Why Bank of America Tanked This Week

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:

  1. So long as the economy continues to improve, the Fed will begin tapering its monthly bond purchases by the end of this year.
  2. QE is expected to end entirely by mid-2014, when unemployment is projected to drop to 7%.
  3. 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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Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

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  • Report this Comment On June 21, 2013, at 2:36 PM, pksloope wrote:

    What is the talk about a bubble? Just because the stock market rises for a few months its a "bubble" that needs to be deflated? Usually you hear about bubbles in a specific industry like housing or the technical industries where issues become over inflated. That isn't the case here.

  • Report this Comment On June 21, 2013, at 3:19 PM, XMFGrgurich wrote:

    The economy is doing better and better, but it's hard to see where all the optimism that drove the market to new highs was coming from, which leaves excess liquidity as possible cause. Bubbles are easiest to identify in hindsight.

  • Report this Comment On June 21, 2013, at 5:15 PM, jdvenetti wrote:

    Do not believe the naysayers? U.S. Banks are the safest investment in the market. Buy it... hold it... watch it grow.

    BAC's stock is undervalued which means if BAC sold all of its assets each stockholder would receive more than $22 per share; therefore, if I can buy it now in the $13 dollar range and hold it until it goes to $26 I will double my money with very low risk. That is hard to do even with high risk BS stocks with zero Gov backing.

    BAC is the ninth largest bank in the world backed by the U.S.Government making profits and paying dividends. Why do people buy high risk BS stocks when they can own low risk high value? Chance of failure...near zero. Locations 41 countries, 5600 banks, $2.2 Trillion in assets, Revenues $83B/yr Profitable Yes, Pays dividends, Yes, Risk factors, Low

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