Shares of Bank of America (BAC 3.42%) are marginally higher today as investors anxiously await the conclusion of a critical hearing in New York state court. Roughly halfway through the trading session, it's trading up by 0.22%.
There's little doubt about the significance of this case for Bank of America and its shareholders. Stemming from an $8.5 billion settlement that the bank entered into in 2011 with investors in Countrywide-issued mortgage-backed securities, a failure to attain the sought-after judicial approval will expose the nation's second largest bank by assets to an untold amount of additional liability. To date, according to The Wall Street Journal, it's already spent nearly $50 billion on legal costs tied to the financial crisis.
As a mortgage-finance litigator told Bloomberg News, "The settlement is the centerpiece of the strategy to resolving Countrywide's mortgage liability. It's imperative they get this approved or there's going to be a lot more pain down the road."
The parties opposed to the settlement, including insurance giant AIG (AIG 1.48%), argue that it amounts to a "pennies-on-the-dollar bargain" for the bank because claims related to the underlying securities could eventually exceed $100 billion. They also argue that Bank of New York Mellon (BK 1.76%), which served as trustee for the securities at issue, acted in bad faith by entering into the settlement, and as a result, the deal should not be given a judicial stamp of approval.
In response, Bank of America's attorneys purport that AIG is simply using the case to gain leverage in separate litigation between the parties. The fact that most other major objectors to the settlement, including the attorney generals from New York and Delaware, have since abandoned their complaints adds credibility to this position. The parties that remain in opposition are nothing more than a "vocal minority," said those in favor of the deal.
The group of investors who lined up to settle in the first place reads like a Who's Who list of Wall Street powerhouses. Among them are the asset-management giant Blackrock (BLK 0.34%), Goldman Sachs (GS 0.39%), and the insurer MetLife. "When no other trustee [had] recovered [losses] for investors, it recovered $8.5 billion," said an attorney for Bank of New York Mellon. As a result, "The choice was made in good faith."
I've noted on multiple occasions over the past few months that this case will be one of the principal catalysts for Bank of America's stock this year. If the bank is able to put this matter behind it, it's reasonable to conclude that its shares will respond in kind. But if it isn't, well, you do the math.
