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NEW YORK (
Bank of America(BAC - Get Report) and the three other largest U.S. banks should have little difficulty paying for additional legal claims tied to vulnerable mortgages underwritten ahead of the 2008 global financial crisis, argues a report Tuesday from Drexel Hamilton analyst David Hilder.
Following a review of second quarter filings of "reasonably possible losses" above existing reserves for mortgage-related claims against Bank of America, as well as
JPMorgan Chase(JPM - Get Report),
Citigroup(C - Get Report)and
Wells Fargo(WFC - Get Report), Hilder concludes the institutions have more than enough capital to withstand their own worst estimates. Those estimates range from $3.3 billion at Wells Fargo to $7.5 billion at JPMorgan.
The banks' worst case estimates "are clearly manageable in the context of each bank having Tier 1 common capital under Basel 3 nearly equal to or exceeding the requirements that won't take full effect until 2019, and the maximum estimated additional loss amounts equaling 10% to 37% of expected pretax earnings for 2013," Hilder writes.
While Hilder acknowledges "examples in which banks' initial estimates of mortgage-related losses and litigation settlement costs were too low," he argues that "at this point, more than five years since the mortgage-driven parts of the crisis began to explode into public view, we believe the banks' estimates of 'reasonably possible' losses are likely to be more accurate than externally- derived estimates."
Most Wall Street analysts appear to share Hilder's view. One notable exception is CLSA analyst Mike Mayo, who sees
billions in potential liability for Bank of America above the bank's estimates due to an ongoing challenge to a more than
two year-old proposed settlement between the bank and 22 large institutions. That settlement would have Bank of America pay $8.5 billion to resolve $107 billion in investor losses. While many parties that initially objected, including attorneys general for New York and Delaware, as well as two Federal Home Loan banks, dropped their objections,
AIG(AIG), along with several smaller investors, continue to challenge the deal.
Hearings on whether to approve the settlement are set to resume Sept. 9 following a 45-day recess and are being presided over by New York State Supreme Court Judge Barbara Kapnick.
Written by Dan Freed in New York.