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Bank of America Is Drowning (and Its Shares Are Plummeting) Thanks to This Extraordinary Sequence of Events

An extraordinary sequence of events has enveloped Bank of America (NYSE: BAC  ) in the worst publicity crisis since its debit-card debacle in 2011. Not surprisingly, shares of the nation's second largest bank by assets have dropped by nearly 20% in just over a month.

Fifty days ago, the bank's prospects couldn't have looked better. On March 14, Bank of America learned that it sailed through this year's Comprehensive Capital Analysis and Review, a process used by the Federal Reserve to determine whether the nation's biggest banks can increase their dividends or repurchase more shares. The news prompted the Charlotte, N.C.-based bank to boost its dividend for the first time since the financial crisis.

But elation was premature. On April 24, word leaked out that the government is seeking $13 billion more from the bank by way of yet another legal settlement. And four days later, Bank of America suspended its previously announced dividend increase. By its own admission, the bank had overestimated its regulatory capital levels by incorrectly accounting for losses related to its Merrill Lynch acquisition. Shares plummeted by more than 6% on the day of the announcement.

BAC Chart

Since then, things have gone from bad to worse. Although Warren Buffett came to Bank of America's defense, saying the error "does not bother me," few other analysts and commentators have been as understanding. Most notably, CLSA analyst Mike Mayo urged clients to abandon the bank in favor of Citigroup (NYSE: C  ) , which, it's worth noting, had its own capital plans rejected by regulators in the middle of March.

Moreover, on the eve of Bank of America's annual shareholder meeting this Wednesday, the California State Teachers' Retirement System pension fund admitted to voting against four members of the bank's board in response to the accounting misstep. "The shortcomings in processes and risk controls underscore the need to make the necessary changes to ensure this sort of issue does not arise again," spokesman Ricardo Duran said in an email to The Wall Street Journal. Given the pension fund's size and standing in the investment community, it was an unwelcome and undeniable blow.

And last but not least, U.S. Attorney General Eric Holder broke ground this week by intimating that the Justice Department is preparing criminal charges against major banks. "There is no such thing as too big to jail," Holder said in a recorded statement on the department's website Monday. "No individual or company, no matter how large or how profitable, is above the law." Spokespeople for the government confirmed that France's BNP Paribas and Switzerland's Credit Suisse are the subjects of Holder's ire.

That Bank of America isn't a target, however, should give shareholders little comfort, as there's speculation these are merely test cases. At the end of last year, for instance, the Justice Department was clear that its $13 billion settlement with JPMorgan Chase (NYSE: JPM  ) "does not absolve JPMorgan or its employees from facing any possible criminal charges." And in Bank of America's case specifically, there's little doubt that its conduct related to the servicing of mortgages at the very least skirted the edge of legality -- click here for a full list of Bank of America's misdeeds since 2008.

What does all of this mean for Bank of America? For investors who remain optimistic about its future prospects, it may be time to put your money where your mouth is. At Tuesday's closing price, the bank trades for an almost 30% discount to book value, making it the second cheapest big bank after Citigroup. Meanwhile, for those who remain suspicious of Bank of America's ability to fully and finally atone for its past sins, this will merely add fuel to an already blazing fire. It is, quite frankly, impossible to predict the outcome.

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Read/Post Comments (8) | Recommend This Article (5)

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.

  • Report this Comment On May 08, 2014, at 9:16 AM, Rifleman3006 wrote:

    Why do you guys always rehash dribble that everyone already knows?

  • Report this Comment On May 08, 2014, at 9:29 AM, mastedon2 wrote:

    Anytime a simple "bloggist" writes for the MF, its obvious they have an agenda.

    Words like "plummeting" and "Diving" in terms of a stock price are meant to capture the attention of readers, despite its outright short-driven bias, and fraudulent attempt at creating a sentiment.

    This article has nothing to do with its headline, which again verifies that MF does not give a crap who writes for them.

  • Report this Comment On May 08, 2014, at 9:55 AM, castellone wrote:

    More dribble from the FOOL. What do you expect?

  • Report this Comment On May 08, 2014, at 10:16 AM, Oregonboy wrote:

    Bottom line is that BoA is sitting on a lot of cash..and they are MAKING a TON of cash. It is not like they have products to sell which they depend on for making money...they are making money FROM MONEY. Buffet is correct...why be worried when long term. Get it now or regret it later.

  • Report this Comment On May 08, 2014, at 1:19 PM, PEStudent wrote:

    Bank of America is drowning???

    - yet it's year long string of positive earnings is continuing despite billions in fines.

    BAC stock is plummeting???

    - yet it's up 1.5% on the day this article was published.

    BAC is one of those stocks whose earnings will almost certainly skyrocket in 2-3 years, but there's so much litigation going on now that the fund managers can't go after it because it will potentially make them look bad over the next several quarters.

    This is very likely one of those classic cases Ben Graham and Warren Buffett talked about when they said the individual can more easily focus on the long-term and not to pay attention to what Mr. Market is saying about the stock, but how much he wants to trade it for.

    I did a value study on BAC and think it should come back to an eps of at least $3/share after all the fines and lawsuits are settled in the next year or two. That's based on BAC earning $4.59 a share before the crash but now facing investment risk restrictions plus they've acquired Merrill Lynch and Countrywide since then - the reasons for most of the government's fines despite the fact that Bush's Treas. Sec. Hank Paulson effectively forced BofA CEO Ken Lewis to acquire them.

    I put more of my portfolio than was prudent into BAC stock in early 2013 at $11/share ($15 now) and am looking for ways to justify even more.

    At an eps of $3 to $4 in 2016 or 2017 and a conservative P/E of 10, BAC stock would be worth $30 to $40 - double to nearly triple the price today.

    There's not much chance it's earnings are going to collapse between now and then - even if there's a correction - and the current $15 share price should hold well enough so that it will preserve most invested capital under any conditions. The government doesn't want another bank catastrophe so soon after the last and there have been stress tests to minimize them.

    In my view, it's a relatively low-risk investment that could easily be a 2 or 3 bagger in 2-3 years.

    I also like Wells Fargo as an even lower-risk investment that could be a 2-bagger in 2-3 years.

  • Report this Comment On May 08, 2014, at 6:22 PM, Rifleman3006 wrote:

    MF is plummeting due to ridiculous articles

  • Report this Comment On May 08, 2014, at 8:48 PM, funfundvierzig wrote:

    Rabid fans of Bank of America and its decidedly mediocre and mendacious Management love to ignore commercial reality. BAC has indeed and in fact plummeted and cliff-dived from 52 less than seven years ago to 14 and change today. We call an over 70% decline in a stock price, a "dive" with substantial accuracy.


  • Report this Comment On May 09, 2014, at 10:15 AM, Chvillian wrote:

    I've considered TMF to have a quality product, even though their marketing sometimes undercuts that perception with high-energy / mass-market techniques.

    But, when I see National Enquirer-like headlines like this one, it seriously erodes TMF's credibility in my mind.

    I wonder if they will soon descend to 'POWERFUL BANK CEO FOUND IN FLAGRANTE DELICTO WITH SEC HEAD.'

    Just like the banks, I think TMF needs to invest in a little more oversight of its staff ... :-)

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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.

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