Bank of America: Probably Still Screwed

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Brian Moynihan looked and sounded confident this morning as he closed out his first year as President and CEO of Bank of America.

This is quite a feat considering that Bank of America [BAC 14.25 -0.29 (-1.99%) ] posted a fourth-quarter net loss of $1.24 billion, or 16 cents a share. Analysts had expected the bank to earn 14 cents a share.

Revenue, which analysts had predicted would come in at $25 billion, was down 11% to just $22.7 billion. The $3 billion mortgage repurchase provision Bank of America announced just 3 weeks ago has grown to $4.1 billion. The bank took an additional $2 billion charge on the declining value of Countrywide.

Bank of America is trying to sell the market on the idea that last quarter—in fact all of 2010—saw a close to its troubles.

“Last year was a necessary repair and rebuilding year," Moynihan said. "Our results reflect the progress we are making at putting legacy—primarily mortgage-related-issues behind us.”

On CNBC’s Squawk Box, Moynihan said that the mortgage-related charges “won’t be recurring.” He even said that the bank would like to start raise its dividend in the second half of 2011.

The bank put an upward number of $10 billion on mortgage repurchase liability, but noted that theoretically the number could be as low as zero.

The “we put that behind us” line seems to be working. DealBook said the losses underscore “the still lingering effects of the mortgage mess.” Any number of other stories relate the losses to the acquisition of Countrywide and those “legacy” loans from 2005-2008, the worst years of the housing bubble.

I’m not so sure the problems at Bank of America are all in the past. Let’s focus on Bank of America’s mortgage lending. Now everyone knows the old story line about mortgages that goes like this: following the credit crunch of 2008, mortgage lending was much tighter, underwriting standards much better, and mortgage quality much higher.

The problem is that there is very little evidence to support this. In fact, we have lots of anecdotal evidence that the mortgage pool of 2009 might be nearly as toxic as those from the worst years of the housing bubble.

Let’s run through some data points on 2009:

* The mortgage volume was GIGANTIC. Around $2 trillion of home loans were made in 2009, the majority of them by the largest banks. That’s not really that far behind 2007’s volume of $2.4 trillion.
* Bank of America was the second largest mortgage lender in 2009, behind Wells Fargo. Its volume was up 116% over the previous year. Meanwhile, Citigroup and JP Morgan were pulling back, allowing the size of their mortgage business to shrink.
* Freddie Mac recently conducted a review of a sampling mortgages sold to it by Citigroup, and discovered that mortgages in the sample from 2009 had a 32% defect rate. It’s highly likely that other banks, including Bank of America, had similarly flawed mortgage processes in 2009.
* The recent robo-signing scandal has demonstrated that banks had pitiful internal controls over the foreclosure process as late as October of 2010. There’s good reason to suspect that the mortgage origination and purchase process is still broken too.
* The government intervened heavily in the housing market by putting in place a home buyer tax credit that allowed some buyers to pay for their downpayments with the tax credit. Essentially, some of these people put no money into their houses. We have no good estimate about how large this problem might be.
* The growth of the balance sheets of the FHA, Fannie, and Freddie took a lot of the immediate risk out of lending—risk that could return if the government mortgage companies start demanding that banks repurchase loans or cancelling insurance.

So far, the mortgages from 2009 have been performing well. But they are only one year old—and during much of that year home prices were appreciating. If home prices dip again, many of these borrowers will find themselves with declining equity and increasing reasons to default. Legal backlash against foreclosures has made it possible for many homeowners to stay in their homes for a very, very long time after they stop paying.

In short, we may soon discover that the home loans made in 2009 were far worse than is currently appreciated. And Bank of America was the second biggest lender in that market. The “lingering” mortgage mess may wind up lingering a lot longer than anyone thinks.

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http://www.cnbc.com/id/41195932

Before Business Leaders, Bernanke Discusses Unemployment’s Toll on Americans

Ben Bernanke, right, the Fed chairman, with I.B.M.'s chief executive, Samuel Palmisano, in Ohio.

COLUMBUS, Ohio — The Federal Reserve chairman, Ben S. Bernanke, found some respite on Tuesday from the second-guessing the central bank has faced since it announced a $600 billion effort to stimulate the slow recovery.

During a 75-minute discussion here with five business leaders, including the chief executives of I.B.M. and Ford Motor as well as the founder of a local chain of ice cream stores, inflation and monetary policy were not even mentioned, much less debated.

Mr. Bernanke did, however, emphasize the toll high unemployment was taking on families and on the share of the unemployed — more than 40 percent — who have been jobless for at least six months.

“At the pace of growth that we’re seeing now, we’re not growing fast enough to materially reduce the unemployment rate,” he said. The economy needs to grow at an annualized rate of 2 to 2.5 percent just to accommodate new workers coming into the labor force, he said. Mr. Bernanke has made this point repeatedly this year.

At 9.6 percent, the unemployment rate is about where it was when the recession officially ended in June 2009, Mr. Bernanke said, and only about a million of the 8.5 million jobs lost since the peak of the last economic expansion have been restored.

“Part of the barrier to faster growth and recovery is confidence in households that they will be financially secure and that they can make purchases and take chances in changing careers and changing locations,” Mr. Bernanke said. “With unemployment so high, that confidence is hard to come by.”

The discussion, organized by the Federal Reserve Bank of Cleveland and held at the Fisher College of Business at Ohio State University, was part of an effort by Mr. Bernanke to reach out more.

“We spend a lot of time, of course, looking at data, sitting in Washington, looking at the screen, but there’s only so much you can learn from that,” he said.

Sandra Pianalto, the president of the Cleveland Fed, who moderated the discussion, referred obliquely to the firestorm the Fed has faced in recent weeks. “Through my interactions with Ben, I’ve learned that extreme circumstances often require very creative and aggressive policy responses, and that the right decisions sometimes aren’t the most popular decisions,” she said.

While none of the executives criticized the Fed, Samuel J. Palmisano, the chief executive of I.B.M., said that uncertainty, particularly over regulations, was holding back businesses, not financial constraints.

“Clearly, there’s tons of liquidity, as you know,” he told Mr. Bernanke, who was seated to his left. “There’s probably more than we could consume. It’s not a credit issue. It’s not the financial system or a banking issue. I think at the end of the day it’s clarity.”

But two of the three local business owners on the panel said financial conditions were still tight. “Credit is much more tight today than it was in past years,” said Dwight E. Smith, founder of Sophisticated Systems, a provider of information technology services.

Curtis J. Moody, co-founder of Moody Nolan Architects, said, “The lines of credits are more difficult to get, and they’re lower.”

The business leaders agreed that the partisan climate in Washington was not helping matters. “Exports aren’t partisan, competitive tax policies aren’t partisan,” Mr. Palmisano said. “Economic expansion, job creation, isn’t political at the end of the day.”

Alan R. Mulally, the chief executive of Ford, said the government needed “a laser focus on creating an environment where businesses can grow.” He said that “currencies need to be set by the market” and “not manipulated,” and added, “We need to have trade agreements that actually allow us to export.”

That appeared to be a reference to a free trade agreement with South Korea that was negotiated by the Bush administration and is opposed by Ford. The Obama administration wants to complete the deal and submit it to Congress, but negotiations with South Korea have become stuck over restrictions on American auto and beef exports.

Mr. Bernanke said he took away from the discussion the need for clarity on regulatory, trade and fiscal matters. He also emphasized the importance of government support for technological innovation and the need to improve public education, community colleges and work force training.

Several M.B.A. students in the audience said that they had hoped Mr. Bernanke would discuss the Fed’s decision to buy bonds to reduce long-term interest rates, a topic they had debated in class. The students were generally skeptical about the strategy’s effectiveness.

“If you inflate the economy without doing anything about growth, you’re just printing money,” said one of the students, Jyotisko Sinha, 27.

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http://www.nytimes.com/2010/12/01/business/economy/01fed.html?partner=rss&emc=rss