Bank of America Corp's Big Settlement Has Screeched to a Halt. So What?

Don't let the 11-figure headlines about Bank of America's inevitable settlement with the justice department cloud your judgement about the bank's business.

Jun 12, 2014 at 12:40PM

In the latest chapter of Bank of America's (NYSE:BAC) seemingly endless legal drama, it looks like the reports of an imminent $12 billion settlement with the Justice Department arrived too soon.

According to the latest news, the deal has stalled after the Justice Department surprisingly rejected Bank of America's latest settlement offer of more than $12 billion.

Bac

Shares are now nearly 15% off highs reached in March. So, should shareholders get out, or stay the course?

What comes next?
This is a tough question to answer. The Justice Department is reportedly seeking a settlement of around $17 billion, accusing the bank of selling subpar mortgages which caused investors to lose billions of dollars. So, it is safe to say the two parties are still pretty far apart.

Many of the mortgage securities in question were sold by Merrill Lynch before Bank of America acquired the struggling firm. Normally, any of an acquired company's liabilities would pass to its acquirer. However, Bank of America has made it clear that it felt pressured by the Federal Reserve and Treasury to complete the acquisition, and as such feels the penalties are unreasonably harsh.

Still, even though the Justice Department is preparing a civil complaint against Bank of America, an actual lawsuit is still not certain, or even probable.

It'll all be over soon
One thing is certain – Bank of America is ready to put the mortgage crisis firmly in the past. For this reason alone, a lawsuit is simply not a good option for them. It could take years, which Bank of America definitely doesn't want.

The option is still on the table for Bank of America to raise its offer to avoid a suit, and that's what is most likely to happen here, it's just a question of when and for how much.

Bear in mind that Bank of America and all of the other banks in similar situations have been setting aside money for settlements like this. Whatever this settlement ends up being, it's not all coming out of the bank's quarterly earnings and producing massive losses. Some of the cost has been planned for in the form of legal reserves.

Additionally, the earliest figure being tossed around was a $20 billion settlement, which would have included the $6.3 billion cash portion of the deal the bank subsequently made with the FHFA. So, the remaining part of the settlement was originally estimated to be about $13.7 billion, give or take, so it's pretty safe to assume the bank has planned ahead for at least that amount. The recently reported $12 billion figure was on the low side, so there is definitely some wiggle room for negotiating.

One thing we can say about the banks is they aren't getting caught off-guard by these settlements. And, Bank of America has more experience than most of its peers in this sort of thing, having already paid or agreed to pay about $60 billion in legal settlements in recent years.

Patience is a virtue
CEO Brian Moynihan said the Justice Department settlement will be the last big one the bank will face as a result of the mortgage crisis, so the "settlement era" will be over sooner rather than later. All of Bank of America's management had hoped for a swifter end to the mortgage-related legal issues, but it is what it is.

Don't let the 11-figure settlement headlines cloud your judgment on Bank of America. As fellow Motley Fool Financials writer Jordan Wathen found in his recent valuation of the bank, most of its business segments are not only much improved from since the crisis, but are thriving. In particular, the consumer banking and GWIM (global wealth and investment management) businesses are doing incredibly well.

In all, Bank of America is worth considerably more than its trading for right now (about 20% more, according to the part-by-part analysis). Once the legal drama is over, it won't be on sale like this forever. Just have a little patience...

These stocks beat the big banks...
Here's your chance to pocket big dividends. Over time, dividends can make you significantly richer. And guess what? The big banks are laggards when it comes to paying dividends. So instead of waiting for a cash windfall that may never come, check out these stocks that are paying big dividends to their investors RIGHT NOW. Click here for the exclusive free report.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers