B of A, JPMorgan See CDO Storm Ahead

Bank of Americasaid Friday that continued "market dislocations," including those related to the value of securities it owns that are backed by loans, will hurt its fourth quarter results.

Bank of America branch, New York City.
Oliver Quillia for cnbc.com
Bank of America branch, New York City.

But the nation's second largest bank did not provide an estimate of how large the impact will be.

In a regulatory filing with the Securities and Exchange Commission, the bank said it has some exposure to collateralized debt obligations -- complex financial instruments that combine slices of different kinds of risk. CDOs are often partly backed by subprime mortgages, or loans given to customers with poor credit history.

Bank of America does not directly offer subprime loans, but the value of the CDOs has plummeted as an increasing number of subprime borrowers have defaulted on their home loans.

"We expect these significant dislocations in the CDO market to continue, and it is unclear what impacts these dislocations will have on other markets in which we operate or maintain positions," the filing said

Also Friday, JPMorgan Chase said shaky credit markets could trigger more write-downs in the fourth quarter as the bank is exposed to about $50 billion worth of leveraged loans, risky subprime mortgages and collateralized debt obligations.

JPMorgan did not give any specific potential write-down figures in the filing. But the bank said unstable market conditions could affect results.

As previously disclosed, the bank's portfolio of held-for-sale leveraged lending commitments stood at $40.6 billion at the end of September. These commitments are hard to hedge against losses as the market for corporate debt used in leveraged buyouts has diminished substantially in recent months.

"Further markdowns could result if market conditions worsen for this asset class," it said in the filing.

In the third quarter, JPMorgan wrote down $1.3 billion, after fees, on the leveraged loan portfolio.

Meanwhile, the bank also may have to write down its portfolio of subprime mortgages and collateralized debt obligations, whose downturn has walloped rivals such as Citigroupand Merrill Lynch.

JPMorgan's exposure to CDOs is about $6.8 billion and about $2.6 billion for risky subprime mortgages. CDOs repackage assets including mortgages and credit-card receivables into bond structures.

Trading in JPMorgan and Bank of America shares picked up dramatically following release of the two banks' quarterly regulatory filings.


JPMorgan shares were little changed after warning in the 10-Q that it may have additional leveraged loan writedowns. Bank of America came off its session high but quickly retraced most of the decline.

-- Reuters and AP contributed to this report.