Bank of America Slays Countrywide Beast

NEW YORK (TheStreet) -- It will be a very interesting opening for Bank of America (BAC), with the company announcing a settlement with investors saddled with Countrywide paper and pre-announcing a second-quarter net loss.

The shares were up 4% in pre-market trading, to $11.23. Other large U.S. banks were also seeing shares rise during pre-market trading, with JPMorgan Chase(JPM), up over 1% to $40.04, while Wells Fargo(WFC), was up 2% to $28.00 and Citigroup(C), was also up 2% to $40.89.

Bank of America CEO Brian Moynihan

While an $8.5 billion settlement of mortgage putback claims over mortgage-backed securities purchased from Countrywide before the issuer was purchased by Bank of America for $4 billion in 2008 is certainly a huge figure, the good news for investors is that the company will leave the bulk of its Countrywide exposure behind.

According to Bank of America, the settlement covers "nearly all legacy Countrywide-issued first-lien private-label" mortgage-backed securities exposure, representing "530 trusts with original principal balance of $424 billion.

Bank of America also said it would set aside an additional $5 billion in the second quarter for further mortgage exposure, and pre-announced a second-quarter net loss "in the range of $8.6 billion to $9.1 billion," or a loss of 88 cents a share to 93 cents a share.

The second-quarter loss will include a $14 billion mortgage representation and warranties provision -- including the $8.5 billion Countrywide settlement and an additional $5.5 billion for further mortgage exposure - as well as "$6.4 billion in other mortgage-related charges in the second quarter of 2011, including a non-cash, non-tax deductible impairment charge of $2.6 billion to write off the balance of goodwill in the Consumer Real Estate Services business."

Bank of America is scheduled to report its second-quarter results on July 19.

Institutional investors who will be on the receiving end of the settlement will include the Federal Reserve Bank of New York, BlackRock (BLK) and MetLife (MET), according to various reports.

Responding to questions from analysts over how difficult it will be for Bank of America to meet the enhanced Basel III capital requirements for the largest banks, CEO Brian Moynihan said during a conference call with analysts that the company would not have to raise capital as a result of the Countrywide settlement. Chief risk officer Bruce Thomson said the Bank expected its Tier 1 common equity ratio to be between 6.75% and 7.00% by the beginning of 2013.