The Conflicting Testimony That Could Sink Bank of America

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When Terry Laughlin, Chief Risk Officer for Bank of America , noted that negotiations between the bank and 22 investor groups back in 2011 were "tense," he wasn't kidding. He noted that the investors were "aggressive" and endeavoring to get the highest settlement -- up to $16 billion.

That talks were contentious shouldn't surprise anyone -- after all, the two parties were literally on completely different sides of the table. But, it seems Laughlin felt that the bank's adversaries deserved a jolt, so he delivered one: If the parties didn't tamp down their demands, B of A would put Countrywide into bankruptcy -- something for which, according to PIMCO executive Kent Smith 's testimony last week, the Office of the Comptroller of the Currency had given its permission.

Yesterday, however, Laughlin dropped a bomb: While it's true that he did threaten that bankruptcy was an option at the time, as it continues to be, he did not say that B of A had the OCC's permission to set the wheels in motion.

Much at stake
Did he, or didn't he? It is clear that Bank of America's managers were on the hot seat and felt backed into a corner when the investors were demanding $16 billion. Laughlin said that the bank never thought it would have to pay anywhere near that amount, and was offering $1.5 billion at the time.

That's a valid concern, but would that prompt the use of deception? There's little doubt the talks were heated, and sometimes messy -- Smith recounted B of A officials literally throwing documents at the investors, vowing that they would get nothing. Then, when the bondholders asked if they could inspect random loan samples in order to estimate losses, they were told Bank of America would not allow that, and in a sort of all-or-nothing scenario, the investors would instead be required to look at files numbering in the hundreds of thousands.

So, tempers were high, certainly. Smith may have misunderstood, or Laughlin may be prevaricating. If PIMCO executives heard the claim, then surely so did AIG . The megainsurer has been gunning for B of A on this issue, as well as others concerning toxic mortgage-backed securities it claims that the bank sold under less than candid circumstances. That testimony should be very interesting, indeed.

More testimony on the way
The big question may be whether trustee Bank of New York Mellon knew of Laughlin's claim, if indeed it was made, particularly since it seems the likely reason the investors settled for so little recompense in the end. The issue of "reasonableness" may well extend to whether or not Laughlin actually mentioned the OCC, and if so, how much weight this issue was given as BONY worked toward a settlement amount.

As the hearing progresses, this issue should become clearer. Revelations so far have had a dampening effect on Bank of America's stock price, which has already dropped 1.2% by mid-morning today. What deep, dark secrets will be unveiled in future testimony? 

Bank of America's stock doubled in 2012, and it's been no slouch so far this year, as well. Could this case be the bank's undoing, or might it finally pave the way to fixing the Countrywide problem?  With significant challenges still ahead, it's critical to have a solid understanding of this megabank before adding it to your portfolio. In The Motley Fool's premium research report on B of A, analysts Anand Chokkavelu, CFA, and Matt Koppenheffer, Financials bureau chief, lift the veil on the bank's operations, including detailing three reasons to buy and three reasons to sell. Click here now to claim your copy.

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Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool recommends American International Group. The Motley Fool owns shares of American International Group and Bank of America and has the following options: Long Jan 2014 $25 Calls on American International Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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