Source: Bank of America.
As we all know,
used its second-quarter
as an opportunity to announce that it finally reached a
settlement with the Department of Justice over its mortgage
practices. Will we see a similar announcement soon from
Bank of America
over its soured mortgage-backed securities?
Citigroup settlement sets a precedent for Bank of
As a result of its settlement, Citigroup parts with about $7
billion to end the DOJ's probe into its mortgage business. The
settlement resolution itself was astounding, given that Citigroup
was previously willing to offer only around $4 billion. The DOJ,
however, was going on the offensive at the time and threatening
legal escalation if Citigroup didn't fork over a cool
After some back and forth, and probably some nasty haggling
behind closed doors, it's good to see that both parties have
reached a compromise. Of Citigroup's $7 billion penalty to
resolve the DOJ's mortgage investigation, $4 billion will go
straight into the DOJ's coffers, $2.5 billion will be used for
"consumer relief," and $200 million will benefit the Federal
Deposit Insurance Corp.
Bank of America CEO Brian Moynihan. Source: Wikimedia
While the Citigroup settlement is a good thing for the bank
and its shareholders, it also bodes well for Bank of America,
which is working on its
own settlement right now
Bank of America, because of its outsized exposure to the
mortgage market through its acquisitions of Merrill Lynch and
Countrywide, will be hit with a significantly larger penalty than
Citigroup's $7 billion, which will also probably consist of
various components such as a DOJ civil penalty and funds
earmarked for "consumer relief."
about four weeks ago that Bank of America offered $13 billion in
the latest round of haggling to resolve the mortgage probe.
That's well short of the $17 billion DOJ wants, and Attorney
General Eric Holder has gone so far as to refuse to meet with
Bank of America CEO Brian Moynihan in person, because the "
parties remained too far apart for a meeting to
What's become clear over the past few weeks is that the DOJ is
playing hardball with Bank of America, and investors should
probably expect a settlement at the higher end of the spectrum --
in the neighborhood of $16 billion to $17 billion.
Investors want closure
After Citigroup reported earnings and made the settlement
announcement, shares rose 3% the same day, an indication that
Citigroup's shareholders were happy to get the issue off the
table. Should Bank of America report a settlement in the near
term, which I expect, the stock could go either up or down
depending on whether investors feel they got a good deal.
Bank of America has tested investors' nerves over the past few
years with a never-ending stream of lawsuits and litigation
costs. In the second quarter of 2014, Bank of America reported
another $4 billion (pre-tax) litigation expense, and a large part
of Bank of America's persistent book-value discount is
attributable to the company's ongoing litigation and settlement
Any news that would indicate that Bank of America is making
progress in resolving its mortgage issues will help the stock
price. Getting a settlement done is fundamentally important for
the stock in the long run, as the bank can start to concentrate
on growth and its actual banking business, instead of being
distracted by ongoing litigation headaches.
Getting the mortgage issue off the table once and for all
should also be a major driver of a narrowing gap between Bank of
America's stock price and its book value per share.
The Foolish bottom line
Bank of America remains an attractively valued banking business.
At a current share price of just around $15.22, Bank of America
trades at a whopping 28% discount to book value.
Should Bank of America's shares sell off as a result of a
settlement announcement, investors will probably have a good
chance to snap up a quality bank at a massive margin of safety,
as Bank of America's long-term earnings prospects aren't affected
by a mortgage settlement in the slightest.
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Bank of America Corp: Expect a
Multibillion-Dollar Settlement Any Day
originally appeared on Fool.com.
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