Just when investors in Bank of America (NYSE:BAC) thought things couldn't get any worse, they just did. Less than a week after the government was reported to be seeking $13 billion from the Charlotte-based bank, investors learned that its recent and much-anticipated dividend increase will stay just that -- much anticipated. News of the retraction sent shares tumbling. The stock ended down over 6% -- its worst day since November 7, 2012.
On Monday, Bank of America said it uncovered a mistake in the way it valued debt instruments inherited in its 2009 acquisition of Merrill Lynch. According to the bank's official explanation, "the company discovered an incorrect adjustment being applied in the determination of regulatory capital related to the application of the fair value option to certain legacy Merrill Lynch structured notes resulting in an overstatement of its regulatory capital amounts and ratios."
The net effect is Bank of America must revise its regulatory capital ratios and resubmit its 2014 capital plan to the Federal Reserve before going forward with its previously announced dividend hike and share buyback program. In short, it means the bank has less high-quality capital than previously reported.
For Bank of America shareholders, the news comes on the heels of two other recent developments that have weighed on its stock price. Two weeks ago, investors learned that it set aside $2.4 billion in legal reserves during the first three months of the year. The announcement, disclosed in materials from its first-quarter earnings, ignited rumors that Bank of America is on the verge of settling a long-simmering dispute with Ambac Financial Group over mortgage-backed securities dating to the financial crisis.
And last week, media reports revealed that the government is seeking as much as $13 billion in damages from the bank stemming from the origination and sale of toxic mortgages in the lead-up to the crisis. Notably, this is in addition to the $9.5 billion settlement that Bank of America reached with the Federal Housing Finance Agency earlier this year. Once completed, in turn, these deals will add to a shockingly long list of misdeeds that the nation's second largest bank by assets has been forced to atone for since acquiring Countrywide Financial and Merrill Lynch in 2008 and 2009, respectively.
What does all of this mean for Bank of America going forward? I'm still cautiously optimistic that current shareholders in the bank will be adequately compensated when it emerges from under the cloud of the financial crisis. At the same time, I can't help but admit that my optimism has been tempered by the latest developments.