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With Legal Reserves Low, Bank of America Faces a Big Lawsuit

With Legal Reserves Low, Bank of America Faces a Big Lawsuit

Bank of America has been underestimating its legal risks for years, and brazenly so, according to its critics. Is that strategy about to pay off with the Federal Reserve?

On Thursday, the Fed will release figures on how much capital the nation’s biggest banks must have to cover a “stress” situation. The following week, investors find out whether those banks will be able to return more of their capital to shareholders by paying dividends or buying back stock.

Last year, the Fed passed most of the big banks and let them pay out billions. Bank of America, sensing a request would be unwelcome, didn’t even ask. This year, however, Wall Street expects that Bank of America will get the green light.

Yet the bank continues to face gargantuan payouts to clean up legal disputes from the bubble years. Now a lawsuit suggests that the bank’s mortgage portfolio could cost it tens of billions more than it had planned. In one big case, if things go wrong, Bank of America may be required to make good on many more billions worth of bad mortgages from Countrywide Financial, which the bank acquired, in the sense that one acquires Ebola virus, in 2008.

Bank of America, however, has kept its legal reserves low — perhaps dangerously so.

The dispute involves a 2011 settlement that Bank of America reached with some of the world’s biggest investors, including Pimco and BlackRock, for $8.5 billion. That amount covers more than $400 billion of Countrywide loans, on which there have been tens of billions of losses. The actual loss total is in dispute because they are estimates, but it ranges from $70 billion or so to well over $100 billion. That means, at the high end of the range, the settlement was for pennies on the dollar. On a conference call last week held by Mike Mayo, the CLSA bank analyst, a legal expert suggested that if things went south in the courts for Bank of America, the settlement might rise to $25 billion to $30 billion.

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