News Column

Possible BofA Settlement Worries Investors

October 22, 2013

Andrew Dunn, The Charlotte Observer

bank of america
A possible $6 billion settlement has investors worried about Bank of America.

Oct. 22--Emerging reports that Bank of America could face a $6 billion settlement from the Federal Housing Finance Agency are raising fears anew that the Charlotte bank's legal troubles are far from over.

The agency overseeing mortgage giants Fannie Mae and Freddie Mac is working toward a settlement with Bank of America that would resolve a 2011 lawsuit over mortgage-backed securities sold to Fannie and Freddie that later went bad, news reports Monday said.

Bank of America and the Federal Housing Finance Agency declined to comment. Bank of America's stock fell less than 1 percent Monday, to $14.52.

A Bank of America deal would come as the federal agency is pursuing a similar $4 billion penalty against JPMorgan Chase, the largest U.S. bank by assets. It could be part of a $13 billion total settlement with other government agencies over JPMorgan's packaging and sale of mortgage bonds.

"None of the large banks can assume that they've got all these issues squarely behind them at this point," said Marty Mosby, a bank analyst with Guggenheim Securities. "They've still got some work to do."

Should the $6 billion Bank of America deal come to fruition, it could confirm fears that analysts discussed during the second-largest U.S. bank's earnings call last week. After learning that JPMorgan had a total of $23 billion set aside to deal with litigation amid a "volatile" regulatory climate, the analysts had worried that more legal trouble could be in store for Bank of America.

Executives at Bank of America told analysts that the bank has paid more than $40 billion in settlements over the past three and a half years -- more than any other bank -- and said they thought they were adequately prepared.

Mosby said a $6 billion settlement would be "rather manageable" for Bank of America, which has already set aside a substantial amount of money to cover potential losses from the suit.

But the real risk for Bank of America could come from a flood of lawsuits over similar allegations should the government require the bank to admit guilt, Mosby said. While the $6 billion settlement would be covered by a quarter or two of earnings, another round of litigation could "tear at the fabric" of the company, he said.

Bank of America also still faces a number of other legal uncertainties. An $8.5 billion settlement with a number of investors who held mortgage bonds issued by Countrywide Financial before the crisis still must be approved. Bank of America bought Countrywide in 2008.

The bank has also been on trial this month in federal court in New York in a suit brought by U.S. attorneys alleging that Countrywide produced and sold mortgages to Fannie and Freddie without regard to quality.

"Investors are anxious for these (legal issues) to get behind them," Mosby said.

Bloomberg News contributed.

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Original headline: Reports of potential $6 billion settlement at Bank of America stir investor fears


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