NEW YORK (TheStreet)--Bank of America (BAC) had a disastrous second quarter earnings call, sending shares lower by 4.9% Wednesday and another 3.3% shortly before the close on Thursday, but it isn't clear which is more serious: the bank's problems or management's clumsy attempts to explain them.
The real shocker in the quarter was the surge in claims against the bank over problem mortgages underwritten by Countrywide Financial, which Bank of America acquired in 2008. After running from $3.8-$4.9 billion per quarter for the past four quarters, new claims surged to $8.2 billion in the second quarter, according to a slide in the bank's second quarter earnings presentation.
Bank of America CFO Bruce Thompson said the bank "fully anticipated" the rise in claims a year ago, and increased its reserves at the time to account for it. Still, Thompson received several questions on the conference call about the rise in claims, and analysts later wrote in research notes that uncertainty over the eventual cost of mortgage -related disputes continues to weigh on the outlook for the bank.
One area of confusion was the terms of a settlement Bank of America reached with Syncora, a monoline mortgage bond insurer. Bank of America said the settlement would "will reduce outstanding monoline claims at the end of June by approximately 20 percent."Extrapolating from that number, the fact that the bank shows $3.128 billion in outstanding monoline claims, and the fact that Bank of America settled with Syncora for $375 million, Oppenheimer analyst Chris Kotowski concluded that Bank of America had paid about 60 cents on the dollar to settle the claims. CFO Thompson told Kotowski that number was incorrect, offering up this explanation. It is worth quoting at length, only to highlight how utterly unhelpful it is. "I think you have to be careful, Chris. I can assure you that the rate at which was paid was not anywhere near the number that you quoted, and the reason is keep in mind with the monolines. As we've talked about you've got a couple different buckets that go into what you think a monoline exposure is that drives that number significantly lower than what you just quoted. The first is there are claims that come in that monolines have submitted. At points in time monolines have stopped submitting claims because they believe that they're going the route of litigation; and then third, over and above those two buckets you have things that may happen in the future that have not been realized or worked through. So when I quoted the fact that the Syncora settlement was 20% of those claims, you should not in anyway extrapolate out that that's the payment percentage," Thompson said.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV