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B of A profit buckles
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October 14, 1998: 8:17 p.m. ET
BankAmerica pegs hedge exposure at $1B; promises 'orderly' liquidation
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NEW YORK (CNNfn) - BankAmerica Corp., the nation's fifth-largest bank, stunned investors Wednesday by revealing more than $370 million in trading losses tied to a single New York-based hedge fund -- and then compounded the shock by agreeing to snatch up the firm's entire portfolio.
The disclosure came as the company reported third-quarter financial results showing a 78 percent slump in net income, which it attributed to global economic turbulence.
The news sent BankAmerica (BAC) shares tumbling on the New York Stock Exchange Wednesday, where they ended down 5-7/8 at 48-1/16, a 10.89 percent decline, and well below the 52-week high of just over 88.
Later in the day, BankAmerica, scrambling into damage control mode, said it would seek an orderly liquidation of about $20 billion in fixed-income securities that it plans to purchase from D.E. Shaw.
Shaw, with $1.7 billion in managed assets, is the latest hedge fund to see its riskier bets evaporate amid a buckling of emerging markets.
In a statement from its New York, headquarters, Shaw sought to allay investors' fears.
"Although we have experienced some losses as a result of price distortions attributable in part to forced liquidations by certain financially distressed firms, " the company said, "our investment, hedging and risk management techniques, together with a substantial degree of diversification and a lesser use of leverage, have allowed us to avoid the sorts of catastrophic losses experienced by such firms."
By agreeing to buy its entire portfolio, BankAmerica said it would substantially reduce Shaw's exposure.
In its third-quarter results, BankAmerica said loan-loss provisions due to market volatility totaled $1.4 billion. By contrast, provisions for loan losses in the year-ago quarter totaled $489 million.
The current quarterly losses included a $372 million charge to write down exposure to Shaw, with which Bank of America entered into a strategic alliance in March 1997, before its mega-merger with NationsBank Corp.
BankAmerica said it planned to sell over time the $20 billion portfolio, which is composed primarily of U.S. Treasurys and Japanese government bonds, along with lesser amounts of securitized student loans, municipal loans and other securities.
"They are going to take on these securities and liquidate them over time," said Thomas Theurkauf, a banking analyst at Keefe, Bruyette & Woods. "I think the bank wants to unwind these positions in as orderly and as profitable a way as they can and that they believe this structure allows them to do that."
A mutually beneficial relationship
Shaw manages $1.7 billion in assets. Under their alliance, BankAmerica reportedly lent Shaw about $1 billion for its investment portfolio in return for a 50-percent stake in the fund's profits and losses.
The alliance also apparently gave BankAmerica a valuable chance to observe up close the intricate financial gambles of the hedge fund.
The downside of those gambles -- which involve complex stratagems aimed at predicting market turns -- was vividly underscored by the near-collapse last month of Long Term Capital Management, a Greenwich, Conn.-based hedge fund run by trading legend John Meriwether and two Nobel laureates.
In the wake of the LTCM fiasco, several major financial institutions have disclosed losses stemming from hedge-fund exposure. The growing debacle has made already antsy banks even more cautious about extending loans -- a mood shift that has some economists warning of a credit crunch ahead.
In Washington, the fallout has included calls for tighter regulation of the essentially unregulated funds, which draw their clientele predominantly from an elite pool of affluent, institutional investors.
Even after its whopping charge, BankAmerica still had a $1 billion investment in Shaw, mostly in the form of loans or credit lines.
And the write-off charge comes on top of $330 million in previously announced pre-tax charges in the third quarter, due largely to exposure to Russia.
Earlier Wednesday, BankAmerica blamed global market volatility and expenses related to its merger with NationsBank for a dramatic shortfall in third-quarter earnings. Excluding a $519 million charge to cover the merger costs, BankAmerica posted operating profit of $893 million, or 51 cents a share.
The bank said overall income fell to $374 million, or 21 cents a diluted share, from $1.73 billion, or 96 cents a share, a year earlier. The results include a $519 million after-tax charge for costs related to its merger with NationsBank.
Analysts polled by First Call had predicted the earnings of 90 cents a share. BankAmerica also posted a trading loss of $529 million, vs. profit of $281 million a year ago.
"While we are not satisfied with our bottom line, we are encouraged that loan growth and consumer banking performance remain positive," Hugh L. McColl Jr., chairman and chief executive officer, said. "Loan growth was strong across the board.
McColl said the bank also had experienced growth in our credit card and deposit businesses, while overall credit quality remained healthy.
"In all," he added, "we believe this quarter did not reflect the earnings power we have with the new Bank of America. We remain incredibly enthusiastic about our company's future."
For the first nine months, operating earnings totaled $4.89 billion, or $2.73 per diluted share, compared with $5.13 billion, or $2.82 a share, last year. Net income for the period fell to $4 billion from $5.08 billion.
BankAmerica Corp. and NationsBank Corp. merged on Sept. 30, creating the new BankAmerica Corp. The most recent quarter results reflects the combined financial results of the new company.
BankAmerica had warned previously that net-income losses in the third quarter would be around $65 million, because of a single borrower. Nonetheless, the extent of the loss surprised some analysts and raised questions about the risk profile of the bank as it forges a new corporate lifestyle with the former NationsBank.
"I was frankly a little bit surprised this morning to learn that their exposure was as large as it is," Theurkauf said Wednesday, noting he had spoken to BankAmerica officials in the past three weeks. In the last discussion, he said, the bank reassured him that its exposure to hedge funds was "modest."
After Wednesday's revelations, Theurkauf didn't try to conceal his disappointment with the bank.
"It's losing money and it's lost some credibility," he said. "I think many analysts, myself included, thought the exposures were much more carefully managed than apparently they had been. … It's definitely tough sledding for this quarter anyway."
Theurkauf added: "I certainly think that going forward, the risk profile of the company will be changed. My guess is that they will take on the imprint of the old NationsBank and … trading results, both on the plus and minus side, will be lower going forward than we've seen historically. … I think they will continue to aggressively manage down their exposure to emerging markets."
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BankAmerica
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