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For BofA, more legal costs lie ahead

Five years after the financial crisis, Bank of America is still feeling the effects in its pocketbook. And it’s not over yet.

The Charlotte bank has struggled under the weight of legal settlements, attorneys’ fees and forced mortgage buybacks more than any other bank in the five years since the meltdown.

Bank of America still faces a slate of lawsuits and legal claims that could add up to billions more in costs. Analysts have hesitated to project how much more they could actually add up to. But this much is clear: The bank’s ongoing legal issues will take several more years to resolve.

Already, Bank of America has spent a total of $20.1 billion over the last five years on legal fees and litigation expenses, reports filed with the Federal Reserve show. The bank also has paid out or set aside another $35.7 billion to repurchase mortgages from investors who claim the bank misrepresented the quality of the loans, according to the bank’s most recent quarterly earnings presentation.

Combined, that’s a $55.8 billion price tag for legal entanglements since the crisis – far more than at peers like JPMorgan Chase, Citigroup and Wells Fargo.

“Bank of America had been the real epicenter for all this,” said Marty Mosby, a bank analyst with Guggenheim Securities. While he said the bank appears to be making progress on its current legal issues, investors still worry that more costs could pile up. “Is there a lingering surprise that is all of a sudden going to come back and hit you in the ninth inning?”

A Bank of America spokesman declined to comment for this story. But the bank’s litigation status has been a frequent topic of conversation on earnings calls and investor conferences for many months. CEO Brian Moynihan regularly cites cleaning up the bank’s legal woes as a top priority.

And he has made headway. Bank of America has settled three large-scale conflicts in just the past year.

In the first, the bank agreed to pay $2.43 billion to settle a shareholder suit over its 2009 acquisition of Merrill Lynch. Soon after, Bank of America came to a $10 billion agreement with mortgage giant Fannie Mae over more than $1 trillion in loans sold to the government-sponsored entity that went bad. In May, the bank agreed to pay bond insurer MBIA about $1.7 billion to settle a dispute over who should take the loss on soured mortgage-backed securities.

It has also slowly come to agreements with other types of investors who bought loans from Bank of America or from Countrywide Financial Corp., the subprime lender the bank acquired in 2008. Amid the housing collapse, many of these loans went bad, and investors sought to force the bank to buy them back.

“I think we’ve made a lot of progress,” Chief Financial Officer Bruce Thompson told investors at a conference last week.

Still, the possibility of future legal costs and losses has continued to weigh on the bank’s stock price. Bank of America shares are down more than 50 percent from where they were just before the financial crisis. They closed Friday at $14.49.

In an unscientific poll last week at an investor conference in New York, participants were asked what would most influence them to buy Bank of America stock. The most-cited answer: getting more clarity on the bank’s litigation picture.

Regulators and U.S. attorneys have continued investigations and have filed a number of new actions in recent months -- with promises of more. But there’s plenty on Bank of America’s plate to keep its lawyers busy for the next few years.

“We all knew ... it was going to take a decade before it was all rounded out,” Mosby said. “It’s just going to take a long time to process.”

Here’s a glance at the legal issues still to come in some of the more prominent cases.

$8.5 billion in limbo

Most imminent is a judge’s decision on whether to approve an $8.5 billion settlement between Bank of America and a consortium of investors who held mortgage bonds Countrywide issued before the crisis. The bank reached the accord in June 2011, but its approval has been hung up in court.

Twenty-two institutional investors have signed off on the settlement. A few, led by American International Group, have objected.

The dissenters have spent more than five weeks this summer in a New York courtroom trying to make their case why the settlement shouldn’t stand. Those hearings continued this past week. A judge has set a Sept. 25 deadline for when the hearings should conclude, and she must then rule on whether the settlement will be finalized.

Investors have worried what would happen should the judge reject the settlement. Some investors say they fear the bank’s liability could reach billions higher.

“People are concerned that if it doesn’t get approved, does it open up a Pandora’s box?” said Chris Mutascio, an analyst with Keefe, Bruyette & Woods. “You don’t know until you know.”

Thompson, the chief financial officer, pointed out earlier this year that the court does not have the ability to enforce a higher settlement figure.

“The court is not opining on a number. They're either opining on approving or not approving,” he told analysts on a conference call. “Obviously if it doesn't get approved, this will revert back to going to individual trust by trust and working through it.”

AIG suit

The insurer AIG sued Bank of America, Merrill Lynch and Countrywide in 2011 alleging they misrepresented the loans that went into more than 300 mortgage-backed securities.

It claimed damages of $10 billion. They’ve since been reduced to $9 billion, according to Bank of America securities filings. But much of the last two years has been tied up in determining where the lawsuit would be handled -- in state or federal court.

It could take several more years for an ultimate resolution.

FHFA suit

Another major issue is a lawsuit filed by the Federal Housing Finance Agency, the government body overseeing mortgage giants Fannie Mae and Freddie Mac. The agency sued Bank of America and a number of other banks, also alleging misrepresentation on mortgage-backed securities that later went sour. These were sold to Fannie and Freddie before the entities nearly collapsed.

UBS settled its portion of the lawsuit for $885 million in July. That represented a 20 percent loss rate on the total value of securities in question, Mutascio said. Apply that calculation to Bank of America’s much larger figure and the cost to the bank could exceed $11 billion.

The first trials in the case aren’t scheduled until next year.

Government actions and more

The U.S. government alleged last fall that Countrywide pushed loans to Fannie and Freddie without oversight or quality control. Federal prosecutors initially claimed $1 billion in damages through a scheme they called “the Hustle.”

“The fraudulent conduct alleged in today’s complaint was spectacularly brazen in scope,” U.S. Attorney Preet Bharara said in a statement accompanying the suit, adding that Countrywide “made disastrously bad loans and stuck taxpayers with the bill.”

Another suit last month said Bank of America hid information on the risks of a pool of prime mortgages sold in 2008. The government alleged losses of $70 million on the $850 million pool, with another $50 million in losses expected. The investors, which include Wachovia and the Federal Home Loan Bank of San Francisco, did not sue.

And there’s always the risk that something new could come up in the next few years.

Some of the suits tied up in courts now could end up making it to the U.S. Supreme Court, Mosby said. That’s because many of the cases deal with esoteric bits of securities law that are uncharted legal territory. Sorting it all out could take years.

Legal issues are “probably the biggest risk to Bank of America right now,” Mutascio said. “It seems like these things come out of the woodwork.”

Dunn: 704-358-5235 Twitter: @andrew_dunn
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