Bank of America Sued! Nobody Cares

Stop the presses! This just in: According to the story gracing the top of virtually every financial news website right now, Bank of America (NYSE: BAC  ) has been sued for malfeasance related to the financial crisis. Wait a second, is this groundhog day?

Pardon the hyperbole, but it's true. Earlier today, the United States Department of Justice filed a lawsuit against the nation's second largest lender by assets alleging that it -- or more accurately Countrywide Financial, a subprime mortgage originator that B of A acquired in 2008 -- misrepresented the underwriting standards used to originate mortgages that were then sold to Fannie Mae and Freddie Mac.

On the heels of this news, shares in B of A are paradoxically up more than 1% in intraday trading. What gives?

Why the market doesn't care
The answer to this is threefold.

First, most analysts have been expecting something along these lines since similar lawsuits were filed against JPMorgan Chase (NYSE: JPM  ) and Wells Fargo (NYSE: WFC  ) earlier this month. In the suit against Wells Fargo, for example, the Justice Department claims that the California-based bank and now-largest mortgage originator in the country committed "reckless underwriting and fraudulent loan certification for thousands of FHA-insured loans that ultimately defaulted."

Second, the lawsuit seeks a purported $1 billion in damages. Now, make no mistake about it, $1 billion is a lot of money. But it's nevertheless an extremely manageable figure when you compare it to the revenue-generating abilities of B of A -- to say nothing of the bank's voluminous litigation reserves and billions of dollars in excess capital. Not to mention, it could have been much worse when you consider that Countrywide was the largest subprime originator before the financial crisis.

Finally, despite the new charges, there's reason to be optimistic that B of A has finally turned the corner. In its most recent earnings release and conference call, it reported industry-leading capital levels, improved credit quality, and even hinted at a breakthrough in its discussions with Fannie Mae over tens of billions of dollars in put-back claims, through which Fannie Mae is seeking to force B of A to repurchase mountains of now-toxic mortgage-backed securities.

Putting this lawsuit in context
At the end of the day, this lawsuit is just one more hurdle that B of A must jump before it puts its past behind it. When will that happen? As I predicted over the weekend, I believe it will be sooner rather than later.

To read up on why B of A's shares could double or triple over the next five years, download our new in-depth report on the company by clicking here now.

John Maxfield owns shares of Bank of America. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo. Motley Fool newsletter services recommend Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.


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  • Report this Comment On October 24, 2012, at 8:04 PM, healthpicker wrote:

    I think you underestimate this new problem - and so does BAC.

    This is a civil fraud case and is not just a CFC thing - it does reflect badly on BAC.

    This is not a loan level put back dispute with Fannie any more - this is systemic fraud allegation with a whistleblower behind it.

    41Billion is only a start point.

    Also LIBOR is waiting in the wings.

    Look at provisions vs liabilities - BAC could be the first "too big to fail" Chapter 11 case.

  • Report this Comment On October 24, 2012, at 8:05 PM, healthpicker wrote:

    correction 1Billion not 41Billion

  • Report this Comment On October 25, 2012, at 10:58 AM, jpanspac wrote:

    Let's see, if the DOJ is seeking $1B that means they'll settle out of court for $50M, and BoA won't have to admit any guilt.

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