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BofA $3B write-down adds to credit angst
2007-11-13
Bank of America Corp. said Tuesday it will take a $3 billion debt-related write-down in the fourth quarter and warned its losses could grow, adding to fears the nation's housing and mortgage-lending slump might exact a greater toll than in the wretched third quarter -- when industrywide write-downs topped $40 billion. The Charlotte-based bank said it will also spend about $600 million to support a group of its money market funds because of "uncertainty around the value" of the funds' investments. Of specific concern are the funds' holdings in structured investment vehicles, which use borrowed money to make risky but potentially high-yielding investments. "These are not normal times," said Bank of America chief financial officer Joe Price, who added the bank is also setting aside more money for potential losses it considers "manageable." Despite the announcement, Bank of America shares rose $2.29, or 5.2 percent, to $46.27 Tuesday. Investors were likely heartened by Price's comments about Bank of America's investment in China Construction Bank, which he said had posted a gain on paper of more than $30 billion. The company paid $3 billion in 2005 for an 8.5 percent stake in the Chinese bank. Price also said Bank of America expects a $1.4 billion pretax gain in the fourth quarter from the sale of Marsico Capital Management, which it announced in June. So far, at least six companies have said they expect mortgage-related write-downs in the fourth quarter, totaling nearly $23 billion -- including a write-down of up to $6 billion at Morgan Stanley. More announcements are expected, since more than a dozen companies who had third-quarter write-downs have yet to say if they'll post additional markdowns in the year-ending period. The overall industry total will eclipse the $44 billion in third quarter losses if those announcements follow the pattern of the nation's two largest banks, Bank of America and New York's Citigroup Inc., which has said it will write down as much as $11 billion. Their fourth quarter write-downs are nearly double those posted in the third quarter. In all, major banks and brokers could record more than $50 billion in second-half charges, Deutsche Bank analyst Mike Mayo estimated last week in a note to investors. Many of the losses are related to collateralized debt obligations, complex instruments that combine slices of different kind of risk and are often backed in part by subprime mortgages -- loans given to customers with poor credit history -- and other loans. While Bank of America does not directly offer subprime loans, as defaults in such loans have risen, the value of the CDOs has plummeted. Price said Bank of America has about $11.7 billion in subprime exposure in its CDOs -- $9.8 billion in liquidity support and $1.9 billion in cash positions. "There is complexity and difficulty in estimating the value of these positions," Price said. "I might note that while we have classified these as principally supported by underlying subprime exposure, they do contain other asset classes in the collateral mix." Last month, Bank of America reported a 32 percent drop in third-quarter profit, as trading losses and write-downs on a wide variety of loans offset solid revenue growth in most businesses. Soon after, chief executive Ken Lewis announced 3,000 job cuts and ordered a strategic review of the corporate and investment banking unit that should be completed by early 2008. Price said Tuesday that Bank of America does not intend to update its $3 billion write-down estimate prior to the announcement of fourth quarter results in early January. Price spoke at an investor conference in New York, along with executives from several other financial service companies. Goldman Sachs Group Inc. Chief Executive Lloyd Blankfein said his Wall Street investment bank, which posted $2.4 billion in third-quarter write-downs, didn't expect significant asset write-downs in the fourth quarter. Along with Bank of America, JPMorgan Chase & Co. said in a filing with the Securities and Exchange Commission last week that its fourth-quarter results would suffer. JPMorgan wrote down $2.45 billion in the third-quarter and while the nation's third biggest bank hasn't yet come forward with a fourth quarter number, Chief Executive Jamie Dimon said Tuesday "we think we're fine" as he discussed the company's subprime and CDO exposures. Last week, Charlotte-based Wachovia Corp. marked down the value of its loan-backed securities by about $1.1 billion. Wachovia's general bank chief Ben Jenkins will present at the conference on Wednesday.
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