Bank of America expects hit from loans

Second largest U.S. bank says market dislocations will hurt fourth-quarter results but offers no estimate of impact.

Bank of America Corp. said Friday that continued market dislocations, including those related to the value of securities it owns that are backed by loans, will hurt its fourth-quarter results.

But the nation's second largest bank did not provide an estimate of how large the impact will be.

In a regulatory filing with the Securities and Exchange Commission, the bank said it has some exposure to collateralized debt obligations - complex financial instruments that combine slices of different kinds of risk. CDOs are often partly backed by subprime mortgages, or loans given to customers with poor credit history.

The Charlotte-based bank does not directly offer subprime loans, but the value of the CDOs has plummeted as an increasing number of subprime borrowers have defaulted on their home loans.

We expect these significant dislocations in the CDO market to continue, and it is unclear what impact these dislocations will have on other markets in which we operate or maintain positions, the filing said.

Bank of America shares rose 48 cents, or 1.1 percent, to $43.98 in late trading Friday.

Last month, the bank reported $607 million in trading losses and recorded $247 million in loan markdowns, helping reduce third-quarter profit by 32 percent to $3.7 billion.

Bank of America said it had provided more than $15 billion of liquidity support for commercial paper sold by CDOs, of which a net $9.8 billion is mainly backed by subprime residential mortgage securities. The bank said it also has more than $3 billion of exposure to CDOs through its structuring, warehousing and trading activities.

Earlier Friday, crosstown rival Wachovia Corp. said the value of securities it owns that are backed by loans sank by about $1.1 billion in October. The nation's fourth largest bank also said it plans to boost its allowance for loan losses in the fourth quarter due to expected credit deterioration in certain regions of the nation's housing. The provision is pegged at $500 million to $600 million in excess of charge-offs in the quarter.

Mortgage-related writedowns across the banking industry eclipsed $40 billion during the third quarter, and the fourth quarter is shaping up to be just as bad, if not worse.

Wachovia was the third national financial institution to announce fourth-quarter writedowns eclipsing $1 billion. Citigroup Inc. said it will likely take between $8 billion and $11 billion in writedowns during the fourth quarter, while Morgan Stanley said it will take up to $6 billion in writedowns during its fiscal fourth quarter, which ends Nov. 30.

Also on Friday, JPMorgan Chase & Co. warned of possible fourth-quarter writedowns but did not give any specific potential figures in a quarterly filing with the SEC.

Source - CNN Money