Bank of America's $8.8 Billion Black Eye


Bank of America"The largest loss in Bank of America's (BAC) history." That's the sound bite from the bank's second quarter earnings report, which disclosed an $8.8 billion bottom-line loss.

If it seems odd that B of A would announce such a massive loss this far out from the financial crisis, perhaps an analogy will help. Imagine you're at a party and tip back a few too many. You then proceed to kick over the punchbowl onto a white rug, use a standing lamp as a javelin, have your Olympic-caliber throw stopped short by a flat-screen TV, and make a pass at your best friend's wife. And that's just what you can remember.

Now imagine the next week, when the pounding headache has finally subsided to some extent. It's time to make apologies and, more importantly, settle up with the host and other party goers to cover the damages (both emotional and physical) that you caused.

That's more or less where Bank of America is right now.

Time to Settle Up

During the second quarter, Bank of America agreed on amends with a wide-ranging group of investors that includes BlackRock (BLK), MetLife (MET), and the Federal Reserve Bank of New York. The deal covers mortgages that had soured after being packaged into bonds. Assuming the agreement gets approved, Bank of America would pay the group $8.5 billion.

Additional mortgage-related settlements during the quarter helped plunge the bank's Consumer Real Estate Services segment to a $14.5 billion loss.

Other Than That, Mrs. Lincoln...

For rather apparent reasons, B of A would prefer that investors not focus on the $8.8 billion loss, and instead consider what the bottom line would have looked like if all that bad stuff weren't there.

As CEO Brian Moynihan put it, "Obviously, the solid performance in our underlying business continues to be clouded by the costs we are absorbing from our legacy mortgage issues."

To be fair, some aspects of the quarterly report could legitimately be considered highlights:

  • Deposits at the bank rose by $8.2 billion, up 2.4% from the second quarter of last year.
  • Provision for losses in the Global Card Services business fell drastically, from $3.8 billion last year to $481 million.
  • The bottom lines for the wealth management, commercial banking, and investment banking businesses were also much improved from last year, climbing 54%, 69%, and 74%, respectively.

Investors = Skeptical

If you want an easy gauge for how investors feel about Bank of America's stock, look no further than its valuation. Currently, B of A trades at less than half of its book value; it's historically fetched 1.5 to two times book value. Investors seem comparatively sanguine about competitors like JPMorgan Chase (JPM), Wells Fargo (WFC), and (gasp!) Citigroup (C), which are trading at respective book value multiples of 0.9, 1.2, and 0.7.

Bank of America's work certainly isn't done, but at least it's getting done. At this point, I think investor pessimism may have overwhelmed reality. B of A's rock-bottom valuation could make it a good pick for risk-tolerant investors.

Motley Fool contributor Matt Koppenheffer owns shares of Bank of America, but does not have a financial interest in any of the other companies mentioned. The Motley Fool owns shares of JPMorgan Chase. The Fool owns shares of and has opened a short position on Bank of America. The Fool owns shares of and has created a ratio put spread position on Wells Fargo.

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Michael McDonald

July 23 2011 at 12:11 AM Report abuse rate up rate down Reply

I guess you took a nice loss with your BOA stock.... go sell your story some other idiot...or better yet ...go start selling
EDSELS again....Try again....

July 20 2011 at 9:08 AM Report abuse rate up rate down Reply

Boo-*******-hoo for Bank of America!!! Money grubbing dirtbags with 1.2 million dollar bonuses for their CEO's and the rest of the cronies.

July 20 2011 at 4:24 AM Report abuse +4 rate up rate down Reply

bank of america stock no more than 3 dollars a share .it will be too many years before the bank cover those huge losses.

July 20 2011 at 1:18 AM Report abuse +1 rate up rate down Reply

People that bought homes that were beyond what they could afford should admit that they made a mistake and quit blaming the banks for their bad decisions! Its easy to blame it on the "big bad banks". AFterall the Obama administration has shown a good example by blasting the banks. Looser!

July 19 2011 at 10:49 PM Report abuse -1 rate up rate down Reply
1 reply to MARY's comment

Mary, People made a mistake? Not hardly. People make an offer on a house. The bank approves what the appraiser says and then the bank approves the mortgage. The appraiser was wrong and so was the bank to issue a mortgage for more than the hlouse (will be) wowrth. Exactly how are the people with the mortgage to blame for this?

July 19 2011 at 11:56 PM Report abuse +1 rate up rate down Reply

Completely agree! Bank of America will rock again and its a great time to buy the stock!! I am long BAC!!

July 19 2011 at 10:47 PM Report abuse -4 rate up rate down Reply


July 19 2011 at 10:44 PM Report abuse +2 rate up rate down Reply

LOL.....more money being paid out .....................and none of the BILLIONS to the homeowners who got screwed !!! Whatever ....

July 19 2011 at 10:41 PM Report abuse +1 rate up rate down Reply
1 reply to Joe's comment
Hi Catmom!

Better look in the top managers pockets, you might find it there.

July 20 2011 at 1:42 AM Report abuse +3 rate up rate down Reply


July 19 2011 at 10:40 PM Report abuse +2 rate up rate down Reply


July 19 2011 at 10:39 PM Report abuse +1 rate up rate down Reply