Legal Woes Continue for Bank of America
Bank of America’s (NYSE:BAC) situation can be aptly described using the analogy of a boat caught in the middle of a storm – each time the crew tries to steer the boat back on course, a new wave throws it off. And it is no small swell this time around for Bank of America with the Federal Housing Finance Agency demanding refunds for all loans “mis-sold” to Fannie Mae and Freddie Mac in a lawsuit filed last Friday. [1] Bank of America, the biggest U.S. lender by assets, has been hit by a string of lawsuits concerning its legacy mortgage business. Each lawsuit has been fueling strong pessimism among investors about the quality of the bank’s assets, and its spiraling legal costs. The FHFA filed separate lawsuits against 17 global financial giants, including Barclays (NYSE:BCS), JPMorgan Chase (NYSE:JPM), Goldman Sachs (NYSE:GS) and Citigroup (NYSE:C).
We maintain our price estimate for Bank of America’s stock of $11 and acknowledge the fact that while the market seems to be over-reacting to any bad news, the growing list of lawsuits represent a significant downside to our price estimate.
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Bank of America received its first major jolt in the last two months with American International Group’s (NYSE:AIG) $10 billion lawsuit holding the bank responsible for the insurance giant’s loss from purchased mortgage-backed securities (See Bank of America’s Stock Gets Double Whammy, AIG Suit a Concern).
As lawsuits piggybacking on this move by AIG continued to trickle in, Bank of America sought to address investor concerns by getting Warren Buffett to invest $5 billion in the business (See Bank of America Strikes Deal for Buffett’s Endorsement).
The bank has also initiated a series of steps to cut down on its Home Loans business while raising cash by any means available – except issuing additional shares. (See Bank of America Scrambling to Ease Investor Concerns). [2]
… but the lawsuits can erode significant value
The impact of the FHFA’s lawsuit on Bank of America can be gauged by the fact that prior to 2008, Fannie Mae and Freddie Mac bought $6 billion in securities from Bank of America, and $24.8 billion & $26.6 billion from the bank’s now-subsidiaries Merrill Lynch and Countrywide respectively – a sum of more than $55 billion. [1]
Should the court rule against Bank of America, the potential decline in our price estimate can be seen by making changes to the chart above, which captures the operating margins for the bank’s mortgage business.
See our full analysis of Bank of America
Notes:- Barclays, BofA Sued by FHFA Over Mortgage-Backed Securities, Bloomberg, Sep 2 2011 [↩] [↩]
- BofA Can Meet Capital Goals Without Share Sale, CFO Says in Internal Memo, Bloomberg, Sep 2 2011 [↩]