Tuesday, April 5, 2011

Bank of America Prodded (Again) by Regulators

BofA CEO Brian Moynihan tries to contain the damage.

Yesterday brought to light correspondence between the Securities and Exchange Commission and Bank of America regarding the latter's level of disclosure to investors of potential risks arising from defective home-mortgage loans made by the company in the go-go aughts. After reviewing the company's 10-K filing for 2009 and all of its 10-Q's for 2010, the SEC suggested in a series of letters that BofA was underestimating its exposure to possible "putbacks" and that it needed to sharpen its pencil in future filings. In January the company said that resolving the disputes might cost another $7 to $10 billion. Some industry analysts put the liabilities in the tens of billions.

Excerpt from an SEC letter to BofA:

we [staff at the SEC] note that for all recent historical periods, you [Bank of America] have increased the amount of the repurchase obligation for probable losses, including specifically for the GSEs, and that your chief executive officer [Moynihan] has made remarks in your third quarter conference call about the level of “normalized” expense for this obligation. Based on these factors, it would appear that there is a reasonable possibility that there will be losses in excess of the amounts accrued and that you have the ability to estimate amount, at least for some of your counterparties. Please tell us and revise your disclosure in future filings to provide the range of reasonably possible losses for all counterparties for which this disclosure is possible. [emphasis added]

In its response, BofA pleads the Fifth:

We [Bank of America] have reviewed our disclosure regarding the aggregate range of possible losses in excess of the accrued liability (if any) related to those matters where an estimate is possible. In particular, we have considered, as requested by the Staff, what additional information could be provided that would further enhance the understandability of the quantified information provided. We believe our existing disclosure appropriately addresses the requirements of applicable accounting and disclosure rules. We remain concerned that providing information in certain matters can be prejudicial to existing litigation. [emphasis added]

CEO Brain Moynihan brushed off the regulator's concerns when he boldly predicted on March 8 a return to "normalized" pre-tax earnings of $35 to $40 billion a year, possibly as soon as 2013. Moynihan's boast goosed his company's stock price by almost 5% on the day he made it (notice the second candlestick from the left in the chart below). But some analysts are skeptical. The stock has since given back 10%:

Will the bank ever see "normal" again? Patiently waiting to find out, the Maine Public Employees Retirement System continues to hold 2.5 million shares. I suggest that MainePERS portfolio managers review BofA's 2010 10-K, filed with the SEC in late February. Pay particular attention to pages 8-19, cataloging all the risks plaguing the company, as well as to pages 33-35, where management discusses risks stemming from its failing home-mortgage business. Then tell me again why we should be owning this company.

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