Bank of America CEO Says Future Legal Losses Could Exceed $9 Billion
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Even if you follow Bank of America closely, it's still difficult to get a grasp on the bank's legal situation. We know it's paid out $43 billion in legal costs since the financial crisis, but until today, we didn't know how much more remained.
Speaking to analysts this morning, Bank of America CEO Brian Moynihan shed considerable light on the situation. According to the bank's calculations, the estimated range of possible losses above existing accruals is anywhere from $0 to $9.1 billion.
Where exactly it comes in on this continuum is largely a function of two things. The first concerns how aggressive the federal government decides to be in its efforts to recoup losses related to the financial crisis.
If the recent JPMorgan Chase settlement is any indication, then it appears the costs could be high. In the middle of last month, the nation's biggest bank by assets inked a record $13 billion deal with an assortment of government entities.
This was the largest single settlement in history, far eclipsing the $4.5 billion deal with BP stemming from the Deepwater Horizon disaster in the Gulf of Mexico.
The second thing that could weigh on future legal costs is the ongoing case involving Bank of America's $8.5 billion settlement with 22 institutional investors that's pending approval from a judge in New York as I write. If that deal isn't approved, it's hard to say how much additional liability Bank of America would be facing.
One of the principal objectors to the deal is insurance giant American Insurance Group , which has sued Bank of America in a separate action seeking $10 billion in damages. Its suit alleges that the bank, as well as its Merrill Lynch and Countrywide subsidiaries, knowingly misrepresented the quality of mortgages they sold to institutional investors.
Working against the Charlotte-based bank, moreover, are a number of critical legal precedents that have been established in the interim between when the settlement was agreed to in 2011 and today. Two months ago, for instance, a jury found that Bank of America's Countrywide unit committed fraud in a last-ditch loan-processing program in 2007 and 2008 appropriately known as the "Hustle."
The point being, for Bank of America and its shareholders, the $8.5 billion settlement is a critical step forward. If it were to be thrown out by the New York court, the bank would have to go back to the drawing board.
Will Bank of America end up paying out an additional $9.1 billion in legal costs beyond accruals? That remains to be seen, but as a shareholder myself, I hope at the very least that the upper limit of Moynihan's estimate is indeed the upper limit.
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John Maxfield owns shares of Bank of America. The Motley Fool recommends American International Group and Bank of America. The Motley Fool owns shares of American International Group, Bank of America, and JPMorgan Chase and has the following options: long January 2016 $30 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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