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Bank of America Corp (BAC): Legal Issues Send Shares Lower

Bank of America (BAC)Shares of Bank of America Corp (NYSE:BAC) are lower today after mixed news from its ongoing legal battles continues to trickle in. Roughly halfway through the trading session, the nation’s second largest lender is down by $0.07, or 0.53%.

In a decision issued yesterday, a judge in New York denied a motion by bond insurer MBIA Inc. (NYSE:MBI) which would have held Bank of America Corp (NYSE:BAC) wholly liable for all of Countrywide Financial’s pre-crisis misdeeds. While the bank has verbally committed to assuming Countrywide’s liabilities — its CEO Brian Moynihan said in 2010 that, “At the end of the day, we’ll pay for the things Countrywide did” — that’s a far cry from being legally obligated to.

The issue, known as “successor liability,” has been used as a bargaining chip by Bank of America Corp (NYSE:BAC) in negotiations with various parties throughout a multitude of settlement discussions — most importantly an $8.5 billion agreement with institutional investors in mortgage bonds backed by Countrywide-issued home loans. The fear was that an adverse ruling in the MBIA Inc. (NYSE:MBI) case could therefore influence other legal proceedings and settlement discussions.

Notably, the judge also denied Bank of America Corp (NYSE:BAC)’s motion to have the issue decided wholly in its favor, leaving the question one for a jury to decide.

Down the street, a federal judge expressed skepticism over the Justice Department’s use of a rarely applied law to sue Bank of America Corp (NYSE:BAC) over the sale of toxic mortgages to Fannie Mae and Freddie Mac in the lead up to the financial crisis. The lawsuit seeks $1 billion in damages and alleges that the bank engaged in a scheme, known as “the Hustle,” to defraud the government-sponsored agencies in order to boost revenues in 2007 and 2008.

The judge was concerned specifically about the Justice Department’s reliance on the Financial Institutional Reform, Recovery and Enforcement Act of 1989, which was passed to combat abuses committed throughout the savings and loan crisis. The law entitles the government to seek damages from anyone who commits a fraud that affects a federally insured financial institution.

In this case, however, neither Fannie Mae nor Freddie Mac was formally insured by the federal government at the time of the alleged misdeeds. Consequently, the Justice Department is arguing that community banks — which are insured by the FDIC and that owned preferred shares of the GSEs — were the victims. The judge said he was “troubled” by this application of the law and said he’d issue a final ruling on the matter on May 13.

The article Bank of America’s Legal Battle Heats Up, Sending Shares Lower originally appeared on and is written by John Maxfield.

John Maxfield owns shares of Bank of America. The Motley Fool owns shares of Bank of America.

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