Bank of America's legal woes? No worries for investors

Lately it seems that barely a day passes without a new legal headache arising for Bank of America (BAC). Monday was no different, as a group of pension funds filed a class-action suit in a federal court in Manhattan seeking "billions of dollars" in damages stemming from bonuses paid to Merrill Lynch executives around the time of the companies' merger late last year.

The suit comes after a federal judge tossed out a settlement between Bank of America and the SEC over similar issues and brings the two sides closer to a trial next year. And it's just one of several high-profile investigations into the Merrill takeover, including a congressional inquest and a probe by the New York attorney general, among others. Yet Bank of America's stock has remained resilient, outperforming the S&P 500 on the year and climbing 435 percent since falling to $3.14 in early March. Shouldn't investors be more worried?
Not necessarily, says banking analyst Nancy Bush of NAB Research. She's been following bank stocks for big firms such as Dean Witter, Brown Brothers Harriman and Prudential (PRU) as well as smaller boutiques, including her own, since the mid-1980s. I caught up with her last week to get her take on the company's legal woes.

We also discussed the legacy of former Federal Reserve Chairman Paul Volcker, who told a congressional committee last Thursday that he'd like to see a return to Depression-era financial regulations that would force companies such as Bank of America to choose between being deposit-taking banks and securities-dealing investment houses. Such a change could go a long way toward preventing firms from becoming "too big to fail," he said. (Being among those too big to fail may be another reason Bank of America shareholders aren't particularly worried about the investigations it faces.)

Here are the highlights of my chat with Bush:

DailyFinance:Do you think BofA's stock reflects the risks it's facing?
Bush: There may be some additional legal penalties involved in this. But the offset is that Mr. Lewis' job may be on the line. If there's a charge of civil fraud that causes him to resign, are investors necessarily going to be that upset? Probably not.

Would they be worse off? They might not see themselves that way.

There has been such a drumbeat of one thing after another that it has become part of the daily noise around the stock. In other words, people are just discounting it at this point because there's just so much of it.

So do you think it would take a real development to move the stock at this point?
You know, I don't even know what that could be at this point. So what if management gets displaced? Big deal. What else could happen, that they fine them a bazillion, gadzillion dollars? They're not going to do that. So I don't know what could happen at this point that could make people feel that bad. The market is focused on the prospects for the company, and all this other stuff has just become noise.

Paul Volcker's testimony before Congress suggests he'd like to bring back the Glass-Steagall Act. What's your take on that?
I love that man. I don't know if we should bring back Glass-Steagall. But we clearly should delineate between commercial banking and investment banking. They should be supervised differently, they should be capitalized differently. This stuff about Goldman Sachs (GS) deciding they want to be a bank holding company, but now they might not want to be anymore because, gee, that has pay constraints -- it's crap. It's just absolute crap.

They're an investment bank. Supervise them like an investment bank and separate them from commercial banking, along with everyone else.

The man is absolutely right. Bringing back Glass-Steagall may dial us back a bit more than we need to be dialed back at this point, but I think his general thought process is extremely correct and I don't know why people aren't listening to him.

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