Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Estimate of Future Legal Losses at Bank of America Reaches All-Time High

Make no mistake about it, Bank of America (NYSE: BAC  ) has made exceptional progress at atoning for its sins from the financial crisis -- and most notably its ill-fated acquisition of Countrywide Financial. But investors nevertheless got an unwelcome reminder on Tuesday just how much ground must still be covered.

According to the Charlotte-based bank's annual financial filing with the Securities and Exchange Commission, the extent of estimated future losses stemming from litigation is at an all-time high. As you can see in Figure 1, the bank's best guess at future litigation-related losses in excess of accrued liabilities tops out at $6.1 billion. This figure is $3 billion more than, or nearly double, the extent of estimated possible losses provided by Bank of America in its 2012 annual filing.

To be clear, figures like these are educated guesses at best. As the bank explains, if a future loss is both probable and estimable, it accrues an associated liability -- this is essentially equivalent to an expense as far as the income statement is concerned. If an anticipated future loss isn't sufficiently probable and estimable, the bank can nevertheless make an educated guess at its possible range (which is what the $0 to $6.1 billion range above refers to) but it can't accrue a liability. Finally, if a future loss is too speculative, and thus an estimate is neither probable nor possible, both the bank and its shareholders are essentially left in the dark with respect to its likely magnitude.

With this framework in mind, and assuming that a bank isn't egregiously overestimating its future legal losses (which seems unlikely given what it would communicate to legal adversaries), it's almost a guarantee that actual losses will nearly always exceed published estimates of future losses. Bank of America is no exception in this regard. As I've already noted, its estimated range from its 2012 annual report pegged the maximum figure at $3.1 billion in excess of accruals (see Figure 2). Meanwhile, the actual loss for 2013 was $6.1 billion -- for the record, its actual litigation-related loss in 2013 is indeed the same as its now-current estimate of future losses in excess of accruals.

It's hard at this point to say what caused Bank of America to nearly double its estimate of future litigation-related losses compared to the prediction in its previous annual filing. Certainly, the size of the recent JPMorgan Chase settlement with a variety of legal and regulatory bodies could have factored into the decision. On top of this, Bank of America's filing reveals an assortment of ongoing cases and investigations in which it's the target. Most notably, it disclosed a new investigation by authorities in North America, Europe, and Asia into its "conduct and practices in certain [foreign-exchange] markets over multiple years." But like I said, pinpointing any particular issue as the impetus for the increase is nothing more than speculation.

What should shareholders take away from this? To be honest, it's hard to say. On the one hand, it could be interpreted as good news -- that is, if it suggests that Bank of America is getting a better grasp on possible, as opposed to unknowable, losses. On the other hand, it serves as yet another reminder that there's still considerable work to be done by the executives at Bank of America before the nation's second largest bank by assets can finally close the chapter on the financial crisis.

1 bank stock that could make you rich
Do you hate your bank? If you're like most Americans, chances are good that you answered yes to that question. While that's not great news for consumers, it certainly creates opportunity for savvy investors. That's because there's a brand-new company that's revolutionizing banking, and is poised to kill the hated traditional brick-and-mortar banking model. And amazingly, despite its rapid growth, this company is still flying under the radar of Wall Street. For the name and details on this company, click here to access our new special free report.

Read/Post Comments (0) | Recommend This Article (3)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2854389, ~/Articles/ArticleHandler.aspx, 8/28/2015 8:34:08 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

John Maxfield

John is The Motley Fool's senior banking specialist. If you're interested in banking and/or finance, you should follow him on Twitter.

Today's Market

updated Moments ago Sponsored by:
DOW 16,643.01 -11.76 -0.07%
S&P 500 1,988.87 1.21 0.06%
NASD 4,828.33 15.62 0.32%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/28/2015 4:02 PM
BAC $16.36 Down -0.08 -0.49%
Bank of America CAPS Rating: ****