Why Bank of America is Eyeing Citigroup Today

As Citigroup nears a settlement with the government, Bank of America looks increasingly isolated.

Jul 9, 2014 at 10:15AM

Following two days of declines, U.S stocks are marginally higher on Wednesday morning, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) up 0.09% and 0.1%, respectively, at 10:15 a.m. EDT. This one-way market has forced most bears to throw in the towel, according to the following statistic, courtesy of the Financial Times and Markit: At 2% of total shares of all companies in the S&P 500, the short interest (the number of shares that have been sold short) is close to the lowest level since Markit began tracking the data in 2006. Perhaps that number will fall further today, as Citigroup (NYSE:C) is said to be close to a $7 billion-plus settlement with the Department of Justice regarding the selling of shoddy mortgages during the housing boom. Bank of America (NYSE:BAC), one of the last holdouts, will be closely following these developments, as well as the market's reaction.


There is nothing like the threat of a lawsuit from the federal government to motivate a bank to settle claims that it has misbehaved. Last month, Citigroup was hoping $4 billion would allow it to settle claims it mis-sold mortgages prior to the credit crisis, but the government was looking for about $10 billion. It's not that surprising, then, that The Wall Street Journal reported yesterday evening that the bank is preparing to settle the matter for $7 billion, splitting the difference between the two parties. An agreement could be announced as early as next week.

Citigroup's position had been that, based on its comparative level of pre-crisis mortgage-related activity, it ought to pay much less than JPMorgan Chase, which agreed to a landmark $13 billion settlement with the Department of Justice last November.

Remember that JPMorgan was held accountable for the misdeeds of two large institutions it acquired during the credit crisis: Bear Stearns and Washington Mutual. While Citigroup bought part of troubled subprime lender ACC Capital Holdings in 2007, this was nothing close in size to those deals. (Fun fact: ACC Capital had in 2006 agreed to pay federal and state regulators $325 million to settle allegations of deceptive lending practices!)

If Citi can finalize the agreement (and there is little reason to think it won't), Bank of America will remain alone among the three major universal banks in not having reached an agreement regarding similar charges with authorities. Bank of America's exposure is substantial, as it made two crisis-era acquisitions similar to those of JPMorgan: Merrill Lynch and Countrywide Financial. In fact, BofA had been in talks with the Department of Justice to settle this matter for $12 billion, but those negotiations ultimately broke down. Today's news will increase the pressure on Bank of America to come back to the table and ink a deal.

For BofA and Citi, this is last major piece of legal exposure related to the excesses of the housing boom. Dealing with that issue and reinstituting a proper dividend are important symbols that these institutions have moved past the repercussions of the crisis and could provide catalyst for a revaluation in the shares. As it stands, the shares of both banks trade at a 20%-plus discount to their book value.

Bank of America + Apple? This device makes it possible.
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its destined to change everything from banking to health care. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here

Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America and Citigroup. 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