Financial Risk Manager

America's largest bank is also its most ruffled.

Another year, another fresh start. Bank of America's takeovers of Countrywide and Merrill Lynch during the financial crisis saddled it with a heap of housing-related trouble. After a rough first year in charge since succeeding Ken Lewis as BofA's boss, Brian Moynihan has spelled out his latest new year's resolutions: tackling the bank's mortgage problems head-on and seeing off a related threat from internet marauders.

In a deal that could become a template for others, the bank this week settled with Fannie Mae and Freddie Mac over most of their investments in dodgy loans that BofA securitised. The total cost of buying back mortgages from the two housing-finance agencies will be around $10 billion, a manageable hit. The deal with Fannie and Freddie "shows a willingness to take control of the situation and sets a tone for the year," says Mike Mayo of CLSA, a stockbroker.

The bank is also trying to limit the possible damage from a document dump promised by WikiLeaks in the coming weeks. Julian Assange, WikiLeaks' founder, claims to have five gigabytes of material from a BofA executive's computer hard drive. Some think this relates to iffy lending by Countrywide. Others speculate regulators investigating the Merrill deal may have also passed on information.

How explosive this proves, or even whether the leak happens, remains to be seen. But the bank is taking no chances. A team led by the chief risk officer, and helped by Booz Allen, a consultancy, is sifting through thousands of internal documents to gauge the impact of their release.

Other problems loom. The bank, America's largest mortgage servicer, is being pushed towards a costly settlement with state attorneys-general, who have been investigating banks' foreclosure practices. Worse, it faces a barrage of loan-repurchase lawsuits from bond insurers and private mortgage investors. Seeing off the insurers should cost BofA only $2 billion, reckons Glenn Schorr of Nomura. The cost of dealing with the private investors is less clear, with estimates ranging from $4 billion to nine times that. Most think it will be towards the lower end, as private investors face bigger hurdles in pursuing their claims than the mortgage agencies. Fannie and Freddie have better access to documents, for instance. Banks also have a clear incentive to make peace with the duo that dominates mortgage markets. But Mr Schorr sees the potential cost of settling with private investors as the biggest risk overhanging the bank from its past.

Another worry is the impact of the Dodd-Frank financial-reform act. Some 4.7% of the bank's revenues are at risk from new rules, compared with 1.4% for its peer group, reckons Andrew Marquardt of Evercore Partners. To its credit, BofA has dealt proactively with some threats, for instance by taking a $10.4 billion charge relating to proposed restrictions on debit-card fees.

That has not stopped BofA assuming the mantle of America's most accident-prone large bank, a title that Citigroup has gladly handed over. A year ago, Citi was reeling and its boss, Vikram Pandit, was seen as Wall Street's most vulnerable leader. But sentiment has begun to swing its way after some vigorous asset disposals and the government's sale of its remaining stake. It helps that Citi earns almost half its revenues abroad, versus 20% at BofA.

Mr Moynihan is working hard to win over fretful clients and investors. But it is a struggle when your bank is hugely complex, culturally messy and heavily exposed to a still-wobbly housing market. Tellingly, BofA is now seen as being more at risk of default than Citi (see chart). Optimists point to the bank's enviable franchises in retail, corporate and now investment banking too. But pressure on Mr Moynihan could grow quickly if the share price, which fell by 11% in 2010, does not rebound. On handing over, Mr Lewis joked that wanting the job was a "unique characteristic" of Mr Moynihan's. That probably still holds true.

Source: The Economist