Bank of America Corp. said Tuesday that it expected to write down $3 billion of debt in the fourth quarter in the wake of the nation's deepening housing slump.
Nevertheless, shares of the second-largest U.S. bank rose as investors gained confidence that the bank and its rivals could withstand further turmoil, even if credit market liquidity failed to improve and more homeowners slid into foreclosure.
The estimated pretax loss stems from so-called collateralized debt obligations, including those tied to sub-prime mortgages, and may increase if market conditions worsen, Chief Financial Officer Joe Price said at a Merrill Lynch & Co. banking conference in New York.
Charlotte, N.C.-based Bank of America also said it was prepared to spend $600 million to help money market mutual funds it manages maintain a net asset value of $1 a share despite holding debt indirectly backed by mortgages. The company also is writing down $300 million on a troubled investment and increasing the provision on its books for other housing-related losses, including losses on loans to home builders.
Price described the company's anticipated fourth-quarter losses as manageable but cautioned that capital markets were likely to remain turbulent into 2008.
Marshall Front of Front Barnet Associates in Chicago, who manages $800 million in assets, including Bank of America shares, agreed with Price's characterization.
"The losses are not only manageable for the bank but were long ago discounted by investors," Front said. "Unless something enormous and unforeseen happens, major, diversified, well-capitalized banks can handle these losses."
Shares of Bank of America jumped $2.29, or 5.2%, to $46.27. They are down 13% this year.
Other banks, including Citigroup Inc., Morgan Stanley and Wachovia Corp., have also projected large fourth-quarter write-downs on mortgage-linked securities and other debt that investors are no longer willing to buy. Industrywide write-downs so far total more than $40 billion.
The lack of a ready market for the troubled debt in question has posed an accounting problem for the banks.
"With the significant deterioration that we've seen, it does make these things difficult to value," Price said.
Among other executives at the Merrill Lynch conference Tuesday, Goldman Sachs Group Inc. Chief Executive Lloyd Blankfein said the company didn't expect significant asset write-downs.
And JPMorgan Chase & Co. CEO Jamie Dimon said, "We think we're fine," as he discussed the third-largest U.S. bank's exposures.
Shares of Goldman and JPMorgan jumped 8.5% and 6.3%, respectively.
Price said some securities that Bank of America expected to write down were tied to sub-prime mortgages, which go to people with poor credit. Although Bank of America makes home loans, it has not offered sub-prime mortgages since 2001.