Here’s Bank of America’s $40 Billion Backpack

Brian_Moynihan“As we look left and right, we’re right with the other climbers, in terms of competitiveness and how we approach the market,” said Brian Moynihan, CEO of Bank of America (NYSE:BAC). Speaking in an interview with Bloomberg at the annual meeting of the World Economic Forum in Davos, Moynihan clarified that while his bank is just as competitive as other major financial institutions, it carries a unique burden.

Specifically, Moynihan argues that as financial institutions fight against bad press, chaotic regulations, and economic headwinds, Bank of America’s rivals don’t have to work as hard because they are carrying a “CamelBak and a water, and we have a 250-pound backpack.” Among other things, that backpack contains Countrywide Financial Corp., a sub-prime mortgage giant that Bank of America acquired in 2008, and that has so far cost the bank about $40 billion in legal fees and settlements.

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Bank of America’s earnings reports have been sprinkled with one-time charges related to mortgage-misconduct settlements that occurred at Countrywide before it was acquired. Investors have carried the costs in one hand and smart restructuring on the other, evaluating the pros and cons. That backpack is heavy, and will continue to be heavy, but Moynihan is right. Bank of America is definitely a top bank. The stock price is up 49 percent year over year…

“What we’ve been doing is taking stuff out of our backpack,” he continued in the interview with Bloomberg. An $11.7 billion settlement with Fannie Mae earlier in January moves the bank a few pages closer to closing a troubled chapter in its history, but it’s still unclear how long until the backpack is empty. Even when it is, the effort of keeping up, the already-enormous size of the bank, and an uncertain regulatory and economic environment may still prove to be barriers to growth.

And now, new questions about the bank’s behavior have emerged surrounding how it settled claims over mortgage abuse at Countrywide after the acquisition. According to the New York Times, documents filed with the Supreme Court in Manhattan suggest that an $8.5 billion settlement was far too little, and shortchanged thousands of investors.

If a judge agrees that Bank of America put its interests ahead of investors and denies the settlement proposal, then that rock that’s sitting in the bank’s backpack could get even heavier. The bank, which has outperformed rivals like Citigroup (NYSE:C), JPMorgan (NYSE:JPM), and Wells Fargo (NYSE:WFC) year over year could begin to lose some of its moment. Already, Bank of America has lagged this group in 2013.

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mortgagepic1While the backpack analogy is illustrative, it doesn’t necessarily capture reality. Other top banks have had their share of heavy burdens, and many are still struggling to shed the extra weight. JPMorgan suffered a tremendous loss in 2012 because of the London Whale Trade, and also performed admirably despite the blow.

Wells Fargo has negotiated a long period of growth as the largest provider of commercial and multifamily home mortgage services, which many investors have frowned on because of the perceived risk. The last quarter saw a 24 percent increase in profit, fueled by mortgage-banking, but the bank has also faced billions in losses and settlement fees because of its position in the industry.

Citigroup has also faced legal charges of over $1 billion to settle litigation related to mortgage foreclosure issues. The company’s fourth-quarter results were heavily weighed on by legal expenses, and earnings fell short of expectations.

At the end of the day, Bank of America is facing unique obstacles and has performed well despite them. But it’s not alone in being forced to improvise its way through unprecedented setbacks.

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