By David S. Hilzenrath
Washington Post Staff Writer
Saturday, January 22, 2011; A08
The toll from the housing crisis could continue to weigh on Bank of America, draining billions of dollars from the company for years to come, the nation's largest bank said Friday.
The bank said it lost $1.2 billion in the fourth quarter of last year, more than six times its loss from the same period in 2009. Perhaps more troubling were the bank's warnings about what might be coming: The company could be forced to pay out as much as $10 billion to resolve some disputes over the toxic mortgages it sold to investors around the globe.
"We would expect resolution of these matters to be a protracted process which could take years to conclude," Chief Financial Officer Charles Noski said in a conference call with analysts and investors.
The company struck a different tone from just two months ago, when chief executive Brian T. Moynihan said the bank was meeting those disputes with "hand-to-hand combat." On Friday, such language was absent. Instead, the bank explained that it was setting far more money aside for the troubles it could be facing ahead.
The bank's earnings included some signs that Bank of America is recovering along with the nation's economy. The soured loans it had issued to businesses and homeowners, for instance, declined by 5 percent from the fall and 9 percent from a year earlier.
Still, the earnings report overall left investors with a deepening concern, said Shannon Stemm, an analyst with the brokerage Edward Jones. They knocked down the company's share price Friday by 2 percent.
Stemm said investors wonder: Is Bank of America "emerging as the bank that's continuing to struggle as opposed to peers who basically seem to be progressing back to normal faster?"
Bank of America was the last of the U.S. banking giants to issue its year-end financial results. These companies continue to contend with fallout from the financial crisis.
Borrowers continue to default on loans. Allegations of robo-signing and other irregularities in foreclosure practices have made it harder for the banks to evict delinquent homeowners, sell the houses and cut their losses. Government investigations loom.
Bank of America dug itself into an especially deep hole by taking over Countrywide Financial, one of the most prolific issuers of problem loans, in 2008. It faces expensive lawsuits from mortgage investors who say the bank misrepresented the quality of the loans when it sold them. Now those investors are trying to get their money back.
In the quarterly financial report it released Friday, Bank of America gave new indications of these potential costs.
It put $1.5 billion in reserve to cover potential judgments or settlements from litigation. That was more than triple the amount the bank set aside for litigation during the third quarter of 2010. It also set aside more than $4 billion to buy back bad mortgages, more than four times the amount it reserved in the third quarter.
In addition, the bank said in the future it could have to pay $7 billion to $10 billion to private claimants - beyond what it has already put in reserve.
Those numbers are the high end of the bank's possible liability, not the probable outcome, Noski said in the conference call.
Some analysts and investors have worried that the bill could be much bigger. The bank did not say how it came up with its estimate, making it hard for investors to make independent assessments.
Analyst David Hilder of Susquehanna Financial Group estimated that the bank is likely to pay less than $5 billion in such future claims.
Though it would bite into Bank of America's earnings, the bank could handily absorb even the upper end of its estimate, Hilder said.
"I would view it as, at most, a minor financial impact - somewhere between a parking ticket and a speeding ticket," Hilder said.
Bank of America announced this month that it took a significant step toward containing the damage, agreeing to pay $2.8 billion to Fannie Mae and Freddie Mac. Those investors are operating as wards of the government, and the payment contributed to the bank's fourth-quarter loss.