Down 4.63% about two hours into the last day of the trading week, Bank of America (NYSE: BAC ) tanked this week for the same reason most other U.S. stocks did: fear of the Federal Reserve announcing firm plans for tapering back quantitative easing, and then the Fed doing exactly that. That said, there's something else on B of A investors' minds that's also not helping things.
The Bernanke-put, taken away
On Wednesday it finally happened. Fed chairman Ben Bernanke laid out a roadmap for the end of QE. In a nutshell, he said:
- So long as the economy continues to improve, the Fed will begin tapering its monthly bond purchases by the end of this year.
- QE is expected to end entirely by mid-2014, when unemployment is projected to drop to 7%.
- Interest rates will stay low until unemployment hits 6.5%.
In B of A-specific news, investors found out this week that a critical trial has been put on hold and won't resume until July. It revolves around the sale of bad mortgage-backed securities by B of A's Countrywide Financial unit.
All parties -- which includes AIG (NYSE: AIG ) , BlackRock (NYSE: BLK ) , PIMCO, and Bank of New York Mellon (NYSE: BK ) -- had previously agreed to a B of A payout of $8.5 billion to settle the claims. But a challenge to the settlement has thrown the case back into court, and now B of A could be on the hook for tens of billions.
Foolish bottom line
Regarding the trial, there's not much investors can do but wait and see. Luckily for them, they're experts at waiting to see what happens with B of A and its never-ending stream of crisis-related lawsuits and regulatory actions.
As B of A is still to big to fail, this is unlikely to be an existential moment for the bank, but the bottom line could be hit hard, which brings us to one silver lining: The $8.5 billion was accounted for in the quarter the original settlement was announced, so the bank has made at least a down payment on anything new that night be agreed to.
As for the markets and the end of QE, they're likely in for a period of readjustment. It's possible that some of the fantastic gains we've seen in recent months were driven by the excess liquidity the Fed has been pumping into them since the third round of QE began last September. Bernanke didn't come right out and say anything to this effect, but it's possible he had the worry of a stock market bubble in the back of his mind as he formulated and announced this taper.
And this could be good for investors. Yes, everyone likes to see their stock prices rise, but bubbles aren't good for anyone, because when they burst, they can cause panic, followed by a rout, depressing prices far below where they should be based on rational valuations. QE had to end sometime, and Bernanke has given everyone plenty of warning. So while the ride may get a little bumpy, a soft landing should be possible.
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