When it comes to buyer's remorse, the purchase of Merrill Lynch by Bank of America (NYSE: BAC ) in 2009 probably doesn't come close to that of the Countrywide acquisition a year earlier. The Merrill buyout has spawned its share of losses, however, and the recent blessing of the lawsuit settlement terms reached last September by B of A and a group of institutional investors is, at $2.4 billion, a princely sum that will hit the bank's bottom line like a slap -- and, it's not the only legal morass still facing the superbank.
2008: A bad year for acquisitions
Investors claimed that they were kept in the dark regarding Merrill's sorry fiscal state of affairs at the time of the purchase, as well as the plan to award over $3.6 billion in bonuses to executives. Later testimony by former CEO Ken Lewis lent credence to this claim, and the $50 billion deal that stockholders approved wound up costing B of A $9 billion in debt offerings, a fourth-quarter loss of nearly $16 billion, and triggered another $20 billion taxpayer bailout. At least the transaction only cost $18.5 billion, rather than the original $50 billion, when it closed in January 2009.
Unfortunately, this is not the only lawsuit pending against B of A pertaining to Merrill Lynch: Insurance giant Prudential (NYSE: PRU ) has filed a claim in federal court in New Jersey claiming fraud on $2 billion worth of securities sold from 2004 to 2007 -- and leveling racketeering charges against the bank, to boot.
A never-ending stream of legal hassles
Those familiar with Bank of America are well-acquainted with its myriad legal problems, many caused by toxic mortgages produced by Countrywide -- very nicely laid out here. Peers face problems in this arena, too. JPMorgan Chase (NYSE: JPM ) recently celebrated a win in claims filed against it by Belgian bank Drexia over $1.6 billion in soured mortgage loans, it but still faces putback claims on mortgage-backed securities valued at more than $140 billion, as well as the $33 billion complaint filed against it by the Federal Housing Finance Agency.
Wells Fargo (NYSE: WFC ) was sued last fall by the U.S. government over a decade's worth of shoddy mortgage production. In addition, the bank has also been sued by homeowners who claim that Wells supplied no relief to borrowers who participated in Wells-acquired Wachovia's "Pick-a-Payment" program, despite a judge's instruction to provide assistance.
As for Bank of America, it still faces two onerous lawsuits, neither of which has been moving in a favorable direction for the bank. One is the lawsuit brought by investors including Blackrock (NYSE: BLK ) and PIMCO, which was settled back in 2011 for $8.5 billion, but has now been reopened because of findings by the plaintiffs that B of A acted more in its own interest than that of investors when modifying mortgages. If the settlement is not affirmed by a judge, the bank may wind up owing much more.
The other is the battle in which it is embroiled with mortgage insurer MBIA (NYSE: MBI ) . As I pointed out recently, things have not been going the bank's way, and it could very well be stuck paying out on loans that haven't even defaulted yet. We're talking about $3 billion in recompense that MBIA wants from B of A, not chicken feed, by any stretch.
Unfortunately for the megabank and its investors, it looks like Bank of America may be looking at another year of pinched profits as it continues to mop up one messy legal muddle after another.
It's obvious that Bank of America isn't out of the legal woods yet, and that significant challenges are still ahead. Therefore, it's critical to have a solid understanding of this megabank before adding it to your portfolio. In The Motley Fool's premium research report on B of A, analysts Anand Chokkavelu, CFA, and Matt Koppenheffer, Financials bureau chief, lift the veil on the bank's operations, including detailing three reasons to buy and three reasons to sell. Click here now to claim your copy.