How Bank of America Can Shrug Off a $12 Billion Settlement

Nailing this settlement with the Justice Department would remove a dead weight on Bank of America shares

Jun 6, 2014 at 10:15AM

After hitting another record high yesterday -- the seventh in the last eight trading sessions -- U.S. stocks are higher still on Friday morning, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) up 0.3% and nearly 0.4%, respectively, at 10:18 a.m. EDT. The Labor Department's employment report for May, released this morning, is positive: Payroll additions came in at 217,000, in line with the 213,000 consensus estimate, for a fourth-straight month of gains above 200,000. The latest gains also have a symbolic significance, as the U.S. economy has recouped the 8.7 million jobs destroyed during the recession (none too soon!).


For Bank of America (NYSE:BAC), it's another day, another multibillion-dollar settlement -- or nearly so. The megabank is reportedly in talks with the Justice Department to extinguish a civil investigation regarding the misselling of mortgage securities (what else?) with a $12 billion settlement paid via a cash fine and homeowner relief. Bank of America only just put to bed a similar investigation by the Federal Housing Finance Agency in March for the tidy sum of $9.5 billion.

The Financial Times has drawn up a league table of ignominy, ranking banks by total fines and settlements paid since January 2009. Even before including any estimate for this latest settlement, Bank of America topped the list with a staggering total of $26.4 billion, followed by JPMorgan Chase (NYSE:JPM) ($26.0 billion) and Wells Fargo (NYSE:WFC) ($8.2 billion).

Note that the "league table of ignominy" -- my expression -- is a misnomer. Indeed, more so than a fundamentally corrupt core, the ranking reflects that these three institutions were solid enough to acquire failing banks and lenders during the crisis (the targets were certainly corrupt or grossly mismanaged). Bank of America actually bit off a bit more than it could chew with Countrywide Financial and Merrill Lynch; without a double dose of government assistance, these targets might have taken the bank down with them.

But back to the latest settlement: The $12 billion figure that is being reported exceeds BofA's total profit last year of $11.4 billion – the highest annual profit in six years. Why, then, are the shares (up nearly 0.7%)  outperforming the broad market and the banking sector this morning? As BofA CEO Brian Moynihan told an investor conference last week, "Of the big stuff, that's [the Justice Department settlement] really the big one." The market abhors uncertainty. In this realm, big settlement numbers are not good, of course, but they are better than having an unknown number hanging over one's head.

Furthermore, at 0.7 times book value and 9.8 times forward earnings (per Morningstar), Bank of America continues to offer adequate value. The same can be said for several of its direct peers (particularly Citigroup) -- but not, conspicuously, of many other parts of this "one-way" market.

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Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, JPMorgan Chase, and Wells Fargo and has the following options: short June 2014 $48 puts on Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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