Hi hardincap -
That was an intriguing article you posted. I thought this quote is quite relevant to a lot of the value investment Buys I make (Note: SVU comes to mind - Great cash flows but more new lows):
"...The other thing that’s required, I should say, is patience, because it’s impossible to time it right. I know you’re going to get some lessons on technical analysis. I’ve tried. It never worked for me. I’ve tried everything. Chicken bones, technical analysis. I just seem to always suffer from, what I could call premature accumulation. I would buy and I would buy too soon. I would buy more, and more the way some people would buy their favorite product on sale at the department store. This requires fortitude, courage, confidence and conviction. And make sure you’re not in denial about what you believe the cash flows of a company to be....".
When discussing their BAC investment there was no mention to the "Mark-to-Market" accounting and when the bank might return to this accounting. It is true that mortgages will turn over on average every 7 years but this particular cycle is not normal. So, if those mortgages have turned over (and were under water) how do they treat the "actual" loss and were these properties reappraised? How is the bank fixing these loans: (1) re-amortizing them over 30 years, lowering interest rates, eating a portion of the loan balance to reflect the actual value of the property, (2) foreclosing; selling property at a loss, (3) providing temporary extensions (ie kick the can down the road).
Therefore, even if the standard 7 year mortgage turnover period passes, there is still a large amount of these sour loans that still need to be written off since they are based on an earlier unrealistic market appraisals. By not having to adjust their loan portfolio to market (ie mark-to-market), the value of their loans are significantly overstated (even if they are performing). To me it's just a "black-box" for BAC.
I agree with Jurgis that the risk to the common share holder is dilution. Buffet was smart to demand a preferred series that would not be impacted by common share dilution. Any recapitalization will wipe out the common shares.
I would be an investor if I heard that the company was doing a work out where new loans were marked-to-market and new appraisals were completed based on current market values. If one could see where they were in the work out of sour loans and/or those that needed to be adjusted based on the current market value, one could have a better feel for how overstated the true value of the loan portfolio is.
With Berkowitz saying that the number of loans they have in the portfolio is too large to manage on a loan by loan basis ( he was comparing to what insurance companies do for determining risk on all the policies they hold in a region) is just foolish. That confirms to me that the bank is just too big. Every loan in their portfolio 10 years or newer needs to be re-appraised. Those that were interest only, liar loans and have equity of 10% or less needs to be re-qualified.
The last time I went through BAC's report(s) I saw nothing along these lines. When I scan my Credit Unions quarterly and annual statements, I know exactly the make up of their mortgage loan portfolio, the outstanding loans vs current market value of their collateralized real estate and the age, type and performance of these loans.
It is true time will eventually make things better and as their extremely large cash flows continue, it's the uncertainty of what their total loan liability is. The pending litigation liability stemming from business they transacted between 2002-2010 and the alleged fraud on applications and the bundled loans sold to third parties (ie Fannie Mae Freddie Mac) adds another level of uncertainty.
Berkowitz could be right in the long term but at the time of the article his cost basis on BAC was $12.00/share. As of the close Friday, Bank of America Corporation Com (NYSE: BAC ) shares were priced at $6.31.
EKS |
