Why Bank of America Corp (BAC) Sank Like a Stone This Week

It was a rough ride for the Big Four banks as well as the markets over the past five days, with Bank of America Corp (NYSE:BAC) in particular down 3.48% for the week at the start of the last day of trading. Promising jobs news from the federal government today looks set to keep Thursday’s late rally in motion, but B of A has a lot of ground to try to make up, and the major trial currently underway isn’t helping things.

Bank of America Corp (NYSE:BAC)

Mixed messages
The Labor Department is reporting that the U.S. economy added 175,000 new jobs in May, beating expectations. The unemployment rate rose from 7.5% to 7.6%, but this is because more people are returning to the workforce. This is the good news.

The bad news is that B of A is in the middle of a trial in which tens of billions of dollars are potentially at stake. On Monday, opening arguments began in a case that pits B of A against, among others, American International Group, Inc. (NYSE:AIG), over bad mortgage-backed securities issued by Countrywide Financial, the subprime lender B of A acquired in 2008.

Arguing for the originally agreed upon settlement amount of $8.5 billion are BlackRock, Inc. (NYSE:BLK) , bond-giant PIMCO, and The Bank of New York Mellon Corporation (NYSE:BK) . Opponents argue that losses attributable to the bad mortgage-backed securities could be as much as $100 billion.

Foolish bottom line
There’s obviously a lot at stake in the ongoing trial. The silver lining is, the $8.5 billion was accounted for when the original settlement was announced. So if B of A can successfully reargue its case, B of A shareholders aren’t in for an unexpected $8.5 billion hit. The problem is, of course, what might happen if B of A doesn’t successfully reargue its case.

Investors are in for another week of holding their collective breath, as the judge has officially set aside these first two weeks of June to hear the case. But in the end, we all know B of A is still too big to fail, and in the past, fines, payouts, and settlements always seem to be carefully calibrated to inflict pain without causing death. Unfortunately, if this case goes against B of A, that pain will fall on shareholders in the way of a depleted bottom line and a depleted share price.