NEWS ANALYSIS
NEW YORK—Mired in a slump that has caused its shares to lose more than 40 percent of its value year-to-date, Bank of America Corp. (BAC) finally caught a break last week.
Warren Buffett’s $5 billion investment in the nation’s biggest bank in assets is a coup for the Charlotte, N.C.-based company, gaining a stamp of approval from the world’s most famous investor.
BAC’s shares got an initial boost from the news last Thursday, but the price was severe. Buffett, through his investment company Berkshire Hathaway, essentially received convertible shares with 6 percent annual dividends, and even greater benefit at redemption. But, any investment from Buffett is costly, and now BAC is squarely looking at putting its past behind it.
Ongoing Challenges
BAC lost nearly $9 billion last quarter, and over the past two years has set aside billions of dollars to pay for delinquent mortgages from its ill-advised 2008 acquisition of Countrywide Financial.
The bank bought Countrywide in early 2008, before the onslaught of the financial crisis, to give it a substantial market share in the residential mortgage business. Countrywide, based in California, had been one of the nation’s biggest originators and servicers of subprime residential mortgages.
But merely three years later, the $4.1 billion acquisition has spelled disaster for its parent company.
BAC recently settled for $8.5 billion with 22 investors, who claimed that Countrywide sold them faulty mortgage-backed securities. The settlement, one of the biggest of its kind, would resolve BAC’s liabilities over 530 mortgage pools and $174 billion in principal balances.
However, some investors have taken the settlement to court, apparently unhappy about the size of the settlement, after having lost money on such mortgage-backed securities. In addition, New York Attorney General Eric Schneiderman earlier this month announced that he also was unhappy with the agreed amounts, and has launched an investigation into the settlement.
Separately, the bank is facing a $10 billion lawsuit from American International Group Inc., the insurance giant that received a massive federal bailout, alleging that BAC, and its subsidiaries Countrywide and Merril Lynch & Co. sold AIG loss-making mortgage-backed securities.
“We estimate that total mortgage underwriting-related losses will reach almost $60 billion and that Bank of America will need to increase its reserves accordingly for such losses,” said investment research firm Morningstar in a research note on Aug. 26.
Next…Looking to Move On
