Correction and Update: 1/8/13, 11:30 AM.
FORTUNE -- When a bank tells investors and the Securities and Exchange Commission how much it expects to pay to cover its legal bills and bad loans, you would think those estimates are fairly accurate -- or if not accurate, at least close. In the case of Bank of America, that expectation proved wrong, once again. This time the bank was off by a whopping $5.2 billion.
On Monday, Bank of America said it reached a $11.6 billion deal with Fannie Mae (FNMA) to settle claims that it and Countrywide, which BofA bought in early 2008, sold faulty loans to the mortgage insurance giant in the run-up to the financial crisis. The bank also is laying out money to resolve claims that it improperly foreclosed on borrowers -- as part of a $8.5 billion broader settlement between federal regulators and a number of large banks -- as well as some other mortgage-related costs.
None of these settlements were all that surprising. The ghost of bad mortgage past has hung over BofA for some time. And the bank has been locked in negotiations with Fannie over mortgage claims. At last count the two were wrangling over about $11 billion in mortgages. So the $11.6 billion payout is pretty close to what should have been expected. Indeed, investors appeared to shrug off the news. BofA's shares (BAC) closed Monday down just two cents, to just over $12.
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But what is truly surprising was just how far off BofA was in estimating how much it would cost to resolve all these claims.
Every quarter, all banks, BofA included, tell investors how much they have set aside to cover such things as defaulted loans and legal bills. This money is called reserves, and it's sort of a rainy day fund. Banks are supposed to put the money aside when they can reasonably expect a loss to occur. And they draw money out of the account when they have to actually pay out or take the loss. The number is supposed to reassure investors. Bank of America, for instance, has earmarked a total of $16 billion just to cover the types of deals it cut with Fannie.
But bank reserves, and in particular legal reserves, are murky. Banks only give a total amount, and not what goes into that calculation. It's the 'trust us' approach. And at least in BofA's case, it's not clear investors should. Take the Fannie settlement. BofA said it had not previously reserved for $2.7 billion of the deal. The bank is paying Fannie $11.6 billion, but that includes buying back nearly $7 billion in loans. Many of those loans may be worth as much as half of their original value. So out of a roughly $7.8 billion deal (final cost), BofA had put only 65% of the settlement aside. By that math, BofA's $16 billion reserve fund for these types of deals should really be more like $24 billion.
In all, BofA had set aside $6.4 billion, or enough to cover just 55% of the cost of the all the legal settlements and losses the bank announced on Monday.
A spokesman for BofA said that the bank was glad to have the Fannie matter behind it. He said the bank does its best to estimate future legal costs, but settlements vary. The spokesperson said the Fannie deal was larger than expected because it covers not just the loans in dispute but other related matters and eliminates any payouts that BofA might have to make to Fannie on behalf of loans it made. BofA could still be forced to compensated Fannie and Freddie Mac for mortgage bonds BofA underwrote and the insurers bought as investors. The BofA spokesperson said some of the charges BofA took on Monday were not things the bank typically sets up reserves for.
(UPDATE: Commenting on the bank's reserve policies a BofA spokesman said, "Bank of America follows all applicable accounting rules with regard to establishing reserves and we book reserves when the amounts are both probable and estimable.")
The SEC knows that banks often don't have a stormy enough outlook when putting together their rainy day funds. So they tell banks to tell investors how much they might possibly lose above and beyond the money they have already set aside. And even on this estimate, BofA was way off. Last quarter, it put its potential Fannie losses at $1 billion. The final bill was nearly three times that.
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And what about that other $2.5 billion in mortgage-expenses that BofA said it would take as a charge on Monday? Well, $1.1 billion has to do with the settlement BofA and other banks signed with federal regulators on foreclosure abuses. Another $900 million is money that BofA is adding to litigation reserve fund for mortgage claims, which is a positive sign, but another acknowledgement that its reserve fund was short. The rest, $500 million in costs, BofA won't say more about other than to say it is other mortgage related costs.
So while BofA shareholders should be happy that the bank has put some more legal claims, and costs, from the housing bust behind it, Monday's settlements and charges should leave investors questioning the bank's financial statements once again. BofA says its legal reserves and its much bigger, and far more important, loan loss reserves are two total different things. But if BofA is skimping on one, who's to say it hasn't been skimping on the other? And recently, BofA has been pulling money out of its loan loss reserves, saying the amount of money it needs to have on hand to cover bad loans is shrinking.
The cover story of the Atlantic this month says that four years after the financial crisis banks remain black boxes - you can't really tell what's in them and how they make money. Legal reserve funds are another example of that. If bankers really want to earn investors' trust back, actually putting aside an amount of money that approaches their real potential losses would go a long way.
Update and Correction: The story is updated to include a comment from a Bank of America spokesman related to the firm's reserve policies. An earlier version of this piece said that BofA had eliminated the possibility that it would owe more money to Fannie for past mortgages. In fact, the settlement just covers loans that BofA made and Fannie insured. A FHFA case against BofA seeks damages on behalf of Fannie and Freddie for losses on mortgage bonds the two insurers bought in their investment portfolio that were underwritten by BofA. Also, an earlier version of this piece said that BofA recorded an accounting loss on the sale of its mortgage servicing rights. That was incorrect. BofA actually had a $650 million gain.