First off, anybody who doubt the numbers i'm about to give can go to the following link and listen for him/herself:
http : // www . cnbc . com /id/30008191
Before I start talking about M2M, some interesting numbers from the interview:
Before 2006 (boom-time), Countrywide, Merrill and BofA earned the following:
Countrywide: $2-3 billion/year
Merrill: $4-7 Billion/year
BofA: $18-21 Billion/year
Total: ~$30 billion/year
Total BAC shares: 6 billion
Earnings per share: $5
10X: $50 per share stock price
Even Joe Kernen, the interviewer, was about to say that BAC at $7/share = 45 billion market cap, is "ridi"(culous)
Now, back to M2M. In the interview, when he was talking to Joe Kernen, he mentioned that about $700 billion out of $2.4 trillion assets are M2M ("marked severely")...that is 30% of total assets. Why did he later in the interview, with Carl Quintanilla, downplay the effects of the M2M changes??? Am I missing something here???
I really think he is downplaying in order to not bring too much attention to it. Otherwise there might be major opposition to it. That's just my opinion.
Here is my take:
- The FASB did not make the changes to M2M to retroactively apply to the 1Q09. Instead it will apply starting with the 2Q09. I guess that mean we will need to look at the forward quidance for 2Q09 in the 1Q09 earning conference call. Hence the financials did not rally much today.
- As for Lewis (and Citibank) downplaying the effect of the changes to M2M, they are trying to give the perception that any future earnings are actuals and will not be inflated because of the M2M changes. If they were to say that M2M means a 20% upside in earnings for the future quarters then it will play right into all the critics hands that its all accounting smoke and mirrors.
- The main benefit of the M2M changes is not the ability to writeup the depressed assets for a paper profit and thus boosting the earning. The main benefit is that it will dramatically reduce the chance of future big writedowns (if the economy worsens) as there is more flexibility in valuations. Lets face it, BAC's current valuation is based on the anticipation the the economy will worsens and BAC will have much more large writedowns of assets...There is nothing "retroactive" about this so the critics can not say that we are changing the rule in the middle of the game. So if we remove this risk, the case for BAC not being around in the future (or significant dilution) is taken off the table. So either way, BAC will benefits.
1. If the economy does not get worst, BAC will not have to writedown much and will keep most of its $45B+ (before tax and asset writedowns earnings).
2. If the economy does get worst, then the change in M2M will help reduce the writedowns and BAC still be able to earn its way out of the crisis.
My take is that the ruling says they can only go back to Q1 thus what ever they wrote off at BAC, Mer or Country prior to that (100's of billions) is still on the books at the old M2M rules..These are assets that can be sold in the new PPiP program at maybe $.60 cents on the dollar that are probably marked at $.30, add to that they have been a huge buyer of these assets (Billions more)in Q1 = One hell of a huge supprise at earnings in Q1 and beyond...
Thanks for clearing things up for me. So because M2M does not apply to previous writedowns, Lewis is basically saying that BAC's current assets are correctly priced and M2M changes does not make much of a difference. This is still very good news! It shows that BAC is in very stable position and all the writedowns have already been done.
Because M2M or any other rules have no effect on real earning. Lewis is concerns with real profit and real performance.
Those number he quoted are after tax and doesn't not take into account the new M2M rule.
If Lewis wanted to pump he would have quotes the profit before tax and pump it up another 20% with M2Model.
All of the bank CEO have been working hard to lower expectation going into earning season.
I watched the interview too; he was quick to point out that BAC was profitable last year, while other banks (namely C) lost tens of billions of dollars last year.
Lewis focused on the "power of the earnings machine", and not about quick fixes like changes to M2M. He could be sandbagging a little howerver, going into earnings.
WFC reports on 4/13. This should give good insight into BAC earnings on 4/20.
Either he is trying to convince people that it's not going to change things so drastically that banks will inflate another bubble
OR more likely (once again my opinion)
That the assets are marked to market very efficiently in that only the truly toxic assets are written down as toxic. I know the bulk of the problem is that the belief is this is not the case, but I would not be surprised if a larger portion of assets than we believe are valued appropriately.
btw: 5 star post...The type of thread that makes sifting through the garbage on these boards worthwhile
It is my understanding from reading an article on-line that M-M will affect the 2Q results... not the 1Q ones. That is why so many Bankers including Lewis where cool about the change.