Bank of America Essay
Financial highlights of bank of America from 2007 to current year
The financial highlights for bank of America consider the uncertainties and all the risks that are involved. The performance may differ materially due to possible events for example, change in economic conditions in various geographical regions where the Bank operates which affect nonperforming assets, interest rate changes, market liquidity which lower interest margins and affect distribution of financial products in the market.
When there are changes in prices and market rates, there is adverse impact on value of securities, deposits and loans. Political conditions and actions of United States abroad affect economic condition, liabilities from litigation and changes in laws of taxation. (Matter, 1993 pp17-23).
Between the months of June to December 2007, financial markets experienced dislocations in leveraged finance and commercial paper markets which were compounded by typical correlations in markets where Bank of America does business. During the fourth quarter, credit ratings of structured securities were downgraded and this widened credit spreads of the securities. Bank of America has been participating actively in the market to maintain exposure to securities and have been making losses from these exposures.
In the month of august 2007, Bank of America made two million dollars investment in financial corporation which is the largest lender of mortgage in united states in form of non-voting convertibles securities that yielded 7.25 percent . In January 2008, there was agreement where shares worth four billion dollars in common stock were purchased countrywide which made Bank of America leading loan servicer. Quarterly cash dividend was declared by board of directors on $0.64 per share which was payable to common shareholders on 28th march 2008. (Globe, 2008 pp40-43).
In January 2008, two hundred and forty thousand shares belonging to Bank of America were issued at fixed-to floating rate with $0.01 par value for every share for a total amount of six billion dollars. There was additional issue of 6.9million shares which were owned by bank of America which consisted of convertible preferred stock that were non-cumulative with $0.01 par value. During November and December 2007, forty one thousand bank of America shares were issued with 7.25% preferred stock of series J for $1.0 billion. In September the year 2007, there was another issue of twenty two thousand shares for $550million with $0.01 par value.
The net interest income was $367 million in the year 2007 and the increase was due to net interest rate which was market based and increased loan to consumers and tax benefits due to restructuring of existing commercial aircraft in United States which offered a leasing business. These increases were offset by hedge costs and spread compression and divestitures of foreign operation in January 2007. There was increase in income from mortgage banking by $361 million because of favorable performance of the bank which offset wide credit spreads on revenue generated from mortgage production and mortgage banking benefited by adopting option of fair value. (Knowles, 2008 pp29-34).
Sovereign wealth funds in America were controlling over $2.9 trillion which was from oil and gas which was a source of surplus funds. Bank of America reduced dividend payout in order to increase liquidity. It sold bonds and preferred stock to get short term funds at high rate of interest. Bank of America has managed to place huge volume of debts to their investors in order to survive the credit crisis where it obtained two hundred billion dollars as new capital in May 2008.
HOW THE SUB PRIME MORTGAGE MARKET HAS EFFECTED BANK OF AMERICA
Sub prime mortgage market has no steady and consistent influence on secondary markets that are sponsored federally. This is because, there lacks public actor to exercise the function of underwriting to be relied on by sub prime mortgage market instead of using the rule of law. There has been legislation of protecting consumers which is imperfect due to commercial change. Even if there was application of consumer laws in subprime loans, securitization deals help consumers to enforce their rights that are cost prohibitive. The capital structure of lenders of subprime mortgage tries to make culpable parties get immune from sanctions of judiciary and consumers lack access to home loans.
Private securitization had a trust that pooled mortgage loans and passed income generated from loans to investors who acquired interest. After resolving the hurdles of tax, pricing and liquidity, there was explosive growth in subprime mortgage market. Securitization model has many different parties with independent roles of structuring, pooling and servicing sub prime mortgage loans with variety of ways of securitizing the loans. Initially, potential borrower is identified by mortgage broker through telemarketing, television and direct mail. (Broderick, 2001 pp04-08).
The broker and originator identifies loan which is unsuitable to the needs of borrower. Home mortgage consolidates unsecured debts of borrower and refinance home mortgage which is pre-existing. In order to determine the interest rate to be charged, the broker uses reporting agencies of consumer credit who compile databases of credit performance of consumers in the past to show outstanding debt and bankruptcies. Once consumer gets a credit score based on statistical models, it helps the Bank of America to know how the customer is reliable in repaying back the loan.
The customer signs all the documents that bind him to loan according to described terms and some brokers prefer funding loan directly by using their funds or line of credit of warehouse and others use the capital of originator. The originator is able to establish right to get payment by using public notice which is put in office of county recorder. Originator can transfer loan to subsidiary in banking firm that carry out investment and is able to give out loans to other people. (Epstein, 2008 pp09-11).
Bank of America formed a joint venture to assist borrowers who were struggling with the burden of getting their monthly payments. It bought largest mortgage lender in the country because it ranked second largest institution of banking. This led to speculation in the country due to proliferation of subprime mortgage that would make it be forced to declare bankruptcy. The committee of financial services said that purchasing country wide mortgage was positive development in solving subprime crisis and keep families in America in their homes.
Subprime mortgage market led to havoc in Bank of America and credit markets where banking system was disrupted significantly due to failing to oversee effectiveness of financial markets. There was failure by administration to get intervention by the government quickly in order to address the issue competently. Debt relief act on mortgage forgiveness have tax deductions on insurance premium charged on mortgage and eliminates accrued tax by forgiving debts.
Before this legislation, forgiveness of debts was taken to be income and was liable to taxation which would further cripple families that are struggling in America. Bank of America received additional capital such as cash investments from sovereign wealth funds that control developing countries surplus savings. Estimated $69 billion was invested in financial institutions last year. In January 2008, there was a total of twenty one billion dollars that were provided by wealth funds to major financial institutions. That capital helped to maintain capital ratios that measures financial health which declined significantly as a result of subprime loan losses.
Bank of America has panicked due to mortgage crisis and it encouraged investors not to investors their money in mortgage bonds that are risky but instead they put it as a store f value due to collapse in the value of US dollar. The bank, mortgage lenders and hedge funds have suffered a lot due to default in mortgage payment or loss of value of mortgage asset. In April 2008, there were subprime mortgage losses that were more than $280 billion. (Lee, 2007 pp13-15).
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Matter B. (1993): American banking community: economic history, pp17-23.
Globe B. (2008): participation in Bank of America: Orthofix International, pp40-43.
Knowles F. (2008): finance in bank of America: Chicago Sun-times, pp29-34.
Epstein D. (2008): new site for Bank of America: Buffalo news, pp09-11.
Broderick P. (2001): subprime mortgage market in America: New York times, pp04-08.
Lee C. (2007): subprime mortgage market: John Wiley and sons, pp13-15.