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.

Nothing Can Get in Bank of America Corp (BAC)’s Way Today

Lately, it doesn’t seem like anything can go wrong for Bank of America Corp (NYSE:BAC), the nation’s second largest bank by assets. Despite a blistering article in The New York Times over the weekend that criticized the Federal Reserve for ostensibly releasing B of A from liability to insurance giant American International Group, Inc. (NYSE:AIG), shares are nevertheless up considerably. At roughly halfway through the trading session, shares in the bank are higher by 2.12%.

B of A vs. AIG
The gist of the lawsuit is this. In the lead-up to the financial crisis, Countrywide Financial, now a subsidiary of Bank of America Corp. (NYSE:BAC), sold billions of dollars in mortgage-backed securities to institutional investors like AIG. Many of the underlying mortgages have since defaulted, and companies like AIG now want their money back.

Bank of America Corp (NYSE:BAC)But in AIG’s case, there’s a twist. As a part of the government’s 2008 bailout of the insurance giant, the Federal Reserve Bank of New York acquired control of the mortgage-backed securities at issue. And along with the transfer of control went the right to sue — at least according to the Federal Reserve and B of A, that is. AIG is claiming that no such transfer occurred and that it still has the right to recover damages from Countrywide (and therefore B of A). It’s accordingly filed a lawsuit that is awaiting the decision of a federal judge on this very issue.

To say that the impending ruling is important to B of A — as well as other potential litigants including Goldman Sachs Group, Inc. (NYSE:GS) and JPMorgan Chase & Co. (NYSE:JPM) — would be an understatement. All told, Countrywide sold an estimated $10 billion in MBSes to AIG — $7 billion of which were ostensibly transferred to the Fed. A favorable decision could save it billions of dollars in liability. But if the judge adopts the same attitude toward the purported transfer as The New York Times did, then it may not be so lucky.

To read more about this particular case, check out my colleague Amanda Alix’s take on it here. And to get an overarching view of B of A’s legal situation, I strongly encourage you to read this multipart series that we published last week.

Why B of A’s shares are nevertheless up
Despite this lingering threat, there are at least three factors fueling B of A’s climb today.

In the first case, there’s mounting evidence that investment banking activity is gaining momentum. The personal computer maker Dell Inc. (NASDAQ:DELL) is going private in one of the largest leveraged buyouts in years. American Airlines and US Airways Group, Inc. (NYSE:LCC) are in the process of consummating a merger. And most recently, Warren Buffet’s Berkshire Hathaway Inc. (NYSE:BRK.B) announced a $23 billion takeover of H.J. Heinz Company (NYSE:HNZ).

While one doesn’t think of these things as necessarily good for banks, they most certainly are — at least for the too-big-to-fail banks on Wall Street. In Bank of America Corp (NYSE:BAC)’s case, specifically, its investment bank (which advises on mergers and acquisitions, among other things) was ranked second in terms of revenue in the fourth quarter of last year.