Please ensure Javascript is enabled for purposes of website accessibility

2 Eye-Opening Charts About Bank of America and the Financial Crisis

By John Maxfield - Oct 11, 2015 at 8:42PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

No other bank in history has survived such enormous losses.

Shareholders of Bank of America (BAC 1.09%) 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.

Data source: Bank of America,, author's estimates. Chart by author.

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.

John Maxfield has no position in any stocks mentioned. The Motley Fool recommends Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Bank of America Corporation Stock Quote
Bank of America Corporation
$36.30 (1.09%) $0.39

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/15/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.