Bank of America says AML remediation costs sit in the run rate after a $1.21 billion Treasury penalty

The penalty accounts for most of the quarter's profit decline, though not quite all of it. Net income was $6.9 billion, down 17% ^[8], which implies about $8.3 billion a year earlier ^[16] and a drop of roughly $1.4 billion ^[17]. Set the $1.21 billion penalty ^[7] against that and about $0.2 billion is left for other causes ^[18]. The inputs are rounded and tax treatment would move the result, so treat the remainder as a range. American Banker wrote that the pain from regulators "wasn't the only problem" ^[14]. Jefferies' David Chiaverini called the quarter a "modestly weaker print" and put the weakness "mostly on fees" ^[5].

Moynihan's claim has two parts. He said on the call: "That penalty is paid, in the third quarter. The expenses are in the run rate." ^[1] The first part is a past cash item. The second is a level, and a level holds only while remediation spend stays at or below what the expense base already carries. The American Banker account does not include a dollar figure for that spend, so the claim cannot yet be tested against a number.

Borthwick extended the claim to other spending. "It won't crowd out anything either, because we've invested the technology and we've invested the people that we feel like we need to get the work done," he said ^[12]. He added: "It should not impact our clients in any way." ^[15] In allocation terms that is a statement about what the bank is not doing, which is cutting other projects to fund the fix. If it is wrong, the expense lines over the next few quarters will show it.

Remediation itself continues. "We have agreed to call this a settlement and move forward," Moynihan said ^[4], and in the same discussion he said the team is "committed to completing the work required to be addressed by the regulators" ^[2]. Chiaverini wrote that "we believe remediation costs are largely embedded in the current expense base" ^[3], then named the open item: "The key debate is how long the consent order could be in place and the extent to which it could impede operations, if at all." ^[6]

We think the earnings frame holds for now. A paid penalty is a closed cash item, and Chiaverini reaches the same conclusion on cost. The counter-thesis is duration: remediation tied to a consent order of unknown length turns a run rate that looks sufficient this quarter into a standing expense. If the order is short, the line fades; if it is long and the current base absorbs it, management is right; if it carries operating limits, the earnings frame fails. Borthwick's answer to the last case was "There's no asset cap here, so there's nothing there" ^[11].

What would change our view is a quarter in which remediation has to be broken out above the run rate, or a restriction on operations that management has not yet disclosed.