BankAmerica’s Loan Loss May Hit $95 Million
BankAmerica Corp. said Thursday that its losses related to a package of mortgage investments may run as high as $95 million, more than twice the figure previously estimated.
The nation’s second-largest banking firm stated that it has set aside another $58 million to cover the expected losses, in addition to the $37 million announced only two weeks ago.
“It’s bad news. We hope there’s no more,” BankAmerica Chairman Leland S. Prussia said in an interview. “It’s a fairly large figure, but it’s not going to sink the corporation.”
San Francisco-based BankAmerica Corp. increased its estimated loss because of new information gleaned from a broad investigation of the mortgages and the properties they represent, Prussia said.
Bank Involved
BankAmerica’s principal subsidiary, Bank of America, served as escrow agent and trustee for pools of mortgage loans, which were sold to more than two dozen savings and loan firms and other financial institutions.
As guarantor of the mortgages, BankAmerica “was left holding the bag” when the properties turned out to be grossly overvalued, irregularities were found in their titles and insurers backing the mortgages failed to honor claims, Prussia said.
To date, the bank has paid the institutions who invested in the mortgages a total of $133 million. The bank now estimates the value of the properties at $38 million.
Setting aside the extra $58 million has forced the bank to restate its profits for the last three months of 1984 and the entire year.
On Jan. 21, the corporation reported profits of $73 million for the fourth quarter, up 39% from the corresponding period of 1983. On Thursday, however, profits were revised to $44 million--a 16% drop from 1983’s fourth quarter. Accordingly, the bank’s profit for the whole of 1984 was reduced to $346 million, down 12% from 1983.
“I’m surprised and disappointed they would have this second round of write-offs,” said Don Crowley, a bank analyst at Keefe, Bruyette & Woods, a New York-based brokerage house specializing in the banking industry. “From a fundamental point of view, $95 million or $37 million doesn’t make that much difference to a bank this size.
“What is at issue is the question of the bank’s controls and how adequate they were or weren’t. And secondly, is this the whole story? What more could be coming out?”
The complex case involves a Southern California firm that packaged the mortgage-backed securities, a Delaware insurance firm that insured the securities and then went out of business, another insurer based in Montana which this week was suspended from doing business in California, and more than two dozen thrift institutions around the nation that bought the mortgage bonds as investments.
A Tangled Tale
Insurance and banking officials in New York, Texas and California, a New York federal grand jury and the FBI are all pursuing a tangled tale of alleged fraud. Two people mentioned as principals are convicted felons.
Federal prison officials said Thursday that Kent B. Rogers, whose Orange-based West Pac Corp. purchased some of the apparently overvalued properties and marketed the mortgages, reported Tuesday to the federal prison at Lompoc to begin a six-month term on a 1981 conviction for concealing assets in a bankruptcy case unrelated to the BankAmerica case.
The U.S. 9th Circuit Court of Appeals this week denied Rogers’ application for bail while he awaits a hearing on his appeal of the fraud conviction, a spokesman for the U.S. attorney’s office in Los Angeles said.
The second man, David A. Feldman, 45, was convicted of mail and wire fraud against his former employer, Merrill Lynch & Co., in federal court in Chicago in 1982. He is serving an 18-month term in a federal prison at Boron, Calif. He is due to be released in April. Feldman has been unavailable for comment since the first estimate of BankAmerica’s loss was disclosed two weeks ago.
A suit filed by Texas, acting as receiver of some of the properties, alleges that Rogers and Feldman bought condominium and apartment complexes in the Houston area and in Southern California, then had them appraised at a fraudulently high value.
Used as Collateral
The inflated values were then used as the basis for mortgages that provided collateral for the securities later sold as investments to financial institutions, the Texas suit said. The mortgage pools were packaged and sold by National Mortgage Equity Corp. of Palos Verdes Estates, a firm controlled by Feldman.
(Rogers has denied that he is a business associate or partner of Feldman’s, and he has contended that his firm maintained an “arm’s length” relationship with National Mortgage Equity.)
The securities were insured by several firms, including Pacific American Insurance, incorporated in Delaware, which is now insolvent. Delaware insurance authorities said in another suit that the firm was secretly controlled by Rogers. Rogers has denied that he was responsible for BankAmerica’s current losses.
A second insurer, Glacier General Assurance Co., chartered in Montana, is listed as guarantor of some of the securities sold by BankAmerica but has failed to pay claims to thrifts who purchased them. BankAmerica officials Thursday blamed Glacier General for some of its current losses, but the insurance company’s president, John Hayden, denied that his firm was responsible for the bank’s problems.
Sweeping Investigation
BankAmerica’s Prussia said the bank is conducting a sweeping investigation to determine the scope of the problem and the extent of involvement by bank officials. Several bank employees already have been suspended and others may follow, he said, but the banking firm previously issued a statement saying that the suspensions “do not imply any judgment by the bank as to any individual’s responsibility.”
“A lot of people are involved” in the probe, Prussia said, including in-house and outside lawyers and auditors. “Thousands of man-hours is a conservative estimate” of the effort that will be needed to untangle the problem.
