Here’s Why Bank of America Is Dead in the Water

Source: Thinkstock

Source: Thinkstock

Just when we thought the worst was probably over for the country’s second largest lender, Bank of America (NYSE:BAC), we found out that was far from the case. Negotiations with the Department of Justice (DOJ) hit a dead end this week, and the bank may now have to battle it out with the DOJ in the courts over a multi-billion dollar penalty.

The prospect of a protracted fight has drained investor enthusiasm. Shares, which just recently began to recover after a post-earnings slump, are beginning to fall again. This year to date BofA stock has lagged the S&P 500, falling about 3.2 percent.

According to The New York Times, negotiations between BoA and Department of Justice overmortgage settlements reached an impasse when the DOJ refused to accept the bank’s $12 billion offer to settle the investigations into BoA’s sale of assets backed by mortgages that had bombed. According to the publication, BoA’s offer falls short of the prosecutor’s demand for $17 billion, which would be the heftiest pay out by any bank so far, if the bank agrees to pay. BoA has already paid about $50 billion since the crisis in order to resolve cases of selling as much as $640 billion worth of questionable mortgage backed securities in the build up to the crisis.

The news could be unnerving for investors who expected to see BoA reach some resolution with DoJ, in line with a similar settlement reached between DoJ and JPMorgan Chase (NYSE:JPM) earlier this year. JPMorgan paid $13 billion on charges of miss-selling asset backed securities in 2007-08, when the financial crisis hit.

Apart from failed negotiations with the prosecutors, the bank is reeling under operational and economic pressures. One of the challenges facing BoA is a huge deposits base worth $1.13 trillion, as of the first quarter of 2014. The problem with such a large deposit base is that if interest rates begin to rise, then the bank will face severe re-pricing pressure on its deposits, unless there is a similar pickup in demand for credit as well.