Bank of America’s Latest Settlement Could Wipe Out All of This Year’s Earnings (and Then Some)

According to recent reports, the government is seeking $13 billion from Bank of America related to the latter's origination and sale of toxic mortgages in the lead-up to the financial crisis.

John Maxfield
John Maxfield
Apr 24, 2014 at 8:17PM

It seems increasingly likely that Bank of America (NYSE:BAC) won't earn a single dollar in net income this year. On Thursday, Bloomberg News reported that the government is seeking more than $13 billion from the bank to resolve state and federal probes into its sale of mortgage-backed securities in the lead-up to the financial crisis.

While we've known for a few weeks that negotiations between Bank of America and the government were under way, it was impossible to predict how big a potential deal might end up being. Until now, that is. "If the Justice Department gets its way, the case against Bank of America will eclipse JPMorgan Chase's record $13 billion global settlement over similar issues in November," wrote Bloomberg's Tom Schoenberg and Hugh Son.

The latest report comes on the heels of the bank's $9.5 billion agreement with the Federal Housing Finance Agency reached earlier this year -- a deal which naively led me to conclude that Bank of America had cleared its last major legal hurdle. The claims in that case alleged that the bank and its legacy companies -- notably, Countrywide Financial and Merrill Lynch -- misrepresented the quality of loans they originated and sold to Fannie Mae and Freddie Mac.

It's worth noting, moreover, that Bank of America faces a number of other large and unresolved legal disputes -- click here to see a full list of the bank's settlements since the financial crisis.

In one, Ambac Financial Group is seeking $2.5 billion in damages for analogous behavior to that described above. In another, American International Group is demanding $5 billion from the bank. And in a third, the Consumer Financial Protection Bureau is purportedly in the process of excising $800 million from Bank of America related to former credit card practices at the bank.

How should shareholders view all of this? That's a good question. On the one hand, you could take a glass-half-full approach and be glad that these issues appear to be coming to a head. Beyond putting these losses in the rearview mirror, their conclusion will allow the bank's executives to fully and finally turn their attention to driving revenue and earnings -- both of where are badly needed.

On the other hand, you'd be excused for finally throwing in the towel. Nearly every year since the crisis, multibillion-dollar settlements have consumed large portions of Bank of America's earnings, leaving little to distribute to shareholders or fuel organic growth. Suffice it to say, the trend is getting old at this point.