Bank of America $8.5B settlement hearing begins

Bank of America’s acquisition of Countrywide Financial Corp. has turned out to be the purchase that’s kept on giving — more litigation, that is.

But the bank could soon find out whether it will finally get to put to rest a big piece of unfinished legal business stemming from its ill-fated purchase of the lender whose mortgage loans contributed to the financial crisis.

On Monday in New York Supreme Court, a hearing began on a proposed $8.5 billion Bank of America settlement with those who invested in bonds backed by Countrywide loans.

While Bank of America is a frequent target of lawsuits — as most large companies are — and has already agreed to billions of dollars in settlements since the economic downturn, investors and analysts have been following the $8.5 billion settlement.

“This is clearly the largest single litigation item, or potential litigation cost, at Bank of America that we know about,” David Hilder, an analyst for Drexel Hamilton, said.

If the settled were approved, it would mean the Charlotte-based bank gets to bury one more very costly headache that surfaced since the downturn. Bank of America’s success at moving past such expensive liabilities is important for shareholders who have been concerned about the bank’s earnings being held back by settlements struck since the Great Recession.

“It would be recognized as a big win for Bank of America," Dan Marchon, an analyst for Raymond James & Associates, told the Observer.

A rejection of the settlement by the judge, Barbara Kapnick, analysts say, would create uncertainty over how much Bank of America might end up paying to satisfy the investors.

"If the settlement is tossed out ... resolution of the matter could be much more expensive for the bank," Mark Palmer, an analyst with BTIG Research, wrote Monday.

Marchon said a rejection of the settlement would be viewed as a negative for Bank of America.

“How negative depends on the reasoning and guidance that we get with the dismissal,” he said.

In addition to the $8.5 billion cash settlement, Bank of America, in its latest annual report, said that it expects to pay roughly $100 million in attorneys fees and other costs related to the case.

The settlement was reached with 22 institutional investors who accuse Countrywide of, among other things, originating home loans that did not comply with the company’s own underwriting guidelines.

The Bank of New York Mellon is the trustee seeking approval of the settlement, which dates to June 2011.

It’s unclear when a ruling might be handed down, although it is expected to take weeks.

The settlement has its objectors. American International Group is among those opposed to it.

In court papers, AIG has said the settlement "is a fraction of the $108 billion in losses" to investors.

Bank of America, when contacted by the Observer Monday, declined to comment.

The start of the hearing comes a month after Bank of America agreed to pay $1.6 billion in cash to MBIA as part of a settlement over mortgage-backed securities tied to Countrywide.

Bank of America shares fell 0.81 percent Friday to $13.55.

Hilder, of Drexel Hamilton, said it’s too early to say how approval of the $8.5 billion settlement could affect Bank of America’s stock.

“The stock could go up by a significant amount if this is finally approved, and then we would look back and say, ‘Wow. The market was more worried about failure to get approval than I had thought.’”

At $8.5 billion, the settlement is twice what Bank of America earned in 2012.