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CHARLOTTE, N.C./NEW YORK (Reuters)-Bank of America Corp. said it expects to take more than 20 billion dollars in expenses after settling with mortgage bond investors, causing a loss in the second quarter.
The sum, which includes a settlement of $ 8.5 billion, removes a question which had been hovering over the Bank from October and shares of Bank of America.
"Investors now begin attaching a number of these unknowns and what it will cost the Bank. With the stroke of a pen, they tackled a big chunk of these problems, "said Paul Miller, a banking analyst at FBR Capital Markets.
Chief Executive Brian Moynihan is working hard to move beyond the mortgage crisis, and this settlement is the last step in this process.
But large amounts of dollar-linked settlement and other efforts to clean up mortgage bank exposure in recent months could weigh on the Bank's capital levels, as most banks are looking to Boost capital and return more money to shareholders.
The Bank was hit hard by toxic mortgages after Ken Lewis, CEO of Bank of America bought the mortgage lender Countrywide Financial in 2008, just as the housing market bubble burst.
Other banks such as JPMorgan Chase and Wells Fargo & Co. & Co, could now face the pressure to settle similar charges and can rise to new legal action, analysts said.
A group of 22 investors, including financial management of BlackRock, claimed that the bonds and purchased by Countrywide Financial were filled with mortgages that should never sold. Bank of America bought Countrywide, once the largest U.S. mortgage lender, in 2008.
Bank of America said that, excluding items such as the settlement, second-quarter earnings could top the average Wall Street estimate.
CHEVY VEGA
The settlement is the third in six months for BofA, following similar deals with investors in Government-backed mortgages Fannie Mae and Freddie Mac and the insurer assured guaranty Ltd.
In January, the Bank announced plans to settle down with Fannie and Freddie to 2.8 billion dollars. In April, BofA divulged a settlement of $ 1.6 billion of insured with guaranty.
Last fall, CEO Moynihan said that the Bank would fight any such repurchase requests. He described the talks with investors on credits as "combat" and said some investors were looking for a better deal through repurchases.
Their attitude, Moynihan said, "I bought a Chevy Vega, but I want it to be a Mercedes".
"We're going to protect shareholders against that," he said during a conference call the company's third quarter earnings.
But Moynihan struck a different tone on Wednesday, saying that the company was trying to put the repurchase woes behind it in terms that are favorable to shareholders BofA.
"Our task is to eliminate risks to allow this company to go forward," he said, rejecting suggestions by analysts that the Bank did not put a fight in the process of settlement.
The dispute of repo with investors began last fall, when a group of prominent mortgage securities owners threatened to sue over toxic mortgages.
In December, the two sides has prevented a court case by agreeing to settlement talks, which have continued since then.
But the deal comes at a price for BofA. FBR analyst Miller said that the settlement leaves little margin for error as the Bank works to meet the new capital requirements.
Other analysts are less interested. Marty Mosby of the Guggenheim securities said that the Bank has 67 billion dollars in excess capital under current rules--and 26 billion under new rules proposed industry.
During a conference call announcing the settlement, BofA Chief Financial Officer Bruce Thompson said the Bank may replace the capital gains through the next two quarters.
Investors largely welcomed the settlement, as the shares rose 3 percent to $ 11.14 in late afternoon trading.
"The Bank must exit the litigation and back into the banking business," said Greg Donaldson, founder of Evansville, Indiana-based Donaldson Capital Management, which owns shares of BofA. Donaldson, said the settlement was the best move that over the past two years had seen from the shore.
Bank of America said that it expects to post a loss of 88 cents to 93 cents per share for the second quarter.
Excluding special items, expects earnings of 28 cents to 33 cents per share. Analysts ' average forecast was 28 cents, according to Thomson Reuters I/B/E/s.
SIX OR SEVEN YEARS
The Bank said charges would include the installation of 8.5 billion dollars with bond investors, 5.5 billion to cover payments provided to other mortgage bond investors and 6.4 billion in other costs related to mortgages.
Separately, BofA said he would have registered a gain of 2.5 billion dollars in the quarter from the sale of insurance Balboa and a piece of his remaining share of BlackRock.
CFO Thompson also said during a conference call with analysts that sales and trading results were higher in the second quarter from a year ago, but less than in the first quarter of 2011.
The settlement must still be approved in court, and small investors is not part of the initial agreement may contest it.
A lawyer for the Group Investor said the agreement was good for all investors. The settlement will be shared among all securities investors, institutional investors and 22 will not receive special benefits, Kathy Patrick Gibbs, a lawyer in & Bruns LLP, said in an interview with Reuters legal blog "on the case".
"I have a hard time seeing how someone could recover most of this in six or seven years of litigation," said Patrick.
Patrick said that Bank of New York Mellon-the trustee for the mortgage-backed securities has played a crucial role in the settlement.
Investors argued that mortgages packed in their bonds do not meet their specifications and that Bank of America, which collects the payments on loans, was not doing enough to maximize collections. Part of the settlement includes improvements to collect payments, known as maintenance.
"This settlement is likely to encourage lawyers to other actor to go after other banks and look for similarities in their securitisation, said Nancy Bush, a veteran analyst of the Bank.
BofA is still negotiating with a group of State and federal regulatory authorities-including a coalition of all 50 state attorneys general over charges the industry precluded improperly the delinquent borrowers.
(Reporting by Joe Rauch and David Henry, additional reporting by Brenton Cordeiro in Bangalore and Lauren Tara LaCapra and Dan Wilchins in New York; Editing by Lisa Von Ahn, John Wallace, Gary Hill)
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