Sometimes a company needs a mulligan. Decisions can have unintended consequences, and a second chance to go back and have a do-over knowing what we know now could make all the difference. For Bank of America, the mulligan moment came on July 1, 2008, when it announced that it had purchased Countrywide Financial, the beleaguered mortgage company at the heart of the subprime mortgage crisis. The $4.1 billion purchase didn't go as planned, and now Bank of America is facing at least $60 billion in mortgage-related claims. Bank of America doesn't just need a mulligan, it needs a time machine. Call Doc Brown and tell him to warm up the DeLorean.

TUTORIAL: Banking: Introduction

On the face of things, Bank of America is clearly in trouble. It has closed bank branches and has announced it is firing 10% of its staff, 30,000 employees, leading some to fear that other banks will take over its mantle as the "bank found everywhere." It is being targeted by firms who invested in its mortgages, and has drawn the ire of federal and state governments. Share prices have plummeted 75% from the purchase date to July 2011.

Is It That Bad?
Everything is not as bad as it seems. A string of acquisitions has left the company operating overlapping data centers, so consolidation and layoffs were inevitable. The other primary issue is from claims lodged against the company. By far the largest chunk of claims - upwards of $60 billion - stems from Countrywide. Even American International Group (AIG), a company synonymous with the mortgage meltdown, is suing Bank of America for mortgages issued by Countrywide. As ominous as this may sound, the continued litigation is slowly whittling away whatever assets Countrywide has left to the point in which the company could be sent off into bankruptcy purgatory. Can Bank of America do this? It depends on whose side you are on. (For related reading, see Analyzing An Acquisition Announcement.)

Bank of America's out might be the Dodd-Frank Act, a piece of legislation that has prompted howls of anguish from all sides since being signed into law in 2010. One provision of the Act, Title II, creates an Orderly Liquidation Panel charged with determining if a company on the brink of collapse can be placed into receivership under the Federal Deposit Insurance Corporation (FDIC). The FDIC would then proceed with liquidating the company. If Countrywide's assets continue to evaporate under legal pressure, Bank of America could shift the company into bankruptcy proceedings.

The Way Out
At the heart of the matter is whether Bank of America is really responsible for Countrywide's liabilities. If Bank of America acquired Countrywide and assumed its liabilities, it would be on the hook for claims from companies that had previously conducted business with Countrywide. However, if Bank of America kept Countrywide as a separate legal entity then Bank of America may have an out. In the case of the Countrywide acquisition, Bank of America bought out its stock, just as an average investor may buy shares in Exxon or Apple. While it does control Countrywide as a business by controlling Countrywide's stock, laws protecting investors from debts incurred by the companies they invest in could apply to corporations investing in other companies as well. In this sense, Bank of America is no different than a very large, very rich Joe Sixpack.

Done deal, right? Not quite. This would have been Bank of America's out if it had kept the operations of Countrywide separate from its own operations, but this is not entirely the case. Bank of America entered into a series of fairly complex transactions in which it moved around Countrywide's debts and "paid" Countrywide by issuing it notes. Claimants are saying that this is proof that Bank of America should be on the hook because it was actively transferring Countrywide's assets around.

If Bank of America valued Countrywide's assets in a legitimate fashion, i.e. paid a reasonable sum for them, then this legitimizes the claim that it should not be on the hook for Countrywide's liabilities. If this holds up then the billions of dollars in claims against Bank of America and Countrywide could evaporate quickly. Claimants would scramble for whatever assets Countrywide is left with, and the FDIC would help guide the beleaguered mortgage giant to oblivion. This will take time, and by no means will the proceedings end quickly or without rancor.

TUTORIAL: Banking: Safeguarding Your Accounts

The Road Ahead
If Bank of America manages to navigate its way out of this mess investors may breathe a sigh of relief, but they should not let up on Brian Moynihan, Bank of America's CEO. Though the Countrywide purchase is widely panned, the company's acquisition of Merrill Lynch has also been fraught with miscues and missteps. Bank of America has struggled to effectively integrate the highly profitable wealth management services offered by Merrill into its retail banking services. It's possible that the company cast its net too wide and has become a leviathan without clear direction, as shareholders clamoring for a Merrill Lynch spinoff have been saying. The company may well keep Merrill around because it creates a one-stop-shop for consumers, and in a similar vein to Standard Oil, allows Bank of America to have its hands in more profitable pots. Without the billions of dollars in settlements and the constant string of lawsuits brought on by Countrywide, Bank of America may emerge as a very profitable bank. (For related reading, see Parents And Spinoffs: When To Buy And When To Sell.)

Related Articles
  1. Fundamental Analysis

    The Evolution of Obamacare Since Its Inception

    Find out whether the Patient Protection and Affordable Care Act, also known as Obamacare, has lived up to its lofty projections from 2010.
  2. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  3. Stock Analysis

    China Mobile: Just How Big is It? (CHL, CHU, CHA)

    The story behind China Mobile, the biggest company you might never have heard of.
  4. Economics

    A History Of U.S. Monopolies

    Here are a few of the most notorious monopolies in U.S. history.
  5. Markets

    The (Expected) Market Impact of the 2016 Election

    With primary season upon us, investor attention is beginning to turn to the upcoming U.S. presidential election.
  6. Economics

    Trump vs. Bloomberg: How They Compare

    If Bloomberg enters the presidential race how will he compare to billionaire brethren Trump?
  7. Fundamental Analysis

    5 Economic Changes to Expect if a Republican Wins in 2016

    Discover the five most likely economic changes the United States can expect if a Republican wins the presidential election in 2016.
  8. Term

    What Is Section 1231 Property?

    Section 1231 property is depreciable business property that’s held for a year or longer.
  9. Economics

    A Look At Fiscal And Monetary Policy

    Fiscal and monetary policies provide our government and the Federal Reserve with two powerful tools to regulate the economy.
  10. Investing Basics

    This is What Donald Trump's Portfolio Looks Like

    Find out what Donald Trump's portfolio looks like and gain some interesting insights into the way the billionaire's investment mind works.
  1. Are 401ks FDIC insured?

    The Federal Deposit Insurance Corporation (FDIC) works as a protector for customers when banks and financial institutions ... Read Full Answer >>
  2. Does the FDIC cover identity theft?

    When a third party gains access to your bank account and conducts transactions without your consent, the FDIC does not have ... Read Full Answer >>
  3. Does the FDIC cover credit unions?

    The Federal Deposit Insurance Corporation (FDIC) does not cover credit unions. The FDIC only insures deposits in banks and ... Read Full Answer >>
  4. Does the FDIC cover business accounts?

    Bank deposits owned by corporations, partnerships, limited liability companies (LLCs), and unincorporated associations, including ... Read Full Answer >>
  5. Are variable annuities FDIC insured?

    Variable annuities are not insured by the Federal Deposit Insurance Corporation (FDIC), which regulates only bank products. ... Read Full Answer >>
  6. Are variable annuities guaranteed?

    Because they are market-based, variable annuities do not come with inherent guarantees. Investors, however, may purchase ... Read Full Answer >>
Hot Definitions
  1. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  2. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  3. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  4. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  5. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
Trading Center