After Monday’s stunning rout, in which the Dow crashed 634 points, financial bellwether Bank of America (BAC: Charts, News, Offers) hit a new 52-week low of $6.31, a chilling price which reminded many investors of the horrifying plunge of 2009. To make matters worse, American International Group (AIG: Charts, News, Offers) has sued the beleaguered bank for a whopping $10 billion in losses incurred on $28 billion in mortgage-backed securities. AIG claims that Bank of America and its subsidiaries, Merrill Lynch and Countrywide Financial, “misrepresented the quality of the mortgages placed in securities and sold to investors.” AIG is also suing Goldman Sachs (GS: Charts, News, Offers), JPMorgan Chase (JPM: Charts, News, Offers) and Deutsche Bank (DB: Charts, News, Offers) for similar reasons as a litigation strategy aimed at recouping billions in losses sustained during the global financial crises of 2008-2009. These lawsuits are sweeping through the industry at an alarming rate, with no less than 90 active lawsuits over mortgage bond losses asking for approximately $197 billion – which could cripple some major financial players quickly and consolidate the industry in unpredictable ways.
Daily Chart
Prior to the market crash, Bank of America, which is ranked as the largest bank in America by both assets and deposits, posted its third loss in four quarters, as mortgage-related issues offset any gains in other business segments. In July, the bank made a shocking announcement that it had agreed to pay $8.5 billion to a group of institutional investors over losses incurred on mortgage-backed securities. It then announced that other mortgage-related losses increased quarterly losses to $20.7 billion. These ghosts of the 2008 market meltdown would foreshadow its current conflict with AIG, its costliest mortgage-related battle yet. In other segments, Bank of America didn’t fare too badly. Credit-loss provisions decreased by $8.11 billion to $3.3 billion, while the net charge-off rate decreased from 3.98% to 2.44%. These numbers are in line with most other recovering banks, as consumers are slowly becoming more credit worthy once again. This can also be seen in its credit card operations, where profit nearly tripled to $2.04 billion, while its provision decreased to $481 million from $3.8 billion. However, CFO Bruce Thompson noted that new debit card reforms, which cap swipe fees, will reduce the card unit’s revenue by $475 million in the fourth quarter.
However, revenue decreased in four of its six business segments. Ironically, Merrill Lynch, which is now in AIG’s crosshairs, was the brightest spot in last quarter’s report. Merrill Lynch’s revenue increased 15% with its investment banking business showing growth, with profit increasing by 74%. Its brokerage business and U.S. Trust also showed improvement, with revenue increasing 7.2 and profit rising 54%. But at Bank of America, loans decreased by 1.6%, with a 7% decrease in commercial banking. The drop in commercial banking loans was attributed to over-exposure to commercial real estate, where the bank claims it is reducing exposure. In total, Bank of America’s revenue dropped 54% to $13.24 billion, and posted a loss of $8.83 billion, both exceeding analysts’ already pessimistic estimates. Bank of America is also highly exposed to Europe with $16.73 billion in assets in large companies in the troubled region. $1.58 billion of these assets are in sovereign debt. Bank of America laid out plans to get back on track by 2019, a long wait which may now be pushed back even further given the S&P downgrade of U.S. debt, the plunging equities market and AIG’s lawsuit.
The pessimism surrounding Bank of America is so thick it can be cut with a knife. At current levels, no reliable technical data can be used since the company’s finances are deep in the red. However, long-term charts would suggest that this is a tempting entry point to accumulate shares for investors that can stomach several more barrages of bad news and sour guidance. But buyer beware, Bank of America’s chart also resembles Washington Mutual’s before it fell off the map, and its current mortgage troubles are all too familiar to investors who were in the market prior to 2008.
Other News About BAC
Bank of America shares tank after AIG’s $10 billion lawsuit
AIG delivers a crippling blow to the struggling bank.
Bank Of America Posts 2Q Loss On Mortgage Troubles
A look back at Bank of America’s earnings.
Other Stocks in the News
Citigroup Shares Fall to Half Book Value
Citigroup gets wiped out along with the rest of the financial sector.
Bowing to Citadel, E*Trade Hires Goldman Sachs
E*Trade attempts to appease Citadel by hiring outside help to get its finances back on track.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
We know from court cases around the country that lender fraud extended well beyond robosigners and “lost” notes. (Is anyone really going to “lose” an instrument worth half a million or so?)
Mr. Sun is absolutely correct when he says that the fallout may consolidate the industry in unpredictable ways. The problem with mortgage fraud is that some appelate courts are just now seeing lower court decisions which, if upheld, may stir this bad dream into a nightmare.