Bank of America announced today that it will take a $3 billion write-down in the fourth quarter related to the deteriorating value of its collateralized debt obligations.
The nation’s second largest bank also warned that losses could increase as the market continues to deteriorate, with the possibility of further credit rating agency downgrades and other complicated factors.
“As market conditions change and possibly worsen, there could be additional diminution in value,” Bank of America Chief Financial Officer Joe Price warned.
“We are only halfway through the quarter, so where valuations will be at the end of the year is anyone’s guess,” Price said.
Bank of America said it has more than $15 billion in net exposure to CDOs, with nearly $12 billion of it supported by subprime mortgage securities.
The bank and mortgage lender also has roughly $400 million in subprime-backed exposure in its CDO warehouse.
“There is complexity and difficulty in estimating the value of these positions,” Price said. “I might note that while we have classified these as principally supported by underlying subprime exposure, they do contain other asset classes in the collateral mix.”
Price noted that the bank is setting aside more reserves for loan losses, but called the potential losses “manageable”.
Despite the foggy outlook, Price said Bank of America does not intend to update the estimate of the write-down prior to its fourth quarter earnings release in early January.
Shares of Bank of America were up $1.68, or 3.82%, to $45.66 in afternoon trading on Wall Street, still well below their 52-week high of $55.08.
Up north, the Royal Bank of Canada said it would take a $360-million mortgage-related hit in the fourth-quarter to account for lower valuations on its CDOs and residential mortgage-backed securities.
Meanwhile, Goldman Sachs said it has maintained a short position in the subprime mortgage market, and doesn’t expect significant write-downs on mortgage-related assets.