Shareholders in Bank of America (NYSE:BAC) should have known it was too good to be true. Three weeks ago, despite a record $16.65 billion settlement reached with the U.S. Justice Department in August, the nation's second largest bank by assets announced third-quarter earnings of $168 million.
Sure, after taxes and dividends on preferred stock were deducted, shareholders of common stock were left with a $0.01 loss per share. But that's getting too far into the weeds. What matters is that Bank of America could credibly claim that it earned money despite the historic accord.
Unfortunately, as we've since come to find out, that assessment was premature. On Thursday, the North Carolina-based bank reported that it has adjusted its third-quarter earnings to reflect an additional litigation expense related to its foreign-exchange business.
As the bank explained:
Subsequent to the company's earnings announcement on October 15, and prior to the filing of the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, the company has been engaged in separate advanced discussions with certain U.S. banking regulatory agencies to resolve matters related to its foreign exchange business. As a result of those discussions, the company recorded a $400 million non-deductible charge and adjusted its third-quarter 2014 financial results to a net loss of $232 million or $(0.04) per share.
To be fair, this happens all the time. Exactly a week before Bank of America's announcement, Citigroup (NYSE:C) did the same thing, reducing its previously reported third-quarter earnings by $600 million due to "rapidly evolving regulatory inquiries and investigations, including very recent communications with certain regulatory agencies related to previously disclosed matters."
Earlier in the month, moreover, JPMorgan Chase (NYSE:JPM) told shareholders that it, too, had increased its litigation expense by hundreds of millions of dollars for the three months ended Sept. 30. As its chief financial officer Marianne Lake acknowledged on a conference call with analysts, the bank is working with a "number of regulators across a number of jurisdictions" to settle allegations that it conspired with other financial institutions to illegally manipulate foreign-exchange rates.
Thus, the issue here isn't about accounting and having to go back to adjust previously reported numbers. In cases like these, doing so is legitimate and within the letter of the law. The issue is instead about the magnitude and revolving nature of settlements like these -- to say nothing about the culture within these banks that the mounting allegations reflect.
Since the financial crisis, Bank of America has been subject to 51 major legal settlements, judgments, and regulatory fines. Taken together, as broken down here, they add up to approximately $91.2 billion in monetary and nonmonetary damages -- and that excludes the cost of lawyers and legal consultants.
But while Bank of America's management continues to tell shareholders that the end of extraordinary legal expenses is in sight, new allegations continue to prove the assurances wrong. U.S. Bancorp's (NYSE:USB) chief executive officer Richard Davis has even claimed that the industry is in only the third or fourth inning when it comes to potential legal and regulatory actions.
Of course, it's impossible to say how many more of these surprises are in the works for Bank of America or, for that matter, any of the major banks. But what isn't hard to say is that the revolving nature of new claims, and the potential that they will continue to weigh on the industry's bottom line, is certainly not a harbinger of outstanding shareholder returns to come.