B of A News Items Spell Problems

On Thursday June 4, 2009, several news items hit the tape which raise some concerns for Bank of America (BAC - Analyst Report) over the near term regarding the potential for enhanced legal fee expenses and enhanced credit issues.

First, Angelo Mozilo, former chairman of the once top U.S. mortgage lender Countrywide Financial -- which was acquired by BAC last year (the name was scrapped about 10 months later) -- and several other executives were accused by The Securities and Exchange Commission (SEC) of fraud. A criminal investigation has occurred based on emails in Mr. Mozilo warned of his company’s “toxic subprime mortgages” at the height of the housing boom.

On Sept. 26, 2006, there was an email that stated, “The bottom line is that we are flying blind on how these loans will perform in a stressed environment of higher unemployment, reduced values and slowing home sales." This will be the first civil charges brought against any high-profile executives following the meltdown in the subprime mortgage industry.

However, Mr. Mozilo argues that the Federal Reserve raising interest rates for too long, crooked real estate speculators, falling housing prices and regulators' attacks were the real blame for the problems exhibited by interest-only and other risky subprime mortgages.

Second, Bank of America will be relieving its Chief Risk Officer Amy Woods Brinkley (52) of her duties effective June 30, 2009, and will be replaced by Gregory Curl (60) who has worked for the bank for 31 years (most recently as global corporate strategic development and planning executive). He will succeed Brinkley on June 30, and Brinkley will retire from the bank this summer.

CEO Kenneth Lewis stated that “Brinkley has been an essential cornerstone of our company, while Curl has the natural ability to look at things, see both the upside and the potential pitfalls, and then navigate the right course." Curl’s mandate appears to focus on credit underwriting, as Mr. Lewis stated in May 2009, “Credit losses should take a 'heavy toll' over the next few quarters,” a sobering comment after nonperforming assets surged to $25.7 billion, up 41% in the first quarter to $25.74 billion.

A spokesman for Bank of America, Robert Stickler, stated the financial institution is going into a much different environment and we need to adjust accordingly, with or without government involvement.

Third, Robert Tillman, former chief executive of home improvement retailer Lowe's (LOW - Snapshot Report), resigned as a director of Bank of America on May 29, 2009. This marks the third director to have left Bank America since April 2009.