Value Destruction on Steroids

What would you think if you bought, say a Bugatti Veyron supercar at what you thought was a screaming deal of $250,000. Shortly thereafter, not only did you realize that what you thought was an exotic sports car was actually a Yugo, but that it was going to cost you an additional $850,000 just to get rid of it.

Now we know what it must have felt like to be Bank of America after they bought Countrywide Financial in 2008. But instead of talking about relative pocket change in the hundreds of thousands of dollars, add a couple of orders of magnitude and make the numbers $2.5bil and $8.5bil respectively.

BofA Agrees to $8.5 Billion Settlement, Sees Quarterly Loss

Bank of America (BAC) has confirmed it will pay $8.5B to large investors who lost money on mortgage-backed securities. The settlement is the largest in U.S. banking history and covers securities issued by Countrywide Financial, which BofA bought in 2008 for $2.5B. The bank will also record an additional $5.5B provision in Q2 2011 for representations and warranties exposure. Bank of America now expects to report a Q2 loss of $0.88-$0.93 a share, including a goodwill impairment charge of $2.6B. The investors include Pacific Investment Management, BlackRock (BLK) and the New York Fed. BofA rose 4.4% in premarket trading after news of the deal, with some estimates having put its liability at much higher than $8.5B. The deal could embolden investors to seek similar settlements with other major U.S. banks such as Wells Fargo (WFC) and JPMorgan (JPM). 

 *sigh*...