Two hours into the trading session, the Dow is up 115 points, the S&P up 10, and the Nasdaq up 20. High beta stocks are off and running. This is a POMO day afterall.
Meanwhile, BAC is getting hammered on the threat of mortgage put-backs. Paul Miller at FBR says the amount of pushbacks might be nearly unquantifiable. Stifel Nicholas downgraded BAC this morning with an apologetic tone given it was downgrading one of the four horsemen at a time when the stock is trading below its just-announced TBV (BAC 11.39, -0.40, -3.5%) of 12.91. At some point, BAC is probably a buy for a trade, especially if the selling takes this even a little bit further. We are now at 0.9x TBV. At 10.30, we'd be at 0.8x. How much BV could the mortgages pushed-back actually consume....? No one knows, hence the sell-off. But, TBV is approx $128.673B. The market cap is now $114.74B. So, the market has already essentially sliced off $13.9B. The headline articles suggest BAC would be on the hook for put-backs on securitizations with total value of $46B. So, 30% of the loans in the securitizations being delinquent/fradulent, etc. has already been priced into the stock. I'd caution against trying to catch a falling knife, but at some point this becomes interesting. At 10.30, or at 0.8x TBV, we'd see ~$26B taken off (or 56% of the securitizations' total value).
Disclosures & Disclaimers: This post is intended for informational purposes only and is not a recommendation to buy or sell any security.
The real crux on the putbacks issue is 1) what has BAC reserved for 2) do the plaintiffs in the lawsuit have standing, and proof of material breaches (proof would have to be established loan-by-loan) and 3) what are their realized losses (expected losses cannot justify putback)? Realized losses on subprime holdings are only running at 10%.
ReplyDeleteAccording to Yves Smith the total value of the deal was $47b, but the subset of bad loans owned by investors is $16.5b (as reported by the WSJ). If this is the face value and not the market value of the bad loans, and investors get, generously, half of expected losses, BAC may be looking at a liability of only $1b.
These things will always get overstated in the plaintiff's initial claim. Crucially, they have to prove that LTV was misstated across the board on a loan-by-loan basis. Moynihan stated on the Q3 earnings call that they were geared up to fight. Even then investors could only recover losses which will be a fraction of what they have asked BAC to putback which is a fraction of the $47b initially claimed.
Not being a securities litigator, I have to take these arguments on faith, but I think the trade you suggest bears consideration.
http://www.nakedcapitalism.com/2010/10/more-on-why-the-pimco-blackrock-freddie-ny-fed-letter-to-countrywide-on-putbacks-is-way-overhyped.html
P.S. When BAC self-reports tangible book, they're not counting JVs with Itau Unibanco, Santander, Blackrock etc., or the $18b in MSRs included in "other assets" or the $158b in VIEs net of allowances...right?