I believe the Supreme Court just issued a ruling that may time-bar virtually all remaining litigation against Bank of America (NYSE:BAC) and other banks like Citigroup (NYSE:C). The article touches on some relatively obscure legal facts, so if you don't know what FIRREA or the statute of repose are, you should start by reading both my previous article on the topic, and Allison Frankel's Reuters story on the topic.
The stakes in this ruling are huge. Here are a few headlines from Seeking Alpha in the last week alone:
- Bank Of America unprepared to pay billions, outlook dark for shareholders
- With $17 billion at risk, is Bank of America going to break it or blow it?
- Bank of America: A $17 billion bombshell in the making?
Given news reports that BAC has offered $12 billion to settle these charges, I believe the investment community estimates that BAC will pay between $12 and $17 billion to settle the DOJ charges. And of course investors, understandably, believe that there will be plenty of litigation after that.
In contrast to the market, I am going to argue the Supreme Court's decision may push the settlement down below $12 billion, with the possibility that litigation may be dropped entirely.
A brand new Supreme Court ruling on Monday in Nomura vs. NCUA suggests that government litigation against Bank of America and other banks may be time barred. As of this writing, I am unaware of any article linking Nomura to the larger context of bank litigation.
The case in Nomura is about the statute of repose and FIRREA (if you don't understand these phrases, please read my previous article). The Tenth Circuit court ruled that litigation against Nomura (another bank) was brought within the statute of repose.
Yesterday, the Supreme Court vacated that decision and asked the Tenth Circuit to reconsider their position on the statute of repose in light of CTS Corp. vs. Waldburger. Recall that CTS Corp was a 7-2 decision where Waldburger was time-barred against suing CTS Corp. I believe the Supreme Court is "hinting" that NCUA should also be time-barred for their suit against Nomura in 2013.
This is not a slam dunk, however. The Supreme Court did not directly rule on Nomura, and the Tenth Circuit may decide its original ruling was correct even in light of CTS Corp.
I believe the Supreme Court's recent decisions in CTS Corp and Nomura significantly raise the odds (but not to 100%) that virtually all remaining litigation against the banks will be time-barred. If my analysis is correct, you will see the following with BAC:
- Instead of a $12-$17Bn settlement with DOJ now expected by the markets, you will see a settlement below $12Bn. It is possible the DOJ will drop their litigation altogether, in which case BAC will show billions of dollars of "profits" by reversing existing legal reserves.
- The fear and threat of future litigation for financial-crisis wrongdoing will end rapidly with litigation deadlines long past their expiration dates.
- BAC's legal expenses, which are around $7-$8Bn/year, will also drop rapidly to something more like $2Bn/year.
In short, I believe BAC is going to reach a settlement billions of dollars better than most participants, and end their financial-crisis litigation much sooner than people expect.
Disclosure: The author is long BAC, C. 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.