September 14, 2011: The losses from the Bank of America’s mortgage operations are not just vast, they are literally incalculable. Since the start of the fourth quarter of last year the bank has written off more than $30 billion in future provisions, legal settlements and other losses relating to their mortgage exposures, according to a tally by CLSA, a broker. Were that the full extent of the damage, Mr Moynihan’s words would now be received with the bored nods that accompany success. Instead, Bank of America’s shares trade at one-third of book value, reflecting concern that total losses are a long way from being recognised. A brief pop in its share price following the announcement of a $5 billion investment by Warren Buffett on August 25th has quickly.
The bank’s big problem is litigation stemming from America’s mortgage fiasco.
This risk is not unique to BofA but it is unusually severe. The lawsuits fester in three different categories. The first of these, responsible for $12 billion in paid claims and another $18 billion in specific reserves, covers litigation in state courts over mortgages sold to investors with allegedly faulty representations as to their quality. An $8.5 billion settlement announced in June with various investors was supposed to have stanched the bleeding in this area, but the deal has recently appeared to unravel. A second category involves alleged violations of federal underwriting laws that are expected to grind through the courts over many years. The final category, tied to irregularities in foreclosure processes, is currently the subject of negotiations with a number of state attorneys-general.
Based on the total volume of securities involved, BofA could potentially be on the hook for hundreds of billions of dollars, says Chris Whalen of Institutional Risk Analytics, a research firm. Although that kind of havoc will surely not come to pass, the litigation (and the accompanying uncertainty) will certainly weigh on the bank’s performance, draining resources and managerial attention. And the distractions come on top of two other worries: the general slowing of the American economy (which is bad for credit, loan growth and interest-rate spreads) and regulatory changes that will force the bank to increase its equity base.