Bank of America Closes the Door on Its Bad Bank

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In one very tangible way, Bank of America (BAC 1.59%) just closed the door on yet another chapter in its post-financial crisis history.

The nation's second-biggest bank by assets said on Tuesday that it's shuttering its legacy assets and servicing (LAS) division, which had been formed in the wake of the crisis to house the bank's toxic mortgage-related assets and noncore businesses.

Beginning with the second quarter, Bank of America will now report results in four business segments: consumer banking, global wealth and investment management, global banking, and global markets. It also reports results from an "All Other" segment that handles enterprisewide issues such as asset and liability management.

Data source: Bank of America. Chart by author.

For lack of a better term, LAS was Bank of America's bad bank, quarantined from the rest of its operations both to illuminate the strength of its healthy operations and to concentrate authority around the task of cleaning up its unhealthy operations.

Citigroup used a similar strategy to isolate its own crisis-related problems, forming Citi Holdings and reporting its results separately from Citicorp.

At its peak, in the second quarter of 2012, Bank of America's LAS unit employed the equivalent of 41,800 full-time employees. And since being carved off from the bank's other units in 2011, it has recorded a total of $44 billion in net losses.

Data source: Bank of America's regulatory filings.

The one downside to the move from the perspective of investors and analysts is that it makes it more difficult to seamlessly track the trajectory of Bank of America's progress since the crisis -- which was already a challenge given that the LAS segment had previously been realigned once following its 2011 debut.

This aside, this is positive news for Bank of America's shareholders. Over the last two years in particular, the North Carolina-based bank has made obvious strides in its efforts to distance itself from the financial crisis.

Its once-unconscionable legal liabilities have now largely been slayed. It has reduced annual operating expenses by $15 billion since 2011. And last year it redirected its focus to generating revenue as opposed to simply cutting costs.

This doesn't mean that Bank of America is back to firing on all cylinders. The question now is whether it can earn its cost of capital in the absence of higher interest rates. I'm skeptical that it'll be able to do so, but, given that Bank of America is my largest stock holding, I look forward to be proven wrong.