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The Mad Mad Mad World of Banking

By Dan Radovsky | More Articles
June 30, 2011 | Comments (1)

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Huzzah! Great news for Bank of America (NYSE: BAC  ) ! It has agreed to a settlement that could reach $14 billion, the largest ever settlement stemming from the largest ever financial crisis since the Great Depression. Three cheers! Hooray!

Wait a minute -- that's nuts. Why is that good news?

Beats me, but the stock market must think it is, because it rewarded Bank of America by upping its stock price by almost 3% when it heard the news.

But that's even more than Bank of America's profits since the financial crisis.

The market moves in mysterious ways. The stocks from JPMorgan Chase (NYSE: JPM  ) , Citigroup (NYSE: C  ) , Goldman Sachs (NYSE: GS  ) , and Morgan Stanley (NYSE: MS  ) gained 2% on the news also.  Bank of America and Morgan Stanley both fell back a bit today, though.

Any other "good news"?

You betcha! There could be even more settlements coming down the road with the large banks that created mortgage-backed securities during the boom, including JPMorgan Chase, Citigroup, and Wells Fargo.

Who gets the money? Homeowners adversely affected by the housing crisis?

Don't be silly. This money goes to 22 of Bank of America's biggest institutional bondholders, such as BlackRock (NYSE: BLK  ) , Pimco, and The New York Federal Reserve to settle bad mortgage investments.

How did Bank of America get so lucky?

Back in 2008, it bought troubled mortgage lender Countrywide Financial in what some analysts -- including our own Morgan Housel more than two years ago -- say is one of the worst banking takeovers ever. Countrywide was in huge trouble at the time after many of its high-risk subprime loans defaulted. But hey, who's laughing now?

I don't think I can take any more good news today.

Wait, I'm not done! Bank of America and other large banks may be on the hook for more! A coalition of 50 state attorneys general are in settlement negotiations with the banks over their shoddy foreclosure practices, with $20 billion being the number discussed. Oh, and I almost forgot, another $21 billion is being sought by bond insurer MBIA (NYSE: MBI  ) from Bank of America. That case is before the New York State Supreme Court right now.

With news like that, can happy days be far behind for the banking industry? Comments are definitely welcomed.

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You may already know that in the final year of his life, Jobs revealed a stunning betrayal — and told his biographer, "I will spend my last dying breath... and every penny of Apple's $40 billion in the bank to right this wrong." What was it that made Jobs so irate — and why could it make a few in-the-know investors some major profits over the coming months and years?

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Fool contributor Dan Radovsky has no financial interest in the above mentioned companies, but he can't seem to un-stick his sarcasm meter.

The Motley Fool owns shares of JPMorgan Chase, Wells Fargo, and Bank of America, has created a ratio put spread position on Wells Fargo, has opened a short position on Bank of America. Motley Fool newsletter services have recommended buying shares of BlackRock. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 30, 2011, at 9:34 PM, Gonzhouse wrote:

    US Banks have subprime and European banks have Greece; why would anyone invest in a bank, foreign or domestic? Banks have turned into nothing except a convenient intermediary to transfer debt from corporate & governmental entities to the ultimate endpoint: the taxpayers.

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