Bank of America Among Those Likely to Benefit Most From Mortgage Settlement

Jul. 7.11 | About: Bank of (BAC)

I'm sure Daily Profit readers think I have an unhealthy obsession with the "too big to fail" banks, especially Bank of America (NYSE:BAC). After all I tend to talk about the banks a lot. I try to keep my coverage balanced, discussing their past transgressions, current issues and future opportunities with somewhat equal word counts.

Lately, I've been mostly focused on the current issues, as a way to gauge future opportunity. (The "past transgression" category is somewhat irrelevant at this point, unless JP Morgan's (JPM) Jamie Dimon wants to whine about unfair treatment.)

It's long been my opinion that the banks are getting what they deserved. Actually, they are probably getting less than what they deserve. But at the same time, the banks are a critical component of the economic recovery. They serve as a ready microcosm for all that ails the U.S. right now, which can be summed up by one word - debt.

Households are still carrying too much debt, whether it's in the form of credit card debt or mortgage debt (made worse by declining home values and underwater mortgages). The parallel for banks is clear - their mortgage exposure remains a millstone.

Banks are also forced to streamline their businesses to meet the requirements of new financial requirements. That's resulting in lower revenues and profit margins, which in turn, means layoffs and less hiring.

And then there's the weak U.S. economy, which is affecting every person and every company. For the banks, in particular, they are trying to deal with their debt issues in an environment of slow growth and lower revenues.

Again, I want to emphasize that I believe banks are getting off easy. Jamie Dimon is lucky he still has a job. But I am still interested in how they are progressing.

So I am interested when I read that there may be an industry-wide settlement in the works. The New York Post is reporting that a $60 billion sum is on the table to settle all the robo-signing, mortgage putbacks, and whatever other mortgage related issues they can come up with. (Bloomeberg is reporting a $20 billion figure.)

The settlement is with state and federal attorneys general. It appears that a fund may be set up to handle civil complaints. There's also speculation that there could be some form of principal reductions for underwater loans.

As an investor, I'm not so concerned about the form any settlement might take. The point here is that we could see some kind of settlement event like the $8.5 billion settlement that Bank of America recently crafted that could go a long way toward lifting some of the biggest problems the banks are facing.

And while such a settlement doesn't mean a sudden return to solid profits, it does mean that bank assets could return to more valuable levels, especially for Bank of America and Citigroup (NYSE:C). JP Morgan (NYSE:JPM) and Wells Fargo (NYSE:WFC) are also involved.

I recently said that I thought banks were only good for a trade. But if they can manage to (finally) get out from under the mortgage problems, they might actually become decent investments.

And in the big picture, getting the banks on better footing is an important cog in the recovery engine. Yes, households have a ways to go, especially those that have been affected by long-term unemployment. And then there are debt problems with some states and the federal government.

But make no mistake: if this settlement goes through, it is a significant step forward and the banks should rally. Citigroup might be the best play.

In a good sign for the global economy, industrial output in both Germany and England rose in May. This may indicate that the "soft patch" we experienced is improving. The U.S. stock market seems to think's rallied strongly since June 27th.