Bank of America (BAC) stock was one of Monday’s largest casualties in the sixth worst day of trading in the history of the Dow Jones Industrial Average. BofA’s stock ended the day down more than 20% settling at $6.52. The stock dropped roughly 50% since the beginning of the year. Early Tuesday, the banking giant’s stock was trading up about 25 cents, or 4%, to around $6.78. The entire market braced for a massive Monday sell-off after Standard & Poor’s downgraded the U.S. debt rating for the first time in history. Investors flocked to gold, which bounced up $70 per ounce to $1,721 and Treasurys. However, the DJIA fell 631 points, taking down nearly every financial stock including JPMorgan Chase (JPM), Citigroup (C), Wells Fargo (WFC), Goldman Sachs (GS), Morgan Stanley (MS) and others. But the fall was especially steep for BofA. Early Monday, The New York Times first reported a lawsuit from American International Group (AIG) seeking more than $10 billion in damages from BofA for alleged misrepresentations on mortgage-backed securities AIG insured. It has been a year of settlements for BofA. Most of the lawsuits and charges stemmed from the Countrywide Financial Corp. mortgage problems inherited from its acquisition in 2008. In the first quarter, BofA paid out roughly $3 billion to settle representation and warranty claims from Fannie Mae and Freddie Mac. It also settled with the monoline insurer Assured Guaranty (AGO) for $1.6 billion. In the middle of July, rumors circulated of a settlement between BofA and the bond insurer MBIA (MBI). At the end of July, BofA settled with a group of investors led by Bank of New York Mellon (BK) for $8.5 billion over soured MBS. Other investors in the deal and the New York Attorney General challenged the settlement, however. Ongoing negotiations between the 50 state attorneys general and the largest servicers, including BofA over recent foreclosure issues, remain ongoing. Latour Lafferty, a former federal prosecutor and currently an attorney in Florida, said private investors have been pursuing similar AIG allegations of “massive fraud” at BofA for some time. “The AIG lawsuit against Bank of America, in my opinion, is enormous in magnitude both because of the economic realities it immediately imposes on Bank of America and the financial markets, but the reality that this perceived ‘accountability’ to the investor public for their enormous losses will ultimately help restore investor confidence in the financial markets,” Lafferty said. “It is the ‘no pain, no gain’ scenario for restoring investor confidence after the financial crisis.” BofA denied the allegations Monday. Still, Christopher Whalen of the Institutional Risk Analytics said the AIG suit is the latest burden for a bank that is beginning to show signs of fracturing. “Just another straw on the camels back that will break soon,” Whalen said. Write to Jon Prior. Follow him on Twitter @JonAPrior.
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