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No other bank in history has survived such enormous losses.
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Shareholders of Bank of America (BAC +0.00%) learned last month that the financial crisis has cost the nation's second-biggest bank by assets approximately $195 billion.
To put that in perspective, Bank of America entered the crisis with only $137 billion worth of capital. It's clear, then, that if the federal government hadn't stepped in to rescue the Charlotte, North Carolina-based lender with more than $45 billion, then Bank of America would have long since ceased to exist.
Data source: Bank of America's presentation (slide 6) at the 2015 Barclays Global Financial Services Conference. Chart by author.
What's so interesting about Bank of America's crisis-related expenses is the fact that they seem to have caught the bank by surprise. As late as 2011, CEO Brian Moynihan predicted that it would earn between $35 billion and $40 billion in pre-tax profits. But in the three full years since then, it has actually earned an annual average of only $8.7 billion before taxes.
How could Moynihan have gotten it so wrong? The answer is that most of the expenses stemmed from fines and legal settlements related to mortgage-backed securities, which, in turn, had been stuffed with subprime mortgages. Because Bank of America had previously sold these securities to institutional investors, and the securities themselves were thus no longer on its balance sheet, the bank seems to have convinced itself that the liability for the loans was no longer its responsibility, either.
Bank of America's chairman and CEO, Brian Moynihan. Image source: Getty Images News/Thinkstock.
There was one problem with this. When Bank of America -- or, more specifically, Countrywide Financial, which the bank acquired in 2008 -- packaged the loans into securities, it agreed to repurchase them if the buyers could show that the mortgages didn't abide by responsible underwriting standards. Known as representation and warranties claims, these have cost the bank $28 billion since 2008. And when you add the $36 billion in ancillary legal expenses to this, you get $64 billion in "off-balance-sheet" risk.
Furthermore, if you throw in the $46 billion in expenses from Bank of America's legacy assets and servicing unit, which was tasked with servicing the repurchased mortgages, then you get a total of $110 billion in crisis-related expenses that would have been difficult, if not impossible, to predict without the benefit of hindsight.
In fact, even if you add the entire $195 billion back into Bank of America's pre-tax earnings, it's still less than the $35 billion to $40 billion figure cited by Moynihan four years ago.
None of this is offered for the purpose of criticizing Moynihan, who has done a commendable job turning the $2.2 trillion bank around over the last five and a half years. It's offered instead to show how unpredictable the future can be. Indeed, even the person best positioned to make a prediction about the future course of events -- in this case, Moynihan -- couldn't offer an estimate that was even in the same ballpark as reality.