Bac By Mike Mozart
Source: Flickr / Mike Mozart. 

Over the past eight years, Bank of America (NYSE:BAC) wrote down a staggering $90 billion worth of its loans in its credit card unit. But that doesn't tell the whole story.

In a recent column, fellow Fool John Maxfield, whom I unequivocally respect, argued that the oft-cited remarks that all of Bank of America's troubles stem only from its acquisitions of Countrywide and Merrill Lynch were simply inaccurate.


He rightfully pointed out Bank of America had massive problems that were the result of its credit card unit, which lost a staggering $11.9 billion in two years, 2009 and 2010.

John is right. The losses were steep, but I disagree that the situation should serve as a deterrent from investing in Bank of America today.

Diving into the details
The first thing worth noting about Bank of America is that while its provision for credit losses from its Card Services unit skyrocketed in the midst of the financial crisis, it wasn't alone in facing this problem. Peer JPMorgan Chase (NYSE:JPM), which is often held in much higher regard, also saw a substantial increase in its losses:

Source: Company Investor Relations

While the total losses are lower, from 2006 to 2009 JPMorgan Chase revised its provision upward by 300%, whereas Bank of America's grew by 265%. It's difficult to say Bank of America came out on top here, as its losses grew by $21.5 billion, but it's worth noting that it was by no means alone in watching its credit card portfolio dramatically turn for the worse.

You're probably wondering why I bring up the percentage of growth when the fact is that the $90 billion in losses at Bank of America far exceeds the $55 billion at JPMorgan Chase.

Well, it's worth noting that Bank of America had a significantly larger credit card business than JPMorgan Chase, so a simple look at the provision doesn't tell the entire story.

Diving deeper
Consider the provision for credit losses as an expense. And one of the best ways to track expenses at banks is through the efficiency ratio, which takes all a bank's expenses and divides them by its revenue.

Under the same calculation -- except replacing total expenses with a provision for credit losses -- you can see that while Bank of America topped JPMorgan Chase once again, the gap isn't nearly as dramatic as it would first appear:

Source: Company Investor Relations. Revenue is Card revenue only.

While this isn't to say Bank of America's performance is to be applauded, it does reveal that things weren't much worse than its highly regarded competitor.

The acquisition roundabout
Of course, I would be remiss if I didn't note the $10.4 billion goodwill charge Bank of America took in 2010, as it reassessed the value of its credit card business as a result of the Durbin Amendment, which restricted the fees banks could collect on their cards.

Yet it must be noted that in 2005 Bank of America acquired MBNA, the nation's third largest credit card issuer at the time, in a $35 billion purchase, and in 2003, it bought FleetBoston for $47 billion. While we don't know exactly how much of that writedown was directly attributable to the $82 billion in purchases, one has to think that most, if not all of it, was the result.


Bank of America Headquarters.

And that truly brings it full circle.

The acquisitions Bank of America made didn't begin with Merrill Lynch and Countrywide, but they ended with them. In a five-year period, Bank of America grew at such a dizzying pace, it was susceptible to incredible risks and losses. In fact, it should come as no surprise that the bank had so many massive failures and incredible problems.

While we may never know how much of the losses Bank of America faced from its credit card business resulted from its purchase of MBNA, this acquisition must be considered when addressing its past. The bank probably did have problems stemming from its own (legacy Nations Bank and B of A) credit card unit, but it could've come from the units it acquired as well.

The key takeaway
In his book The Purpose Driven Life, Rick Warren said, "We are products of our past, but we don't have to be prisoners of it." And while that truth extends well beyond the investments we make, in this case, Bank of America appears to be moving in the right direction to ensure that its future is much bright than its past.

Warren Buffett: This new is a "real threat"
Buffett has staked billions on Bank of America, and he seems confident in his investment. However, there's something keeping him up at night. Click here to access a FREE investor alert on the company we're calling the "brains behind" Buffett's worst nightmare.

Patrick Morris owns shares of Bank of America. The Motley Fool recommends Apple and Bank of America and owns shares of Apple, Bank of America, and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Compare Brokers