Bank of America’s $50 Billion Woes

Bank of America's $50 Billion Woes

The massive Bank of America settlement announced today is something of a drop in the ocean for the beleagored bank, which has lost more than $50 billion since the Charlotte bank bought Countrywide Financial for $2.5 billion, and more losses and legal fees are coming according to reports.

The Bank of America’s slow fall to disaster occurred after former Chief Executive Ken Lewis announced a deal to buy Countrywide Financial in January 2008, calling it a rare chance to become No. 1 in home loans. Instead the bank’s shareholders have spent six-plus years paying for Countrywide’s slipshod lending practices.

The disastrous purchase not only harmed investors but also employees, homeowners and the Bank of America headquarter’s city, which had risen to national prominence as its banks spread across the country in the 1980s and 1990s.

“It was a crippling deal for Bank of America,” said Ken Thomas, a Miami-based banking consultant, “and Bank of America is still in recovery mode because of it.”

Former Bank of America executives say some insiders had concerns about the purchase at the time, but the bank forged ahead. Lewis has said regulators didn’t pressure him to buy Countrywide, but government officials were clearly pleased to check a problem off their list as the financial crisis was emerging.

Since July 1, 2008, when the deal officially closed, the bank’s mortgage business has lost $52.7 billion through the first half of this year, the Observer found. This number – more than double North Carolina’s recently approved annual state budget – includes settlements, payments to investors for soured loans, accounting writedowns, and operating losses and profits. The rest of the bank made about $75 billion over the same period.

The latest Justice Department settlement, which could come within days, would resolve a variety of probes with federal and state authorities, including allegations related to the sale of faulty mortgage-backed bonds. The agreement, not yet finalized, is expected to include roughly $9 billion in cash, plus $7 billion to $8 billion in consumer relief, such as reduced loan balances for struggling mortgage holders.

Bank of America doesn’t disclose the total amount it has set aside for legal reserves, but it has taken $10 billion in litigation expenses in the first half of this year. Some of this has gone toward other settlements, but analyst John McDonald of Sanford C. Bernstein estimates the bank has set aside $5.5 billion for the Justice Department pact. “We believe additional charges could continue to weigh on core earnings going forward,” Paul Miller, a bank analyst with FBR & Co., wrote last month.

It’s not possible to break out exactly how much of the losses in the bank’s mortgage unit came from Countrywide. But the California-based lender was the much larger mortgage company, with about 17 percent market share, compared with Bank of America’s 8 percent, according to Inside Mortgage Finance, an industry publication.

Read more at the Herald Online

 

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