BofA Settlement: Time to Strap on a Straddle?
by Paul Springer
Bank of America (BAC) has apparently pleased investors by agreeing to a $3 billion settlement with Freddie Mac and Fannie Mae over claims that the bank’s Countrywide Financial unit sold problem loans to Freddie and Fannie.
The bank also said it has reserved $2.7 billion for put-back claims on BofA mortgages, and will take a $2 billion goodwill impairment charge.
The bank’s shares were up over 5% mid-day, and Forbes was calling the issue a relative strength play.
But BofA still has two big problems, which at first glance seem unrelated: remaining mortgage claims made by private investors, and an ongoing threat of scandalous divulgence by WikiLeaks.
A tally from BusinessInsider indicates the bank could be on the hook for a lot more money from non-government mortgage investors with ongoing claims:
The Association of Financial Guaranty Insurers (the monoline insurers) believe Bank of America owes them $10 to $20 billion. A group including PIMCO and the New York Fed are also suing Bank of America, claiming the firm owes them up to $47 billion.
A survey of analyst reports from The Wall Street Journal includes Deutsche Bank’s estimate of $15 billion for “private label” liabilities.
At the same time, rumors continue to circulate about an impending WikiLeaks release of information about some big bank that many people believe is BofA.
NPR says the bank is spending a lot of time to clean up its records through internal review and an external review contracted out to consulting firm Booz Allen Hamilton: “But analysts say this proves one thing clearly: Assange’s and Wikileaks’ credibility is cemented by BoA’s actions.”
There are a lot of “ifs” in the equation, but damaging WikiLeakage could severely flood the bank’s defensive Depends – if BofA really is the intended leak victim. What if WikiLeaks dug so deep it came up with incriminating information that’s not currently available in the bank’s official data storage systems?
It could get ugly for BofA, especially if WikiLeaks could prove, for instance, that the bank new more than it should about allegedly illegal underwriting at Countrywide.
On the other hand, what if the worst is over with the Fannie/Freddie settlement? In that scenario, the bank may have stolen WikiLeaks fire by preemptively forking over $3 billion dollars to clear the air – leaving the leakers to whinge about ancient history.
With that many “ifs” floating around, a relatively strength play appears risky in the long run. It sounds like it might be time for a BofA straddle that bets the company’s stock will do pretty much anything but remain where it is now.
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