Bank of America's $1.8 billion loss dims its prospects

The deteriorating economy has dragged down Bank of America, causing the nation's largest consumer bank to report its first quarterly loss in 17 years.

The $1.8 billion in red ink, announced Friday, was magnified by the separate news that Merrill Lynch & Co., which the bank acquired on Jan. 1, lost $15 billion in its last quarter as a separate entity.

Despite an overall profit of $4 billion, the twin fourth-quarter losses weighed on financial stocks, as did Citigroup, which posted an $8.3 billion fourth-quarter loss and, as a first step in resolving its problems, said it was going to split off its banking operations from $301 billion in troubled assets to be held by other units.

For the day, Bank of America saw its share price fall $1.14 per share to $7.18, down 13.7 percent.

The earnings news raises serious questions about Bank of America's prospects for 2009, the infusion of further capital from the federal Troubled Assets Relief Program, and the drag from other Bank of America acquisitions – such as Countrywide Financial in July.

"We did not expect the significant deterioration in mid- to late December that we saw," Bank of America Chief Executive Ken Lewis told investors in a Friday conference call that shed more light on the Merrill Lynch acquisition, which many describe as hurried.

The Merrill Lynch deal hands Bank of America a big portfolio of troubled mortgage-backed securities and other problem assets. In today's release, the combined company reported $118 billion in troubled assets in total, 75 percent of which belong to Merrill Lynch.

The bank acquired the investment firm only after federal authorities assured the bank they would help cover Merrill Lynch's losses. This week, the US government invested another $20 billion in the bank to help it close the takeover and said it would guarantee much of any future losses on the risky assets.

The company also cut dividends to 1 cent a share, down from 32 cents in October, which was itself a halving of dividends.

Bank of America is rapidly building capital in the event of a turbulent 2009, tripling its so-called "loan loss provisions" to $8.5 billion compared to the same period last year. Such a buildup is generally a sign that a firm expects current and future loan losses.

Today's losses "aren't something that just happened," says Robert Brusca of FAO Economics in New York. "You have to wonder whether the principal vulnerability is Countrywide."

Countrywide, acquired in July after toppling under mortgage defaults, was the nation's largest mortgage lender before the acquisition. The $4 billion takeover culminated a dramatic dance in 2007 between the bank and Countrywide in which Bank of America lent the failing mortgage firm $2 billion as it struggled under the weight of toxic mortgages.