How close is Bank of America (BAC -0.21%) to being free from legal liability dating back to the financial crisis?
The answer depends on how you define "close."
Not all legal claims are created equal
In terms of the sheer number of cases, the answer is that Bank of America is tantalizingly close. By my count, there are only four major disputes that remain outstanding -- click here for a comprehensive list settlements since 2008.
By contrast, the North Carolina-based bank has settled or otherwise resolved 47 cases or controversies over the last six years.
Now, just to be clear, not all of these cases were of equal weight.
In August 2011, for instance, it paid $5 million to resolve a case with the City of San Francisco over allegations that the bank had rigged the arbitration forum it used to adjudicate debt-collection disputes with credit card customers.
Meanwhile, six months later it ponied up $11.82 billion in relief to compensate the government and victims of faulty mortgage foreclosure practices.
The point here is that not all legal settlements are created equal. Some costs a few million dollars, while others cost north of $10 billion.
How Bank of America could still owe $25.3 billion
And herein lies the reason you could argue that Bank of America is still leagues away from fully and finally atoning for its past misdeeds.
Namely, while it appears to have only four major cases left to resolve, all four are doozies. As you can see in the table below, their combined total adds up to $25.3 billion in potential legal liability -- and, for the record, this doesn't include fees paid to the bank's lawyers and legal consultants.
|
Description |
Requested Settlement Amount |
|---|---|
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According to multiple sources, Bank of America is engaged in multibillion-dollar settlement talks with the Justice Department to end investigations into shoddy residential mortgage-backed securities. |
While it isn't clear how large a settlement will be, the government is said to be demanding $17 billion in various forms of relief. |
|
Bank of America continues to litigate its dispute with American International Group (AIG -0.13%) over toxic mortgage-backed securities sold by the bank and its legacy companies. |
American International Group has amended its complaint multiple times, and is now seeking $5 billion in damages. |
|
Rumors began circulating in April that Bank of America is concluding a settlement with mortgage-bond insurer Ambac Financial Group stemming from toxic mortgage-backed securities sold by the bank and its legacy companies (namely, Countrywide Financial) in the lead up to the crisis. |
According to Bank of America's latest annual report, Ambac is seeking $2.5 billion in damages. |
|
Bank of America is in talks with the Consumer Financial Protection Bureau to settle allegations that it "forced customers to sign up for extra credit card products." |
Media reports put the figure at $800 million. |
Now, this isn't to say that Bank of America will necessarily take a $25.3 billion loss over the next year or two.
In the first case, it already holds billions of dollars in legal reserves for this very thing. And while it doesn't disclose the precise amount set aside, you can assume that it's well into the billions of dollars.
On top of this, a portion of the eventual damages is likely to consist of non-cash remedies that won't have a dollar-for-dollar impact on Bank of America's bottom line. One example is if it's forced to repurchase faulty mortgage-backed securities. While it may lose money on the transaction, it will nevertheless receive an asset in exchange for payment, albeit an impaired asset.
Finally, all of the figures in the table above reflect the maximum possible exposure. In other words, they are a starting point in the analysis and not an ending point -- though, at least by my estimation, the further Bank of America has gotten from the financial crisis, the less negotiating power it appears to wield against legal adversaries.
The net result is that, while Bank of America may not be on the hook for every cent of the $25.3 billion figure, it must still absorb at least four major blows to its income statement before all of this is finally in the rearview mirror.
