Bank of America Shoots Itself In the Foot Again

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.

Kotowski responded. "I'm not sure I understood that but I'll follow up. Thank you."

FBR Capital Markets analyst Paul Miller was also dumbfounded.

"They need to do a better job explaining that slide. You can't throw a slide out there that they're pretty much saying is stale and then spook everybody," he says.

Miller says he got a better explanation after the call from a Bank of America investor relations executive, to whom he said "why didn't you get on the call and explain it as well as you're explaining it to me on the phone?"

Still, he had already typed up a note expressing concern that the bank "is under-reserving for potential mortgage repurchase risks and may have to play catch-up."

Following that phone call, however, Miller now believes Bank of America paid about 12 cents on the dollar to settle Syncora's claims against the bank.

"If I'd talked to them before I put the note out I'd probably have been softer," Miller acknowledges.

Fixed income analysts at Barclays, however, came up with a different number of 39 cents on the dollar for losses so far on the disputed securities, and 27 cents for "lifetime losses" assuming the securities would rise in value somewhat if held for a longer period.

Still another number comes from BTIG analyst Mark Palmer, who estimated Bank of America paid Syncora 93 cents on the dollar in a note published Wednesday ahead of Bank of America's earnings call.

So is the actual number 60 cents, 12 cents, 39 cents or 27 cents? Here's a radical proposal for Bank of America: tell your investors what the number is. A Bank of America spokesman declined to disclose the bank's internal number, and a Syncora spokesman declined to comment beyond the press release.

Bank of America management has repeatedly done a poor job of explaining itself. It has appeared, on several occasions, to put a box around its mortgage exposure, only to disclose a new unwelcome surprise. It unveiled a $5 debit card fee, but then reversed its decision a month later. It led investors to believe it would be able to increase its dividend, only to get turned down by regulators.

Nonetheless, Miller suspects Bank of America's board is unlikely to give CEO Brian Moynihan the boot since, from his understanding, it conducted an exhaustive search before giving him the top job at the start of 2010, and Miller isn't sure anyone else could do much better under the circumstances.

"Those calls just do not go well, and they haven't for a long time," Miller says. "The management team does a very poor job explaining its situation."

Berkshire Hathaway ( BRK-B)Chairman Warren Buffett, whose company bought $5 billion in Bank of America preferred stock in 2011 and owns warrants to buy 700 million shares, told Bloomberg News last week that Moynihan "has been doing exactly the things in terms of correcting problems for the past, exactly what I would be doing."

-- Written by Dan Freed in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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