Link to comment
Share on other sites

 

 

That's the optimistic projection.  The pessimistic projection is that Basel III type requirements will constrain a lot of their holdings to Sovereign debt with low yield that will limit profits if the economy is stagnant without robust margins on loans.  This includes the potential loss of principal if interest rates increase a lot. 

 

Cheers.  :)

 

I suspect that such checklist banking motivated Dimon's unfortunate "Basel III is unamerican" comments. It just comes down to "by how much?" and "compared to what price?"

Link to comment
Share on other sites

I'm sure someone will respond by saying Bank of America's real problem was Countrywide, and that's very true, but consider this:

 

Bank of America, from 2009 through today, has recorded net charge offs of almost $100 Billion

 

Meanwhile, over this same time period, Bank of America has recorded a GAAP profit of over $8 billion.

 

The business, Bank of America, has absorbed enormous losses but at the end of the day, it has remained profitable. This $8 billion of profits include huge goodwill write downs.  The real pain to common shareholders comes from the massive dilution of their equity in the business.

 

As it appears the dilution is essentially over, and BAC approaches a point of achieving Basel III well ahead of schedule, the logical next step is a decade of share repurchases. There is no need for any acquisitions, no need for balance sheet growth, and there is a limit on dividends. My hope is that ten years from today, BAC's share count is back to the old, pre-crisis share count, and we are sitting here with a $60-70 book value. 

 

Is this what most on here envision?

 

When things finally begin to improve I'm going to have to constantly remind myself not to sell too early. I made an unfortunate mistake coming out of the 2009 crisis and sold too many companies purchased at dream prices after they had doubled, not holding on for the 300%-400% gains that would have followed. (Domino's Pizza at $6, Cheesecake Factory at $6, International Paper at $7, AutoNation at $7, Domtar at $20)

 

 

That's the optimistic projection.  The pessimistic projection is that Basel III type requirements will constrain a lot of their holdings to Sovereign debt with low yield that will limit profits if the economy is stagnant without robust margins on loans.  This includes the potential loss of principal if interest rates increase a lot. 

 

Cheers.  :)

 

A few weeks ago your pessimistic projection was that they still need to raise more equity, so it feels to me like you are actually getting more bullish.

 

 

Actually, I'm a optimist.  I do think, however, that BAC and many other TBTF banks could take a lot longer to work out than many assume because the world is in a super credit cycle crunch.  There is no way out other than stagnation, default, or inflation ( default by a thousand cuts ).  For the US, my bet is stagnation followed by stagflation.  That's more optimistic than what Europe may experience.

 

:)

 

I just think that if the stock stays at $7 and they keep on earning $1 per share (the falling expenses get eaten up by negative revenue developments), hey, 14.5% isn't a bad earnings yield.  Fine, torture me with beautiful women wielding feather dusters.

 

Yet the future I think will be better than that. 

Link to comment
Share on other sites

I'm sure someone will respond by saying Bank of America's real problem was Countrywide, and that's very true, but consider this:

 

Bank of America, from 2009 through today, has recorded net charge offs of almost $100 Billion

 

Meanwhile, over this same time period, Bank of America has recorded a GAAP profit of over $8 billion.

 

The business, Bank of America, has absorbed enormous losses but at the end of the day, it has remained profitable. This $8 billion of profits include huge goodwill write downs.  The real pain to common shareholders comes from the massive dilution of their equity in the business.

 

As it appears the dilution is essentially over, and BAC approaches a point of achieving Basel III well ahead of schedule, the logical next step is a decade of share repurchases. There is no need for any acquisitions, no need for balance sheet growth, and there is a limit on dividends. My hope is that ten years from today, BAC's share count is back to the old, pre-crisis share count, and we are sitting here with a $60-70 book value. 

 

Is this what most on here envision?

 

When things finally begin to improve I'm going to have to constantly remind myself not to sell too early. I made an unfortunate mistake coming out of the 2009 crisis and sold too many companies purchased at dream prices after they had doubled, not holding on for the 300%-400% gains that would have followed. (Domino's Pizza at $6, Cheesecake Factory at $6, International Paper at $7, AutoNation at $7, Domtar at $20)

 

Price is what you pay and value is what you get. Repurchases only make sense if done at the right price. In this case value is dictated by book value and it will be tough to grow that in a deflationary world. Book value /share? Now that is another matter. Brian has proved himself as an astute operator, but how good a capital allocator is he? I like what he did with the reduction of debt and Trups, but will he have the discipline and commons sense to step on the gas with buybacks and cut dividends when it is below book and let up as the price approaches and exceeds book value in which case he can increase the dividend? Probability is low, but not impossible. However, it will be the distinguishing factor; is he being outstanding or brilliant? Most probably he will just have to settle for outstanding

 

Read this...http://www.lmcm.com/908178.pdf

 

 

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...