Don't Expect Much From Bank of America for a While

After finishing down more than 1.5% following a roller-coaster ride in the market yesterday, Bank of America (NYSE: BAC  ) is down again this morning: 1.32% already in the first hour of trading. And with potentially tens of billions of dollars on the line in a reopened case involving -- what else -- soured mortgage-backed securities, don't expect to see much of a rally today.

That's not fair
You probably know the story already, but just in case you don't, here's a quick recap: In June 2011, B of A settled a suit brought by multiple investors -- including BlackRock (NYSE: BLK  ) and bond giant PIMCO -- over soured mortgage-backed securities issued by Countrywide Financial, the subprime lending giant that B of A acquired in 2008.

The agreed-upon amount was $8.5 billion, but some of the affected parties -- including AIG (NYSE: AIG  ) -- thought the settlement unfair. And now the case is back in court, with Bank of New York Mellon (NYSE: BK  ) arguing in favor of the original amount, and BlackRock and PIMCO in agreement with BNY Mellon.

Opponents of the settlement say losses due to the bad mortgage-backed securities could be as much as $100 billion. The presiding judge has set aside these first two weeks of June to hear the case. 

The shadow knows
The original $8.5 billion was accounted for in the same quarter B of A announced the settlement, but it's the potential for tens of billions more in damages that has investors spooked, and rightly so. The financial crisis is the gift that keeps on giving. Of all the banks that emerged alive from the crash, B of A was unarguably in the worst shape and has consequentially had the longest road to recovery.

That said, the superbank is essentially solid at this point and in no danger of failing (especially given that it's still too big to fail, with the implicit taxpayer guarantee that label comes with). But it's the bottom-line-robbing suits like this one that spook investors and make the stock volatile. Do you ever see shares of Wells Fargo (NYSE: WFC  ) spiking and plummeting the way B of A shares do? No. Wells is boring, but profitable, and it isn't in court every other week for crisis-related drama.

Who knows what evil lurks in the heart of B of A's balance sheet, and in the hearts of litigation-minded and crisis-scarred investors everywhere. B of A is a risky, potentially volatile investment to begin with: At the very least, don't expect too much in the way of rallies out of the behemoth until this nail-biter of a two-week trial has ended. 

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Editor's note: A previous version of this article incorrectly suggested that the $8.5 billion in question had not already been accounted for by B of A, when in fact it had. The Fool regrets the error.


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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 05, 2013, at 11:17 AM, questioner5000 wrote:

    I believe that BAC has already written off the $8.5BN, when the settlement was first announced.

  • Report this Comment On June 05, 2013, at 12:13 PM, XMFGrgurich wrote:

    Questioner5000, I'm checking into that right now. If that's the case, I'll amend the article. Thanks for reading, and for keeping your eyes open while doing so. :->

    John

  • Report this Comment On June 05, 2013, at 12:51 PM, questioner5000 wrote:

    Check out BAC's Second Quarter 2011.

  • Report this Comment On June 05, 2013, at 1:09 PM, XMFGrgurich wrote:

    Thanks, folks. The article has been amended.

  • Report this Comment On June 05, 2013, at 1:10 PM, lestergardner wrote:

    Question. What if bac decides to just bk countrywide, in your opinion, how would this effect bac stock? Would it be beneficial to bac or would the stock tank?

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