According to analyst Richard Bove, Bank of America may take a $6.5 billion loss provision in the first quarter of 2008. Bove anticipates that this loss provision would be established to cover possible future losses in Bank of America’s subprime mortgage portfolio and home equity portfolio.
Recent reports have predicted that both of these segments of the market are likely to experience serious difficulties in 2008 and 2009. In late January, Business Week published an article, “The Home Equity Crisis Ahead” by Mara Der Hovanesian which described the deterioration of the $850 billion home equity market. In this article, Amy Crews Cutter deputy chief economist at Freddie Mac, was quoted as stating “The home-equity lender is going to get hosed.” Similar opinions have been expressed regarding the subprime mortgage market. In its March 31, 2008 edition, Fortune quotes Princeton economist Paul Krugman stating “I think there’ll be $1 trillion of losses on mortgage ?backed securities showing up somewhere.” To date, securities firms and banks have disclosed only about $195 billion in losses related to the mortgage markets.
Bove’s analysis indicates a continuation of Bank of America’s subprime securities problems. In December, 2007, Bank of America announced that it would provide as much as $600 million to prop up several of its funds which were managed by its Columbia Management investment unit. These funds had invested heavily in mortgage securities. In December, Bank of America closed its Columbia Strategic Cash Portfolio which had been sold as an alternative to money-market funds. At that time, the Wall Street Journal questioned the values that were placed on various securities held by Bank of America funds in information provided to shareholders.
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