Ronald Ross, a career mentor and coach, said this about surprises:  They're great for birthdays.  They have no place in business.  Businesses want need to know what happened yesterday, what is happening today, and what will likely to happen tomorrow.  Take Bank of America, for example. 

In early January 2011, The WSJournal's Dan Patrick reported that Bank of America Corp. had begun to put one of its most vexing problems behind it by paying Fannie Mae and Freddie Mac almost $3 billion to cover bad mortgages the government agencies purchased from the bank's Countrywide Financial mortgage unit.  Bank of America said it fulfilled its commitment to boost its equity by $3 billion.

Mr. Patrick continued:  For several years, requests have been piling up for the nation's largest bank by assets to repurchase mortgages that allegedly ran afoul of its own underwriting standards.  Total new mortgage repurchase claims amounted to $12.8bn at the end of the 3rd quarter, and about $6.8bn of that amount was from Fannie and Freddie.  The settlement on Monday, which began to thin the cloud of uncertainty over the bank, helped to allay investors' concerns that the mounting requests could overwhelm the bank.

Investors pushed shares up 85 cents, or 6.4%, to close at $14.19 as the amounts paid to Fannie and Freddie were largely in line with what many had expected.

But the settlement doesn't affect the roughly $6 billion in repurchase requests from insurers and private investors who purchased Countrywide and Bank of America loans. Compounding the problem of uncertainty, analysts are divided about how damaging the private requests could be. Their estimates of the bank's ultimate exposure vary wildly, ranging from $8 billion to $35 billion.

Some think the Fannie-Freddie settlement puts a ceiling on what the private-label exposure may be. That is because Fannie and Freddie have better access to documents, better relationships with the banks and stronger underwriting standards, said John McDonald of Sanford C. Bernstein & Co. His estimate of Bank of America's put-back losses from private-label investors is $8 billion, although he noted in a report that the ultimate costs "will remain a wild card" in 2011 and 2012.

Reality is that:  (i) January's $3 billion settlement was not an end unto itself, but the beginning of a long and expensive settlement process;  (ii) BofA's ability to negotiate a "bargain" settlement with institutions that lost $6.8bn would serve as a protective template that could serve as a template for future negotiations that would enable the bank to keep future losses to a minimum;  (iii) BofA's obvious payback commitments might be dwarfed by obligations that the bank could not readily determine or identify - i.e., "surprises."  [WSJournal, 1/4/11, "Bank of America Pays for Soured Loans"]

Fast Forward to 6/29/11.   As the NYTimes reports ... "Maybe Brian T. Moynihan, the Bank of America chief executive, can finally carve his own path. The $21 billion of mortgage-related charges just unveiled by the beleaguered bank doesn’t quite clear the decks. But it removes one of the biggest problems left by Mr. Moynihan’s predecessor, Kenneth D. Lewis.settlements are part of a larger move by the bank to rid itself of many home-lending woes.  Since vowing in the fall of 2010 to fight repurchase requests in "day-to-day, hand-to-hand combat," Chief Executive Brian Moynihan has taken a more conciliatory tone in trying to resolve the conflicts with investors. The payments to Fannie and Freddie, he said Monday, "resolve substantial legacy issues in the best interest of our shareholders."

Reporters Antony Currie and Christopher Hughes continued:   No U.S. bank is more vulnerable to an array of threats posed by home-lending woes. BofA has more repurchase requests than any rival and it services one of every five mortgages, many of them from BofA's acquisition of lender Countrywide in 2008.

Mr. Lewis’s $4 billion offer for the mortgage lender Countrywide Financial looked like a good deal back in early 2008. At a third of book value, it appeared to build in a decent cushion against potential losses on assets held on the balance sheet while making Bank of America the leading American provider of mortgage finance.

But that didn’t allow for a prolonged housing slump or the risk of having to compensate bondholders and others who were exposed to problematic loans Countrywide had sold or repackaged into mortgage securities. All in, these accounted for about three-quarters of the almost $1 trillion of nonagency home loans Bank of America’s various units originated between 2004 and 2008.

The settlement on Wednesday deals with much of the fallout, including an $8.5 billion agreement with 22 institutional investors, from BlackRock to the Federal Reserve. That means Bank of America has now paid or earmarked at least $30 billion to cover claims and related legal and good will write-down costs on nonagency mortgages — almost all related to Countrywide.

That’s more than seven times what Mr. Lewis paid for Countrywide. The financial and reputational hits from both that deal and his grab for Merrill Lynch ultimately cost him his job. Countrywide’s founder and former chief executive, Angelo Mozilo, was fined $67.5 million by the Securities and Exchange Commission and banned from being a company officer or director for life.  

For further details, go to:   [NYTimes, 6/30/11, "Clearing the Decks at Bank of America"]