Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Bank of America Corp (BAC)’s $60 Billion Mistake

This month is an important one for Bank of America Corp (NYSE:BAC), particularly as it pertains to one of many lawsuits concerning deteriorating mortgage-backed securities and the decaying mortgages that reside therein.

Prior settlement thrown into doubt
The case involves a settlement struck in 2011, for $8.5 billion, between B of A and 22 investors, pursuant to 530 mortgage trusts sold by Countrywide. This settlement is now in question, since some investors came up with evidence that the bank did them wrong by putting its own interests before theirs — for example, by modifying mortgages contained within the MBSes, then neglecting to buy them back from the investors, as the plaintiffs allege was the agreement between the parties.

Alison Frankel outlines all the painful contortions this suit has undergone since last year, and the next installment will occur on May 30. It is then that New York State Supreme Court Justice Barbara Kapnick will begin hearing arguments regarding whether or not the settlement should be overturned.

Bank of America CorpThis question is based upon whether or not the The Bank of New York Mellon Corporation (NYSE:BK), acting as trustee for the investors, agreed to the terms of the settlement in good faith. Under New York’s Article 77, the trustee must have acted “reasonably,” which gives the judge wide latitude, it seems. How that law is interpreted will decide whether or not the settlement stays — or goes.

Big investors and big bucks
Members of the group of 22 investors include big asset managers BlackRock, Inc. (NYSE:BLK), PIMCO, and giant life insurance company Metlife Inc (NYSE:MET), with the total amount of losses estimated to be around $108 billion. If the ruling comes down against trustee Bank of New York Mellon and the settlement is nullified, how much might Bank of America Corp (NYSE:BAC) have to pay?

This is just speculation, of course, but the answer seems to be: A lot. One expert estimated earlier this year that the damage could come in at somewhere between $25 billion and $30 billion, while analyst Mark Palmer at BTIG Research figures it may hit more than $60 billion. How does he get to this number?

Using figures from the Bank of America v. MBIA (NYSE:MBI) suit, Palmer notes that the monoline insurer’s lawyers have estimated that 56% of the Countrywide MBSes MBIA insured had issues so odious that a lender would be too embarrassed not to repurchase them. Applying the same formula to $108 billion, the penalty comes in at $60.5 billion.

As Palmer says, even half of that amount would be onerous for Bank of America Corp (NYSE:BAC). While the $60 billion number looks awfully high, its seems a sure bet that, if things don’t go its way later this month, B of A will be paying out more than the original $8.5 billion settlement amount — perhaps quite a lot more. In the crowd of lawsuits surrounding Bank of America Corp (NYSE:BAC), this is one that investors should definitely keep an eye on.

The article The Case That Could Cost Bank of America $60 Billion originally appeared on Fool.com.

Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool recommends BlackRock. The Motley Fool owns shares of Bank of America.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Loading Comments...