BAC Bank of America Corporation

By Rachel Louise Ensign 

Bank of America Corp. has brought in an outside law firm to help examine a soured lending arrangement that led to a $292 million charge in last year's fourth quarter, according to people familiar with the matter.

The losses sprang from financing involving troubled South African firm Steinhoff International Holdings NV, the people said. Bank of America is trying to figure out if the losses, which surfaced at many big global banks, could somehow have been avoided, the people said.

The inquiry is being conducted by law firm Davis Polk & Wardwell LLP and began late last year, the people said. The law firm recently has interviewed Bank of America staff, some of the people added.

Bank of America's board is being kept abreast of the inquiry, which is ongoing, some of the people said.

"One of the reasons we have record-low credit losses is because we take the time to analyze what happened when things don't go as planned and learn from it. It's the responsible thing for a financial institution to do," a bank spokesman said.

Bank of America Chief Executive Brian Moynihan alluded to the inquiry on the bank's earnings call in January. "It is always a wake-up call that some things don't turn out well, and we got to go back and what are lessons learned and what did we do right or wrong on that and how we avoid that in the future," Mr. Moynihan said of the loss. "We weren't happy with it, from the top of the house through to the actual people who were involved in it."

Bank of America was one of a number of global lenders that held pieces of a EUR1.6 billion ($2.0 billion) loan to Christo Wiese, then chairman of the South African retailer. Mr. Wiese's shares in the company served as collateral for the financing.

Those shares collapsed in value last fall after the retailer, which owns Mattress Firm and the Sleepy's brand, disclosed accounting irregularities.

The speed of the resulting share-price decline -- the stock was worth 120% of the loan on Dec. 5 and less than 24% two days later -- left banks few good options. In addition to Bank of America, Citigroup Inc., JPMorgan Chase & Co. and Goldman Sachs Group disclosed losses to what was typically described as a single-name client in the fourth quarter.

This client, people familiar with the matter said, was Steinhoff. The four banks booked a combined hit to fourth-quarter earnings of more than $1 billion.

Bank of America's $292 million loss was the second-largest charge for the quarter and was spread across its global banking and markets divisions.

That drove the bulk of loan-loss provisions in both units in the fourth quarter, a sign of both how large the Steinhoff loss was -- and how healthy the rest of the units' portfolios were by contrast.

Citigroup had the highest charge, described as up to $370 million.

The losses hit banks so quickly and broadly that many analysts have brushed off the charges as a one-time occurrence that isn't indicative of broader underwriting problems. Still, Bank of America is looking to see how the exposure to Steinhoff came to be and how the bank can avoid similar problems in the future, the people familiar with the matter said.

Citigroup, Goldman Sachs, HSBC and Nomura put together the original loan to Mr. Wiese. Those banks sold off large chunks of their exposure to several other banks, including Bank of America.

The loan was made to a vehicle controlled by Mr. Wiese in September 2016 to help him fund a Steinhoff capital-raising needed to pay for one of its many acquisitions. Mr. Wiese's vehicles pledged 628 million shares -- at that point worth EUR3.175 billion -- as collateral against the loan.

In essence, Mr. Wiese borrowed against his Steinhoff shares to buy more Steinhoff shares. Such stock-based lending had been booming across the banking industry due to what was until recent days a long, low-volatility stock rally and the loans' light capital requirements.

Bank of America, which experienced major losses and fines in connection with the financial crisis, has become much more conservative in recent years across its businesses.

Write to Rachel Louise Ensign at rachel.ensign@wsj.com

(END) Dow Jones Newswires

February 07, 2018 07:14 ET (12:14 GMT)

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