Bank of America Must Deal with Exposure of $50-$100 Billion Associated with Toxic Mortgages Securities


Investors who bought toxic mortgage-backed bonds from Bank of America’s Countrywide, and homeowners seeking loan modifications are proposing drastic measures to better enable BofA to deal with the onslaught of their litigation without a bankruptcy or a receivership imposed by the Federal Deposit Insurance Corporation. According to a Reuters/ article entitled “Will Bank of America Tale a Play Out of the Asbestos Handbook,” the proposed approaches include an asbestos litigation-style trust to deal with claims and litigation, a so-called “bad bank” managed by federal regulators, or the sale of litigation warrants by which public investors would purchase the right to receive whatever is left in a settlement trust. The bond investor litigants include American International Group (AIG) and the Federal Housing Finance Agency, among others.

BofA’s liability could reach $50 billion to $100 billion, and it has set aside $15 billion in reserves to wage a war of attrition, according to the article. On top of that, the bank has $40 billion in corporate debt coming due, will need to raise $50 billion to comply with new international banking regulations, and will reportedly need to raise so much capital that this could hamper its ability to earn money by making loans.

In order to adequately fund a settlement trust, BofA may need a large equity capital infusion that would dilute existing shareholders, which the bank does not want to do. It is not known whether BofA is interested in an asbestos litigation-style trust, or one of the other mechanisms. To date, Bank of America’s strategy seems to be cost cutting and selling assets. It was recently reported that BofA will cut an additional 30,000 positions on top of 6,000 jobs already eliminated. BofA recently sold half its stake in China Construction Bank for $8.3 billion and sold $5 billion of preferred stock to Berkshire Hathaway.

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