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What An $8.5B Settlement Would Mean for Bank of America Corp (BAC)

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Bank of America Corp (NYSE:BAC) lost the trust of millions after its Countrywide Financial subsidiary lent money based on underwritten mortgages, but the bank looks ready to earn back investors.

Bank of America Corp (NYSE:BAC)

Bank of America Corp (NYSE:BAC) was eventually blamed for much of the sub-prime mortgage crises and was sold off in spades. Now, the company is looking to win back investors after it completes a mandatory settlement. The $8.5-billion settlement would address issues the bank had with investors who owned bonds issued by Countrywide. Paying the investors and leaving this issue behind will mean the end of the grunt work associated with the financial crises that Bank of America Corp (NYSE:BAC) was in the thick of, and which caused the share price to drop from around $40 to $5. Paying the investors will also show those who were doing business with the bank — either as customers or as investors — that the firm has paid for its mistake.

The deal might not go through

But many are calling the $8.5-billion sum pennies on the dollar. Insurance titan AIG asserted the deal is full of conflicts of interest between those who are involved in the agreement, and the penalty isn’t nearly enough. The agreement involves 22 institutional investors, including Bank of New York Mellon, Blackrock, Metlife and Pimco.

However, Bank of America Corp (NYSE:BAC) has already suffered from around $50 billion in charges that were connected to underwriting mortgages and marketing them to investors in the years leading up to the recession. That was done at arm’s length through Countrywide.

What would the settlement mean?

If approved, the settlement wouldn’t cost the bank a lot of money, but it would put an end to most of the cold shoulder the bank is receiving from investors. In turn, shares of JPMorgan Chase & Co. (NYSE:JPM) could drop and Citigroup Inc (NYSE:C) will have to work hard to keep investors.

Why JPMorgan is Likely to Fall

JPMorgan Chase & Co. (NYSE:JPM) has made a slew of acquisitions during and since the recession, which has shown the considerable strength of the firm. I credit much of the company’s rising price to those acquisitions, as investors noted the bank’s buying power and got in on what they perceive to be a good thing. That could very well be true, but with Bank of America Corp (NYSE:BAC)’s price well below its pre-recession high, many investors might do what they do best and “buy low, sell high.” Furthermore, many of the takeover acquisitions JPMorgan has made have resulted in lawsuits because many of the deals were subprime-related. At the time, JPMorgan was doing business with now infamous companies Bear Sterns, Long Beach, and Washington Mutual. JPMorgan Chase & Co. (NYSE:JPM) could lose billions for repurchasing residential mortgage-backed securities (RMBS).

JPMorgan is also facing a variety of risk factors, such as market risk, regulatory risk, liquidity risk, legal risk, credit risk and operational risk. The company even pointed that out in a 12,000-word 10-K. And at least eight federal agencies, federal prosecutors, and the FBI are reportedly investigating the firm, as the New York Times pointed out. Avoid this bank!

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