Can Bank of America Survive Libor?
Karen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This hasn’t been a good year for Bank of America (NYSE: BAC).
In February, the bank paid a $1 billion dollar fine to the Feds for defrauding the FHA by underwriting loans to unqualified buyers. Just last month Bank of America joined Visa, MasterCard and other large banks to settle a price fixing case brought by retailers over credit card swipe fees. The bank’s portion of that fine: $738 million.
Bank of America bought Countrywide Mortgage in 2008, hoping to become a major mortgage player but, unfortunately, Countrywide hasn’t made an annual profit since 2007. Mortgage investors, claiming that they were misled about the quality of the mortgages and mortgage-backed bonds the bank sold them, have filed claims that have cost the bank over $13 billion so far. The bank lost over $19 billion on their consumer real estate division last year.
The bank missed their second quarter 2012 Wall Street estimate by posting revenues of $22.2 billion instead of $22.8 billion. Part of Bank of America’s $2.46 billion dollar profit came from cutting their bad loans reserve, a rather neat accounting sleight of hand.
Most recently, Bank of America was the recipient of a subpoena and Request for Information from the U.S. Department of Justice regarding their role in the Libor benchmark interest rate scandal. Berkshire Bank likewise named Bank of America, Citigroup (NYSE: C), and Barclays (NYSE: BCS) as some of the defendants in their lawsuit for damages, alleging that Libor fraud lowered the interest rate and correspondingly decreased the interest payments Barclays received from customers. Barclays CEO Robert Diamond already stepped down from his post last month amid the firm being fined a record $450 million dollars for their role in fixing the interest rates. The Royal Bank of Scotland (NYSE: RBS) likewise is under scrutiny from the UK Financial Services Authority for their major role in rigging the interest rates. The bank is looking at a potential fine of $656.2 million by regulators and could pay more than $1.062 billion to settle the civil lawsuits.
Bank of America, Citigroup and JPMorgan Chase (NYSE: JPM), three of the sixteen banks that set the Libor rate, have been the target of lawsuits from investors who may have lost money on assets tied to the Libor benchmark. Both Citigroup and JP Morgan have received Requests for Information, but no subpoenas as yet. All three companies’ stock prices have fallen and will probably continue to decline as the investigation continues.
So will Libor be Bank of America’s final undoing? Although Citigroup and JP Morgan stumbled during the 2008 financial disaster, both banks managed to recover and see their stock prices return to most of their pre-2008 levels. Except, however, for Bank of America, which is still down over 86% from its 2007 high and has a stock that can’t seem to break the $10 dollar barrier.
Bank of America has weathered scandal, economic turmoil, regulatory fines and lawsuits. CEO Brian Moynihan is committed to cutting costs and restoring profitability to lagging divisions. But with the Libor scandal just starting to unfold and the stock price falling again, Mr. Moynihan may need to do more than cut costs if Bank of America is to survive.
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