Bank of America's $19bn China windfall dwarfs $3bn writedown

The $3 billion writedown disclosed by Bank of America early this week has been overshadowed by the announcement that an investment in China stands to earn the firm $19 billion.

At an investor meeting in New York on Tuesday, chief financial officer Joe Price confirmed the bank is expecting $3 billion in mark-downs of collateralised debt obligations (CDOs) in the fourth quarter, due to downgrading of the securities’ creditworthiness.

He also revealed Bank of America has $11.7 billion of subprime exposures, with about $400 million in subprime-backed exposure in its CDO warehouse.

"The credit ratings of certain CDOs were downgraded, which, among other things, helped to trigger severe dislocations in the CDO markets. As market conditions change and possibly worsen, there could be additional diminution in value,” Price warned.

Price also divulged, however, that a $3 billion investment the bank made in China Construction Bank (CCB) two years ago has appreciated handsomely and will dwarf the subprime losses announced by the bank so far.

While the initial holding in CCB was just 8.5%, the terms of the contract allowed Bank of America to increase its position to 19.9% at extremely reasonable rates. The holding now has a value of $16 billion, although Price claimed "on paper we have a potential gain in excess of $30 billion".

Speaking at the same event, Goldman Sachs chief executive Lloyd Blankfein maintained that the investment bank remains short in the subprime sector and will not be announcing any changes to its previously stated financial position. "We are confident that we know how to evaluate these assets," Blankfein said.

Shares both in Goldman Sachs and in Bank of America rallied in the wake of the announcements.