An extraordinary sequence of events has enveloped Bank of America (BAC -1.07%) in the worst publicity crisis since its debit-card debacle in 2011. Not surprisingly, shares of the nation's second largest bank by assets have dropped by nearly 20% in just over a month.
Fifty days ago, the bank's prospects couldn't have looked better. On March 14, Bank of America learned that it sailed through this year's Comprehensive Capital Analysis and Review, a process used by the Federal Reserve to determine whether the nation's biggest banks can increase their dividends or repurchase more shares. The news prompted the Charlotte, N.C.-based bank to boost its dividend for the first time since the financial crisis.
But elation was premature. On April 24, word leaked out that the government is seeking $13 billion more from the bank by way of yet another legal settlement. And four days later, Bank of America suspended its previously announced dividend increase. By its own admission, the bank had overestimated its regulatory capital levels by incorrectly accounting for losses related to its Merrill Lynch acquisition. Shares plummeted by more than 6% on the day of the announcement.
Since then, things have gone from bad to worse. Although Warren Buffett came to Bank of America's defense, saying the error "does not bother me," few other analysts and commentators have been as understanding. Most notably, CLSA analyst Mike Mayo urged clients to abandon the bank in favor of Citigroup (C -1.09%), which, it's worth noting, had its own capital plans rejected by regulators in the middle of March.
Moreover, on the eve of Bank of America's annual shareholder meeting this Wednesday, the California State Teachers' Retirement System pension fund admitted to voting against four members of the bank's board in response to the accounting misstep. "The shortcomings in processes and risk controls underscore the need to make the necessary changes to ensure this sort of issue does not arise again," spokesman Ricardo Duran said in an email to The Wall Street Journal. Given the pension fund's size and standing in the investment community, it was an unwelcome and undeniable blow.
And last but not least, U.S. Attorney General Eric Holder broke ground this week by intimating that the Justice Department is preparing criminal charges against major banks. "There is no such thing as too big to jail," Holder said in a recorded statement on the department's website Monday. "No individual or company, no matter how large or how profitable, is above the law." Spokespeople for the government confirmed that France's BNP Paribas and Switzerland's Credit Suisse are the subjects of Holder's ire.
That Bank of America isn't a target, however, should give shareholders little comfort, as there's speculation these are merely test cases. At the end of last year, for instance, the Justice Department was clear that its $13 billion settlement with JPMorgan Chase (JPM 0.15%) "does not absolve JPMorgan or its employees from facing any possible criminal charges." And in Bank of America's case specifically, there's little doubt that its conduct related to the servicing of mortgages at the very least skirted the edge of legality -- click here for a full list of Bank of America's misdeeds since 2008.
What does all of this mean for Bank of America? For investors who remain optimistic about its future prospects, it may be time to put your money where your mouth is. At Tuesday's closing price, the bank trades for an almost 30% discount to book value, making it the second cheapest big bank after Citigroup. Meanwhile, for those who remain suspicious of Bank of America's ability to fully and finally atone for its past sins, this will merely add fuel to an already blazing fire. It is, quite frankly, impossible to predict the outcome.
