The Case That Could Cost Bank of America $60 Billion

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This month is an important one for Bank of America (NYSE: BAC  ) , particularly as it pertains to one of many lawsuits concerning deteriorating mortgage-backed securities and the decaying mortgages that reside therein.

Prior settlement thrown into doubt
The case involves a settlement struck in 2011, for $8.5 billion, between B of A and 22 investors, pursuant to 530 mortgage trusts sold by Countrywide. This settlement is now in question, since some investors came up with evidence that the bank did them wrong by putting its own interests before theirs -- for example, by modifying mortgages contained within the MBSes, then neglecting to buy them back from the investors, as the plaintiffs allege was the agreement between the parties.

Alison Frankel outlines all the painful contortions this suit has undergone since last year, and the next installment will occur on May 30. It is then that New York State Supreme Court Justice Barbara Kapnick will begin hearing arguments regarding whether or not the settlement should be overturned.

This question is based upon whether or not the Bank of New York Mellon (NYSE: BNY  ) , acting as trustee for the investors, agreed to the terms of the settlement in good faith. Under New York's Article 77, the trustee must have acted "reasonably," which gives the judge wide latitude, it seems. How that law is interpreted will decide whether or not the settlement stays -- or goes.

Big investors and big bucks
Members of the group of 22 investors include big asset managers BlackRock (NYSE: BLK  ) , PIMCO, and giant life insurance company Metlife (NYSE: MET  ) , with the total amount of losses estimated to be around $108 billion. If the ruling comes down against trustee Bank of New York Mellon and the settlement is nullified, how much might Bank of America have to pay?

This is just speculation, of course, but the answer seems to be: A lot. One expert estimated earlier this year that the damage could come in at somewhere between $25 billion and $30 billion, while analyst Mark Palmer at BTIG Research figures it may hit more than $60 billion. How does he get to this number?

Using figures from the Bank of America v. MBIA (NYSE: MBI  ) suit, Palmer notes that the monoline insurer's lawyers have estimated that 56% of the Countrywide MBSes MBIA insured had issues so odious that a lender would be too embarrassed not to repurchase them. Applying the same formula to $108 billion, the penalty comes in at $60.5 billion.

As Palmer says, even half of that amount would be onerous for Bank of America. While the $60 billion number looks awfully high, its seems a sure bet that, if things don't go its way later this month, B of A will be paying out more than the original $8.5 billion settlement amount -- perhaps quite a lot more. In the crowd of lawsuits surrounding Bank of America, this is one that investors should definitely keep an eye on.

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Read/Post Comments (18) | Recommend This Article (19)

Comments from our Foolish Readers

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  • Report this Comment On May 03, 2013, at 2:37 PM, websiteauthor wrote:

    Glad to hear BofA is still struggling. These clowns gave credit cards to illegal aliens and they were up to their necks in the whole mortgage debacle, and now it appears they scammed their own investors . . . watching this corrupt goliath go down warms my heart.

  • Report this Comment On May 03, 2013, at 3:13 PM, ArchMadman wrote:

    Good, but sadly the government will probley just bail them out again in the future.

  • Report this Comment On May 03, 2013, at 3:19 PM, adieselman wrote:

    The only parts of this that makes me sad is that those who lost will never recover anything and that one less "too big to fail" banks leaves only a few "too big too fail banks that will be even "more too big too fail"

  • Report this Comment On May 03, 2013, at 4:54 PM, BOASUCKS wrote:

    that's why they cant foreclose on anyone---and that's why im getting my house for free---screw you BOA--your all crooks

  • Report this Comment On May 03, 2013, at 5:02 PM, OracleofOmahaha wrote:

    You can thank that idiot Ken Lewis. As the former CEO he was willing to acquire any bad company he could find without doing any due diligence just to make BofA bigger. Then Lewis sneaks away like the weasel he is. The investors should sue Lewis for everything he's got. He made the decision to acquire Countrywide.

  • Report this Comment On May 03, 2013, at 5:35 PM, GhostdogWarrior wrote:

    Nah, the taxpayer will pick up the tab again and again and again and again

  • Report this Comment On May 03, 2013, at 6:30 PM, topqat wrote:


  • Report this Comment On May 03, 2013, at 7:54 PM, Wowthisagain wrote:

    BlackRock, PIMCO... are rappers running Wall Street now?

  • Report this Comment On May 03, 2013, at 8:48 PM, Rusty56 wrote:

    Oracle is the only one who makes sense, Lewis is the bastard who should pay! But the rest of you don't realize it yet, but BAC will be much higher in a year or two - your idiots.

  • Report this Comment On May 03, 2013, at 10:13 PM, javystrong wrote:

    BOAsucks what do u mean they can't foreclose on anyone? why not,


  • Report this Comment On May 03, 2013, at 10:20 PM, Pieter808 wrote:

    Believe me when I tell you that working with BOA during my "Making homes affordable" mortgage refinance was the worst experience in my lifetime. This is the short version: During initial paperwork and while making lower trial mortgage payments for the program, BOA came after me for the original mortgage payments which was absurd and affected my credit. They repeatedly asked for the same documents which I sent again and again via their supplied FEDEX envelope. The underwriter contacted me directly and asked for the documents which I then sent to him directly so he could complete his portion of the process. BOA contacted me and because I was not complying with their requests for documents, I was not eligible for the program. I pointed out that the underwriter completed his part of the process which he could not have done without said documents, and BOA replied are correct. This actually surprised me. After 8 months I did get the refinance but lost a few years of life due to stress. To this day when I hear BOA, in my minds eye is see their offices filled with employees and every one of them has their head completely up their a..... never mind. When they do fall, it will be a day of celebration for me, good riddance.

  • Report this Comment On May 03, 2013, at 11:00 PM, blankp99 wrote:

    Why should Bank of America have to payback money to those that invested in those securities? ?

    Its like they risked their money and if the lose then just sue. If you make money its fine, but once you lose then sue; what an attitude. However, if fraud was involved; then its a game changer.

    Then the bank should just settle and move on; though if they issue a multi billion dollar cashier check I would wait till it cleared the bank before spending it.

  • Report this Comment On May 03, 2013, at 11:23 PM, notme77 wrote:

    I got screwed by these clowns on my loan also. I was behind one month called to arrange payment to catch up they refused and foreclosed. I was in military and and overseas. i dint find out till came back stateside about settlements and lawsuits but by that time to late to do anything about it. i got one check saying i overpaid on something Why didnt they use it to make up the payment. I hope that they fail.

  • Report this Comment On May 03, 2013, at 11:23 PM, Dadw5boys wrote:

    Hello Fed, Is Bernaki around. Oh yeah hi, this is BOA we need $60 Billion for a few months ok. Hold on. Ok the computer transfer just hit. Thanks. bye.

  • Report this Comment On May 04, 2013, at 6:35 AM, sanoran wrote:

    Bin-Bernanke has kept Bank of America alive by taking 1 Trillion dollar worth of junk mortgages from Bank of American and other Banks. Bin-Bernanke is not elected, -he is selected, ... via donations from Bank of America, GoldmanSachs, and other financial institutions. bin-Bernanke's job is to make sure tax-payers are tricked into keeping the Banks profitable. Without bin-Bernanke's buying of junk mortgages, Bank of America would be long gone. Now, instead, US Citizens are paying for Bank of America with inflation.

  • Report this Comment On May 04, 2013, at 2:37 PM, firefly61 wrote:

    This bank stays in hot water constantly and will self destruct due to their own greedy, underhanded practices.

  • Report this Comment On May 04, 2013, at 7:15 PM, Rusty56 wrote:

    All of the above posters are basically low paid, low life, morons. $8.5 Billion is set to stand firm and you are all too STUPID to know how to make a buck on a rebounding Bank! Idiots - All of you! Ha HA!!

  • Report this Comment On May 04, 2013, at 8:23 PM, Pieter808 wrote:

    After that comment Rifleman5779 we now know who the narrow minded moron is.

    Thanks for playing.

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