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Wednesday, January 21, 2009

Bank of America Goes on Offense

As posted by: Wall Street Journal

Bank of America Corp. reported a fourth-quarter loss of $1.79 billion Friday and went on the offensive to answer critics and shore up support for the giant Charlotte, N.C., lender during a time of crisis.

The loss, the first for Bank of America since its predecessor NCNB Corp. posted a loss in 1991, was down from a net income of $268 million a year ago. It came on the same day details emerged of a new agreement with the U.S. that provides Bank of America with $20 billion in additional federal aid and loss protections on $118 billion in toxic assets.

Bank of America maintains it went back to the government for more support because of larger-than-expected fourth-quarter losses at Merrill Lynch and that the problems came to light after shareholders approved the Bank of America-Merrill combination on Dec. 5. But 25% of the protected asset pool belonged to Bank of America, Chief Financial Officer Joe Price said Friday, a signal that the problems weren't tied strictly to Merrill's disintegration.

The nation's largest bank by assets continues to be weighed down by rising credit costs linked to the economic downturn and an array of problems confronting U.S. borrowers. It set aside $8.54 billion for bad loans in the fourth quarter, up from $3.31 billion a year earlier. Loans written off as unpaid nearly tripled, to $5.54 billion.

It also reported write-downs and trading losses in its capital-markets business, including losses on collateralized debt obligations of $1.7 billion and write-downs on commercial mortgage-backed securities of $853 million.

Investors sent the stock down 14% Friday, to $7.18, undermining the bank's effort to shed the best light on its situation by rushing out the release of its earnings earlier than expected and issuing a memo Thursday to employees titled "Bank of America Remains Strong." Shares fell 18% Thursday.

Chief Executive Kenneth Lewis "has very little credibility with the investor public right now," said Paul Miller, analyst with Friedman Billings Ramsey Group Inc. in Arlington, Va.

Mr. Lewis's credibility among employees may also be suffering. Many are angry not only at how the losses were handled but also that just last week they were issued compensation in the form of shares worth $14.33 apiece, said people familiar with the situation. Several employees questioned how the company could have issued the shares in light of the past week's news, these people said. Bank of America declined to comment.

"While these earnings and these businesses in some cases are substantially lower than earnings in normal times, they're still profitable, even with the significant increases in credit costs, lower customer activity and other market headwinds." --Ken Lewis, Bank of America CEO
Read the full transcript of Bank of America's conference call, provided by Thomson StreetEvents (www.streetevents.com). (Adobe Acrobat Required.).

Executives at both Bank of America and Merrill have indicated the losses at Merrill ballooned in mid-December, leading to a meeting between Mr. Lewis and Treasury Secretary Henry Paulson on Dec. 17. However, the market for various credit-related products began to deteriorate in mid-November, leaving many Merrill insiders to ask what Merrill CEO John Thain knew, and when.

Merrill lost $15.3 billion during the period, and the run-up in losses was concentrated in the firm's sales and trading department, run by Tom Montag, who was hired by Mr. Thain in 2008 to run that division. The two frequently told the firm's other top managers that the losses, while significant, were largely connected to so-called legacy positions at Merrill and the losses were "market-related" and not out of step with Wall Street.

Friday, some top executives and members of Merrill's board questioned privately why they weren't told about the magnitude of the losses or that the deal was possibly in jeopardy. Mr. Thain declined to comment on whether he knew about the Dec. 17 meeting between Messrs. Paulson and Lewis.

Merrill incurred large losses during the fourth quarter from derivative trades with thinly capitalized bond-insurance companies whose financial health deteriorated considerably last year. Many of the derivative contracts were written to cover periods of more than 20 years, which meant the bond insurers wouldn't be on the hook for significant cash payouts for years.

Mr. Lewis rejected the suggestion Friday that he and his team didn't conduct enough due diligence. "We did not expect the significant deterioration in mid to late December that we saw," he said on a conference call with analysts.

Despite the need for more capital and the cutting of the bank's quarterly dividend to a penny, from 32 cents, the consumer-banking and wealth-management operations performed well in the fourth quarter, Mr. Lewis noted. The company made $115 billion in new loans during a time of crisis, he added.

Meanwhile, Merrill said on Friday it will pay $550 million to settle shareholder lawsuits claiming it failed to inform investors about the risks associated with its business in the subprime-mortgage market.

Merrill "vigorously disputed" the allegations, but agreed to pay $475 million to settle a suit brought by the Ohio State Teachers' Retirement System, and another $75 million to Merrill employees who held company stock in retirement programs.