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Monday, July 18, 2011 11:11 AM

Bank of America Clobbered on $50 Billion Capital Shortfall Related to Mortgage Losses

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Shares of Bank of America corporation are getting clobbered once again, this time on news of a $50 billion capital shortfall related to devastating mortgage losses.

Please consider BofA Mortgage Settlements Magnify Capital Strain as $50 Billion Gap Looms

Bank of America Corp. (BAC) may have to build its capital cushion by $50 billion and renege again on Chief Executive Officer Brian T. Moynihan’s pledge to raise the firm’s dividend as mortgage losses drain funds.

Expenses tied to soured home loans may total $20.4 billion in the second quarter, pulling the bank further from capital ratios demanded under new international standards, the Charlotte, North Carolina-based company said June 29. The gap may equal 2.75 percent of risk-weighted assets starting in 2013 -- at about $18 billion for each percentage point -- crimping Moynihan’s ability to raise dividends and repurchase shares.

Moynihan, 51, has booked about $30 billion in settlements and writedowns to clean up mortgage liabilities at the biggest U.S. bank since succeeding Kenneth D. Lewis last year. As the costs mounted, Bank of America’s stock declined 26 percent this year, the worst showing in the 24-company KBW Bank Index. The company reports second-quarter results tomorrow and has told investors to brace for a loss of as much as $9.1 billion.

Under rules prepared by the Basel Committee on Banking Supervision, Moynihan has to achieve a 9.5 percent ratio of capital to risk-weighted assets between 2013 and 2019. That’s based on a 7 percent minimum and a 2.5 percent surcharge imposed by regulators on the largest companies whose collapse would pose a threat to the banking system.

Moynihan’s task was complicated after he underestimated how big the capital surcharge would be. The bank counted on 1 percentage point, an assumption based upon “fairly senior information saying that was a reasonable number to use,” Moynihan said in a June 1 conference. The 2.5 percent announced last month means an extra $27 billion burden.

Moynihan has previously had to revise guidance about the bank’s dividend after the Fed rejected what he called a “modest” increase requested for later this year. His deals to settle disputes over defective mortgages, including an $8.5 billion accord last month, means the CEO may have to adjust another promise to investors -- a larger dividend boost by 2013.

In March, Moynihan said that all $42 billion of projected earnings in 2013 and 2014 would be returned to shareholders. Bank of America was “committed” to raising its 1-cent dividend to a higher level equal to 30 percent of earnings, he said.

“We go from being a company which gets its capital in shape in 2011 and 2012 and pays a modest dividend to a company which has significant capital generation from there on out,” Moynihan said at the March 8 conference. The result would be a total of $12 billion in payouts during those two years, he said.
Bank of America Daily Chart

The idea that Bank of America would soon be in a position to raise its dividend was silly when Moynihan proposed it and looks absurd now. Indeed, Bank of America should not have a dividend at all given its huge capital problems.

All the nay-sayers who said the Countrywide Financial takeover would kill Bank of America got it correct.

Mike "Mish" Shedlock
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