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Will This Lawsuit Ice Bank of America's Grand Plan?

Cutting costs is what it's going to take to bring better profits for Bank of America  (NYSE: BAC  ) shareholders. At the moment, however, cutting costs may also be what's inflicting pain on them.

In the blandly labeled case "In Re Bank of America Home Affordable Modification Program (HAMP) Contract Litigation," we've been treated to some damning confessions from former Bank of America employees. Take this excerpt from the statement of Simone Gordon:

Employees were rewarded by meeting a quota of placing a specific number of accounts into foreclosure, including accounts in which the borrower fulfilled a HAMP Trial Period Plan. For example, a Collector who placed ten or more accounts into foreclosure in a give month received a $500 bonus. 

You can't make that stuff up. Well, to be fair, you can, so it's still the alleged incentives that B of A gave its employees for stringing along customers looking for HAMP modifications. 

But as investors anxiously await the outcome, there is reason to be concerned. One primary worry is that CEO Brian Moynihan and his "Project New BAC" has been stripping costs from the bank too quickly.

From an investor perspective, New BAC has the laudable goal of trying to cut out unnecessary costs from B of A, particularly in areas like management of "legacy" assets -- which, it might not surprise you, includes much of the bank's nonperforming mortgage inventory. But even if long-term paring down of those operations is a good idea, not having enough personnel -- or the right personnel -- may be a terrible idea in the short term. Properly managing its obligations under HAMP would be a step in the right direction when it comes to getting in the better graces of regulators and consumers.

Some investors may shake their head at this and assert that this particular lawsuit will hardly make a dent in B of A's balance sheet. That's probably true. However, if the assertions by the mortgagors and former B of A employees are on point, it could suggest that under Moynihan the bank is taking a short-term view of fixing the bank. That is, focusing too much on drastically cutting costs to appease Wall Street today, rather than managing the bank -- and the brand -- for long-term success.

This sort of outside-in thinking -- again, if it's true -- is exactly the kind of thing that investors should abhor. Short-termism is what got Wall Street into trouble prior to the financial crisis, and it's the banks and other financial institutions that continue to operate like that that'll have more problems in the future.

In a heated letter filed today with the SEC, activist investor Finger Interests nails it here:

...this will never be a great company until the corporate culture has changed. Until a culture of honesty and integrity is instilled in this institution – starting from the top management and the board of directors-down to every level of the company, there will continue to be a gap between this company's potential value and its realized value. Until there is a moral imperative to act in the customer's best interests, where managers who fail to do so are disciplined or terminated, this value gap will remain.

As a Bank of America shareholder myself, I'd like to believe that the claims at hand aren't true. Sadly, it wouldn't surprise me if they are. However, for Moynihan and the rest of the executive team at B of A, there's no time like the present to take a strong stance and make it clear that short-term, screw-the-customer thinking will not be tolerated. Period.

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9/29/2016 1:15 PM
BAC $15.22 Down -0.17 -1.07%
Bank of America CAPS Rating: ****