I know what you're thinking: Only an extremely unimaginative financial writer could come up with a mere three reasons to sell shares of Bank of America (NYSE:BAC), one of the biggest financial basket cases over the last decade. Well, the truth is that I could list dozens of reasons, but for the sake of brevity I've winnowed it down to what I believe are the three biggest ones that might lead a current stakeholder in the nation's second largest bank to offload their position.
1. It's time to take gains
The first reason is, if anything, a testament to how far Bank of America has come since bottoming out nearly five years ago. Since the beginning of 2012, shares of the Charlotte, N.C.-based bank have more than doubled, leaving the broader market, represented by the S&P 500 (SNPINDEX:^GSPC), in the dust. You'd be excused, in other words, for taking gains if you haven't already done so.
2. Legal problems
I trust that Bank of America's legal problems don't come as a surprise to you. Over the past five years, it's racked up tens of billions of dollars in costs related to legal settlements and expenses -- most of which derive from its heinous decision in 2008 to double down on subprime mortgages via its acquisition of mortgage-originator-cum-criminal-enterprise Countrywide Financial.
What isn't as well appreciated, however, is the extent of damage that likely remains in the bank's future. Never mind that its massive $8.5 billion settlement with private investors in Countrywide-issued mortgage-backed securities remains on the rocks. And never mind that Bank of America is still awaiting to hear how much it owes after Countrywide was recently found liable for scamming Fannie Mae and Freddie Mac as a part of its appropriately christened mortgage origination program, the Hustle.
Indeed, the bigger concern at this point is the unknown unknowns. In its latest filing, Bank of America pegs future damages at $5.1 billion in excess of current reserves -- that's up from a previous estimate of $2.8 billion. But if JPMorgan Chase's recent settlement with the FHFA is any indication, and there's reason to believe that it is, then the carnage could easily exceed even the upwardly revised figure. Additionally, the government's success in the trial against Countrywide effectively opens the flood gates for future claims, as the net legal result was to extend the statute of limitations for actionable civil fraud claims from five years to 10 years. That alone is huge and is reason enough to unload an in-the-money position in Bank of America if you're otherwise on the fence.
3. Reputational problems
Last but not least, though in no part separate from the legal issues, Bank of America has enormous reputational problems that could very well lead to a deteriorating market share in deposits -- and particularly on the retail level.
I've discussed this on multiple occasions -- most recently, as a part of an in-depth examination of the issue at the bank -- and can't help but conclude that this matters despite frequent insinuations to the contrary. While current customers may be stuck thanks to onerous switching costs, new ones have an abundance of alternatives. That is to say, that needn't voluntarily submit themselves to the same maltreatment claimed by so many others.
Does this mean you should sell?
Before you get the wrong idea, let me make one thing clear: I own shares of Bank of America and have no intentions of disposing of them. To me, it's a long-term bet on a deeply entrenched franchise that could someday, once all of the legal issues are behind it and the interest-rate cycle turns in its favor, earn upwards of $30 billion in pre-tax profit if not more.
That being said, I've been wrong in the past and am comfortable with the possibility that I will be again. If I am wrong, however, I think it's a good bet that legal and reputational issues will be the source of my misjudgment. And it's for this reason that I identified them as two of the three primary reasons that current Bank of America shareholders might want to change their exposure to it.