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BP and BofA: Are There Parallels?

Biggest talk on trading desks is what's happening with banks, with Bank of America at a new low on concerns over its exposure to the foreclosure mess.

BofA bought Countrywide, which sold billions worth of mortgage backed securities which may now be subject to put-backs from the buyers of those securities on the grounds that BofA violated servicing agreements for not properly following legal procedures.

Bears argue that the weakness is justifiable given the (currently) unquantifiable level of exposure to potential putbacks over its private label mortgage exposure. They also note that BofA is the largest mortgage servicer, with more than 20 percent market share.

But others are saying this is following a similar trajectory to the BP mess, which started out with dire predictions for everyone...but the worst did not come to pass.

That's what most analyst s think about the foreclosure mess: the Street is over-discounting its exposure to put-backs. Raymond James, for example, this morning released a model with $5 billion in losses over the next five quarters for BofA ($2.5 billion in losses in a base-case, an additional $1.5 billion for higher than expected losses, and $1 billion in legal expenses). That amounts to $0.34 per share; by comparison, their Q4 2010 earnings estimate is $0.28.

That is a hit for sure, but it is not a calamity. "We believe the big banks have the capital and earnings power to resolve the mortgage mess without de-railing the ongoing EPS recovery," Raymond James ' analysts wrote this morning.

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