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BofA needs more restructuring, not pink slips: IRA

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Bank of America (BAC) is widely believed to be on the verge of deep cuts in both its retail business and related personnel. Reports speculate that as many as 40,000 Bank of America employees may need to be let go as the embattled bank seeks to raise capital. Yet, the issue is not profitability or capitalization, but rather the ongoing uncertainty about how much the bank is going to have to pay in legal liabilities and obligations tied to its ownership of residential mortgage-backed securities, according to a new report from Christopher Whalen with Institutional Risk Analytics. Bank of America CEO Brian Moynihan will address wary investors at a conference organized by Barclays Capital. Moynihan recently shook up company management to align it with the bank's three core customer groups: consumers, companies and institutional investors in part of an ongoing internal reorganization. Still, more is needed. He is expected to speak today on the prospect of $1 billion in monthly savings, and outline a plan to make it happen, presumably including the above strategies. Nonetheless, Whalen believes such a strategy is ill-timed and confidence-breaking. "We do not see any need for layoffs or piecemeal asset sales at BofA, yet that is precisely the strategy being pursued by BofA management led by Moynihan," Whalen writes. "Could you possibly pick a worse time than today to be a seller of a loan servicing or origination business?" Bank of America stated it intends to sell its correspondent mortgage lending business. And if no buyer comes forward the bank will slowly wind the operations down. Furthermore, the initiatives will not cure the bank's real problems which stem from legal and regulatory liabilities tied to representation and warranties on RMBS and an influx of lawsuits over mortgages. "At the current run rate, the BofA subsidiary banks are on track to do $84 billion in revenue in 2011, down from $86 billion in bank revenue during 2010," Whalen said. Whalen added that reports suggesting Bank of America is selling or shutting down its correspondent banking unit did little to ease the qualms of investors. "The firm faces tens of billions in current legal claims and may see these claims evolve and grow into larger demands for rescission of RMBS," Whalen wrote. "Whereas two months ago we were talking settlement of at least put-back claims, now it is questionable whether BofA can settle any of the outstanding claims in the near-term. Why should Plaintiffs settle?" Other growing concerns, according to Whalen, is the "imponderable risk that BofA and other lenders may face criminal prosecution in New York for these busted RMBS deals." As the market waits for more guidance from Moynihan, Whalen writes "for now, this situation is in the control of the federal and New York State courts, not Brian Moynihan, federal bank regulators or the Obama Administration." He added, "The fact that the FDIC and the FHFA both had to object, belatedly, to the Countrywide put-back settlement shows you what lies ahead in terms of additional claims from the GSEs and bank holders of RMBS. To paraphrase Freeman Dyson, the unthinkable has a bad habit of occurring." Write to: Kerri Panchuk.

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