Thursday, April 19, 2012

Honey, I Shrank the Bank

Proud papa lets some of the kids go.

Less is more, according to Bank of America CEO Brian Moynihan, who is scrambling to return his firm to profitability.  Thanks to the Viagra-laced edifice complex of his predecessors, Ken Lewis and, before that, Hugh McColl, BofA had become Too Big To Succeed.  Moynihan hopes to change that.  During the first three months of 2012, the company closed 51 branches and issued 3,103 pink slips.

This morning's Q1 earnings release has confirmed the shrinkage.  Revenue dropped 17% to $22.3 billion from $26.9 billion in the year-ago quarter.  In particular, the firm is retreating from the home-loan business, where it lost $1.1 billion in the first quarter--tough noogies, but actually less painful than the year-earlier loss of $2.4 billion.  According to a February note from FBR Capital Markets, BofA's share of mortgage originations dropped to 5.6 percent in Q4 2011, down from 10 percent the quarter before and nearly 25 percent in 2007.

BofA cannot exit that business fast enough, as liabilities from its ill-starred acquisition of Countrywide Financial continue to mount.  The firm has already paid out $42 billion to settle Countrywide abuses.  Even so, repurchase claims rose in Q1 from $12.6 billion to $16.1 billion--or to $19.2 billion, depending on which footnotes you follow.  Either way, it was a staggering increase.  A mere $282 million has been reserved for those claims, a sign of surrender.  Bank of America is at the mercy of the courts and, absent that, of the taxpayers.

Pressured by federal regulators, BofA reclassified $1.85 billion worth of home-equity loans as nonperforming.  The feds are concerned that falling home prices (amounting to mark-to-market losses nationwide of almost $7 trillion) have wiped out collateral on many second mortgages (e.g. HELOCs), leaving them as unsecured debt.  Up until now, banks have been carrying some of these high-risk junior mortgages at full value.  But auctions of foreclosed properties rarely leave anything for second-lien holders.  So lenders must now account for the risk of total loss.

Nonperforming second liens surge at Bank of America.

Bank of America had earlier identified $4.7 billion of home-equity loans that stand behind a delinquent first.  So more write-downs may be coming.

If I could redesign Bank of America's website, I would do it like this.  But someone has beaten me to it.

[update, 05-01-12--]

2,000 more pink slips at Bank of America.  WSJ story here.

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