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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: E_K_S who wrote (44683)	9/29/2011 7:06:57 PM
From: hardincap	Respond to of 78680

If they are marked 50% above true value shouldn't we be seeing much higher charge offs? They currently stand at 2.5% and are falling consistently. What numbers are you using to make the judgment that they'd be value investments if it fell to $5s? Why isn't it a value investment now?

To: E_K_S who wrote (44683)	9/30/2011 2:26:09 AM
From: Spekulatius	1 Recommendation Read Replies (1) \| Respond to of 78680

>>It looks like those loans that were/are modified have a 20% of going sour again. How does the bank quantify (ie value) a non performing asset when setting amounts in reserve. Is the value based on a percentage of the "original" appraised value? Remember those appraisals are 40%-50% over stated if marked to market. I think their actual "loss" number is higher, perhaps $10B more than they have set aside in reserves. Add that to all the potential loans that could be "Put" back to the bank from Fannie & Freddie.<< The loan loss reserves are supposed to cover the expected losses from NPA assets and those assets that are still performing but are expected to be impaired. If you assume that no new performing assets go into the NPA bucket (not too ridiculous of an assumption in an improving economy because some NPA cure themselves) than in the worst case assuming a recovery rate of zero, loan loss reserves of the same magnitude then NPA always cover the expected losses (recovery rates will be far better than zero). They have special reserves build up for putbacks that I believe do not count towards loan loss reserves (I am not totally sure about that though) and those very likely will not cover all the putbacks. This is the big question mark when betting on BAC - on the one hand the nominal sums are huge, on the other hand every month, loans are expiring or aged enough even if they do go bad, the probably cannot be put back any more. My assumption is that the putbacks have started to fall off for all years but 2007 and 2008 has already sharply reduced nominal volume, so they may get over the hump. But I admit, I could be wrong by a large enough margin that it could render that opinion worthless. SO either make a bet because the risk reward is favorable or buy something else like C or JPM which does not have a putback issue of BAC magnitude. That's all I can honestly say about this.