The Coming Catalyst for Bank of America’s Stock

There are few serious investors who don't realize the significance of this week for Bank of America (NYSE: BAC  ) .

On Thursday, the bank concluded a lengthy court proceeding into whether a multibillion-dollar settlement between it and a number of Wall Street's biggest institutional investors should be approved by the New York judiciary. The case is now in the hands of Justice Barbara Kapnick, who could deliver her ruling anytime between now and, presumably, the early part of next year.

Make no mistake about it: This is a very big deal for Bank of America. If the $8.5 billion accord dating back to 2011 isn't approved, not only will its shares trade under an even deeper cloud of uncertainty, but there's every reason to believe that renewed negotiations between the parties would cost the Charlotte-based bank billions of dollars in added fees and expenses.

The underlying issue before the court is relatively straightforward. Governed by New York trust law, Kapnick must decide whether The Bank of New York Mellon (NYSE: BK  ) , serving as the trustee over securities backed by Countrywide-issued mortgages, violated its fiduciary duty to investors in the securities by entering into the accord with Bank of America. That is, given what BNY Mellon knew at the time, did it act reasonably in agreeing to the terms of the deal?

The objectors -- spearheaded, at this point, principally by American International Group (NYSE: AIG  ) -- argue that the agreement should be rescinded because it wasn't the result of an arms-length transaction, was tainted by multiple conflicts of interest, and resulted in a "pennies on the dollar" bottom line that doesn't adequately compensate the aggrieved investors. To prove their case, they brought in experts, marshalled reams of data, and employed some of the top legal minds in the country.

But that's all in the past. The only thing that matters now is Judge Kapnick's decision.

Being a former law clerk myself -- and thus the author of numerous federal judicial opinions -- I can attest to one thing: It's impossible to predict how Kapnick will rule, or, for that matter, how long it will take her to do so. She may not even know at this point. In a case of this size, there is invariably plenty of evidence to justify a ruling in either side's favor.

As a result, trying to game the outcome from an investment perspective is fruitless at best. Will its shares move when the decision is announced? I can't help but think that they will -- and that they'll do so aggressively. But besides the inherent unpredictability, there are any number of intervening forces that could render the associated move irrelevant.

What if the U.S. government goes after Bank of America like it did JPMorgan Chase? What if the Federal Reserve begins to taper its third round of quantitative easing? What if, heaven forbid, unemployment plummets unexpectedly? What if the holiday shopping season drops like a rock, as many analysts and commentators have forecast?

The point I'm trying to make is this: The BNY Mellon settlement is hugely important to Bank of America. There's no use denying that. But for prudent investors in the company, myself included, it's critical, albeit hard, to look past these short-term catalysts in favor of a much greater payoff down the road.

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  • Report this Comment On November 24, 2013, at 2:22 PM, skyisfalling wrote:

    So, what did I get from this article? That the writer is a law clerk..

  • Report this Comment On November 24, 2013, at 3:47 PM, MKArch wrote:

    I'm not a lawyer or law clerk so it's silly for me to think I know the outcome but I'm going to say I think I do anyway. From everything I've read BNY agreed to the terms of the deal because at the time, the banking industry in general was in bad shape and BAC in particular and BAC made a very credible threat to bankrupt Countrywide if demands for compensation were too much for BAC to handle at the time. IE: you can get something or nothing.

    The majority of bond holders agreed with the deal at the time and I think something like 93% support it now. It sounds like AIG's argument is that BAC is in better shape today and could handle a bigger settlement. My understanding is the judge has to base the reasonableness of the settlement on what BNY knew at the time of the settlement not what could have been in the future. I agree that doesn't guarantee BNY/BAC will prevail but it sounds like the law is on their side; which would also explain almost all bond holders agreeing with the original settlement at this point. Just my uneducated opinion.

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