Lex is a premium daily commentary service from the Financial Times. It helps readers make better investment decisions by highlighting key emerging risks and opportunities.
Pre-crisis clouds still hang over Bank of America. On Monday, a hearing is set to begin on an $8.5-billion (U.S.) settlement over mortgage bonds bundling faulty loans arranged by Countrywide, which BofA bought in 2008. It will be up to a New York state judge to approve or reject the settlement, which investors such as BlackRock have endorsed, but another group, including AIG, has contested as offering far too little compensation for anticipated losses. Uncertainty over whether the settlement will stick has served as a refuge for BofA bears as the stock price more than doubled last year. Their case is based on the settlement unravelling, ultimately setting BofA up for much higher payments related to the faulty loans. BofA has set aside $8.5-billion in reserves to cover the settlement.
BofA shares are up 18 per cent this year, lagging behind peers a bit after last year's rally. Still, the gains have sent the price equal to tangible book value per share for the first time in about two years. Worries over litigation and repurchases of bad loans have been a drag. But the entire market, and particularly bank shares, has risen this year. BofA was also helped by another settlement involving Countrywide loans – this one with MBIA for $1.7-billion – that raised optimism about the $8.5-billion settlement.
That settlement and resulting hearing starting this week are complex and include questions about how to value losses from the loans, how to gauge how many were faulty and how much responsibility BofA has for Countrywide loans. A ruling could take months and appeals are likely, dragging out a resolution. If the settlement is rejected, BofA shares are likely to fall. BofA faces other cases, but if this settlement stands, it will go a long way to clearing out the crisis-related clouds that have followed the bank. The stock's next move could then be based on the bank's operations and future – however bright they may be.