Bank of America Now in Dangerous Territory
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Bank of America (NYSE: BAC) may be walking towards dangerous waters right now. I would say that a proactive step will need to be taken and taken fast by its management for it to change its course, otherwise things may take a turn for the worse.
For one, recent news has it that Kyle Lagow, who in 2009 brought a lawsuit against Countrywide Financial on behalf of the United States government for illegally increasing the appraisals of government-insured loans, has reached a settlement in his case. Bank of America acquired Countrywide Financial in 2008. According to the report, the Countrywide scheme had been going on for a long time and had cost the United States government billions of dollars while making life somewhat hard for homebuyers and generally leading to many foreclosures. Lagow is considered one of the first whistleblowers to bring the scheme to light.
Thus, it is not in any way surprising that the Bank of America has reached a settlement agreement with the Department of Justice and the United States government to the tune of about $1 billion dollars. Interestingly, the whistle-blower provision that allows Lagow to file the lawsuit under the U.S False Claims Act also entitles him to a share of the proceeds from the settlement. Hence, Lagow will be walking away with a whopping $14.5 million.
All attempts to get Bank of America's officials to comment on the story have so far proved abortive, yet, the handwriting on the wall is very clear. The mere fact that Bank of America is opting for such an unprecedented settlement is a strong enough argument that it is guilty of the charges. Its supporters may want to argue that the settlement was necessary in order to avoid the bad publicity that may accompany the lawsuit. I'm not inclined to follow that logic. As an African proverb says, you do not behead a man to cure his headache. Thus, the settlement invariably pronounces Bank of America as guilty and such a move may undermine the faith of both consumers and investors in the credibility of the bank.
In another related development, competitor Wells Fargo (NYSE: WFC) has agreed to pay about $432.5 million in settlements as a means to effectively halt a lawsuit that accused it of discrimination in its lending practices in Memphis, Tennessee. News has it that the Bank was accused of forcing predatory loans on African-American neighborhoods by Memphis and Shelby County in 2010.
In a statement, Leigh Collier, the Regional President for the mid-south region for Wells Fargo, said, "We agreed that it was in the best interests of everyone involved to work together rather than to continue to be involved in a protracted legal fight." However, the fact remains that Well Fargo appears to be guilty of the accusations and would most likely lose the confidence of its customers even with all the money that it plans to pump into the local economy with its loan packages.
Without much ado, it seems that we are seeing a season of lawsuits for banks. In fact, the United States government has initiated three separate lawsuits against a conglomeration of large banks because of the losses that were recorded based on mortgage debt. The debt in reference is from Citizens National Bank and Strategic Capital Bank, both located in Illinois. Both banks went under in 2009 and the Federal Deposit Insurance Corp. has taken it upon itself to take the case to court on their behalf.
The big banks that are accused in the lawsuit include Citigroup (C), JPMorgan Chase (JPM), Deutsche Bank (DB) and Bank of America. The combined value of the lawsuits stands at $92 million with some banks being named in all the three lawsuits while others are named in just two of the cases. Whatever the dynamics and the specifics of the lawsuit may be, the fact remains that it does not bode well for the banking industry to be embroiled in these kinds of lawsuits.
The simple truth is that the lawsuits perpetuate the "us" versus them mentality. In essence, consumers and investors could band together on cases like this to take massive action against the banks to demand more transparency and accountability. However, due to the competitive nature of the banking industry, it is doubtful that the banks will stick together or that any alliances that they form will be long lasting. The industry, at large, needs to right its own ship before it starts to see members sinking under the wave of lawsuits, regulations and complaints from investors.
Another piece of news on Reuters saw Bank of America putting up its non-U.S. wealth management business for sale in deal that could be valued at around $2 billion. Some banks have started showing interest in taking possession of business notable among them being the Royal Bank of Canada (RY) and Credit Suisse (CS). Bank of America is hoping that the auction will net it the price tag it believes it deserves. Analysts have put Bank of America's price estimate much higher than its market value, and I expect this sale to be a big reason why.
The question is if the bank can keep its estimate as high after the sale if it continues to encounter lawsuits and terrible publicity. This may be a temporary fix for now, but the future is quite uncertain. The move to sell the division looks like a strategic move to get rid of an unproductive part of the business, but it only serves to raise some concerns about the bank at large and the viability of its overseas investments. The territory where Bank of America is headed does not look sunny right now, the question is how big of a storm it may encounter.
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