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Investments

Bank of America and the $14 billion legal bill

Execs still unsure extent of reps and warrants exposure

October 16, 2013
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Bank of America (BAC) posted a $2.5 billion profit for the third quarter, but it's the $14.1 billion the bank set aside for representations and warrants litigation expense that had analysts probing the Chief Financial Officer on this morning's conference call.

In 2011, Bank of America and Bank of New York Mellon agreed to a $8.5 billion claim originally filed by investors in soured Countrywide mortgage-backed securities. The settlement still requires court approval and BofA CFO Bruce Thompson didn't answer question on the topic with as much gusto as other investor inquiries.

When pressed over the $14 billion reserve to settle reps and warrants claims, and whether the $8.5 billion cost may go higher and take that remaining money, Thompson waivered in delivering the bank's position.

Thompson said, "I don't think it's a foregone conclusion to go one way or another."

Can you blame him? After all, they're still waiting for the hammer to drop on this one.

These are delicate times for the bank and they still struggle to get out from the shadow of Countrywide.

There was a feeling that the worst has past, but that remaining $5.6 billion seems to say it isn't over yet, but a large degree.

According to an article in Reuters, a former executive at Bank of America’s Countrywide unit, told a federal jury on Tuesday that she did not knowingly sell faulty mortgages to Fannie Mae and Freddie Mac in the run-up to the financial crisis.

Bank of America may be hoping for a break in the case to go their way.

Seeking Alpha commenter John Mason is with me. He argues that the earnings report from BofA is too optimistic.

Bank of America still has major challenges facing it in the future, challenges that, I believe, are greater than those facing JPMorgan and Wells Fargo. It is still not clear whether Chief Executive Officer Brian Moynihan is the person who can fully straighten out the problems at Bank of America.

There is still very little in the earnings performance of America's largest banks to believe that they have rebounded strongly from the financial collapse and the Great Recession.

The execs, on the call today, held a swagger that said otherwise. They seem convinced the bank was regaining its footing in a big way.

However, it should be noted, they took pause when they were asked about the reps and warrants legal bill. Not a long pause, but a pause nonetheless.