- I was wrong about being wrong about Bank of America, which means I have been right all along.
- I believe the shares of the bank will take a big hit on Monday, unless a miracle happens.
- I doubt that the Federal Reserve will give the bank a go ahead on both a dividend hike and a share buyback plan.
Just when I was ready to turn the page on my dislike of Bank of America (NYSE:BAC) stock, along comes the breaking news that the DOJ has broken off talks with the bank and it appears very likely that the US will bring a massive civil law suit against the bank.
The Justice Department has reportedly asked for more than $10 billion from New York-based Citigroup and $17 billion from Bank of America to settle the probes against them, though prosecutors are willing to consider proposals below those amounts. However, Bank of America is said to have offered about $12 billion.... Charlotte, North Carolina-based Bank of America's legal charges have been a huge drag on its earnings, with the bank paying about $60 billion since the financial crisis to settle lawsuits and buy back mortgage securities.
I believe that the gap is simply too large for anyone to simply shrug off at this point. I would suggest taking profits, or cutting your losses until all of this is finally settled.
That being said, it appears that unless there is a last minute breakthrough, these issues will continue to drag on for who knows how long.
Even $12 Billion Is Too Much To Ignore
Late last week it appeared that the DOJ and BAC would come to some sort of agreement to settle all civil lawsuits for $12 billion. I believe that most shareholders felt relieved that the bank was finally putting an end to all the legal issues.
Shareholders seem to forget that $12 billion exceeds all of the bank's net income last year. That is an enormous hit, yet even Barron's stated that shareholders were accepting of this ridiculous settlement just to put the debacle to bed.
Though $12 billion exceeds the net income Bank of America generated last year, investors seem relieved, as shares are up more than 1% to $15.60 in recent trading. Why? Bank of America's legal charges have been a blight on earnings. Removing the charges gives clarity and opens the door to a brightening earnings picture, setting the stage for the company to start raising its dividend, which should attract income investors.
Now, we have the DOJ cutting off talks and wanting $17 billion which obviously would mean almost 40% of the bank's net income for this year as well as all of the net income for 2013. That is a $5 billion gap between the parties and I do not see the DOJ backing off, as they are also ready to file lawsuits against Citigroup (NYSE:C).
Do you still want to hang on to BAC stock with all of this mess continuing?
Keep In Mind That The Federal Reserve Is Watching
If BAC is forced into litigation for an extended period of time, and has to come up with around $17 billion to settle the suits, do you still believe that the Federal Reserve will give a green light to BAC to either buy back shares OR increase dividends?
Folks, this is the tipping point. I cannot see how the stock will not take a hit first thing Monday morning if this is not settled.
The parties have about 36 hours before the opening bell on Monday.
Hang on to the railing folks.
Disclaimer: The opinions of the author are not recommendations to either buy or sell any security. Please remember to do your own research prior to making any investment decision.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.