As the Wall Street Journal reported in “Analysts Are Billions of Dollars Apart on BofA’s Expected Legal Costs,” Bank of America is in talks to pay at least $12 billion to settle civil probes by the Department of Justice and a number of states into the bank’s alleged handling of shoddy mortgages.  Bank of America will likely have to add to its current litigation reserves to prep for the DOJ settlement.  But analysts have come up with widely varying estimates about how much the bank will add.

Morgan Stanley analyst Betsy Graseck pegs the amount at $4.6 billion, while Portales Partners analyst Charles Peabody expects a $3 billion charge for the DOJ settlement and $500 million in ongoing legal costs.  At the lower end of the spectrum, Citigroup analyst Keith Horowitz expects the bank to add $1 billion in litigation expenses.

When banks report large litigation expenses, some analysts strip out inconsistencies to calculate a so-called “core” earnings number, while others don’t.  Mr. Peabody, for instance, estimates that Bank of America will report a profit of seven cents this quarter.  He says he doesn’t strip out the so-called ‘unusual’ items because they have been re-occurring and probably will continue to do so.”  Mr. Horowitz, who is estimating that Bank of America will report a profit of 27 cents in the quarter, also doesn’t strip out any legal charges. 

“The reason these analysts are so far off in terms of costs is because of attorney fees and expenses,” said Terry Jesse, Executive Director of NALFA.  In an email to NALFA, Charles Peabody said that his model does not include attorney fees and expenses, just the settlement costs.