Bank of America still not out of the woods

@CNNMoney August 30, 2011: 5:28 PM ET
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NEW YORK (CNNMoney) -- Even with Warren Buffett in its corner, Bank of America's fight to get past the mortgage bust is far from over.

Days after receiving $5 billion vote of confidence form the legendary investor, the list of opponents to BofA's proposed $8.5 billion settlement with investors in mortgage-backed bonds continues to grow.

On Monday, the Federal Deposit Insurance Corporation filed an objection to the settlement, saying it does not have enough information to evaluate the agreement, according to federal court documents.

The settlement, announced in June, has yet to be approved by the courts. It stems from troubled real estate loans made by Countrywide Financial, which BofA acquired in 2008. The money would go to a group of 22 investors, including BlackRock (BLK, Fortune 500), the Federal Reserve Bank of New York and Pimco (PTTRX), which bought bonds backed by the home loans.

Separately, U.S. Bancorp filed a lawsuit Tuesday against BofA on behalf of investors in HarborView Mortgage Loan Trust, according to documents filed in New York State Court.

The suit alleges that BofA willfully breached contracts governing the sale of home loans originated by Countrywide that were packaged by the trust into mortgage-backed securities.

As the trustee, U.S. Bancorp is demanding that BofA buy back all of the loans in the trust within 90 days. The trust, which was set up in 2005, originally had over 4,000 mortgages worth an estimated $1.75 billion.

In its filing, the FDIC said it is the "reciever" of many of banks that would be covered by the proposed settlement with bondholders. The FDIC backs deposits and steps in when banks fail.

But an FDIC spokesman said the filing should not be seen as an indictment of the settlement.

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"This filing is simply a formal notice to preserve our right to make claims as a part of the settlement and seeks additional information to evaluate those potential claims," said FDIC spokesman Andrew Gray. "It is not an evaluation or opinion on the settlement itself."

While the agreement would mark the largest reckoning of the 2008 financial crisis, it has come under fire from state attorneys general, members of Congress and smaller investors. Critics say the settlement is too small and would mainly benefit large investors, while smaller players and taxpayers could come up short.

BofA (BAC, Fortune 500) has called the settlement an "important step" in moving past the problems it took on when it bought Countrywide, once the largest subprime mortgage lender that nearly collapsed in the financial crisis.

"We believe that the trustee acted reasonably in entering into the settlement, and that there are compelling reasons why the agreement should receive judicial approval," said BofA spokesman Lawrence Grayson.

Bank of New York Mellon (BK, Fortune 500), which was named trustee in the settlement, declined to comment on the FDIC's objection.

Analysts said a settlement could resolve a major source of uncertainty weighing on BofA's stock price, which is down nearly 40% so far this year.

Buffett's one-day win: $357 million

Shares of the company have regained ground since Buffett's Berkshire Hathaway (BRKA, Fortune 500) announced his investment last week. BofA kept the rally going Monday after the bank announced plans to sell 50% of its stake in China Construction Bank.

Marty Mosby, an analyst at Guggenheim Securities in Tennessee, said BofA has been seen as the "poster child" for concerns about the banking industry recently. "They have a lot of overhang from the financial crisis and the residential real estate market," he said.

While BofA has a substantial cushion, the ultimate cost of the bank's real estate portfolio remains in question, said Mosby. That uncertainty, he added, "won't go away anytime soon."

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If the $8.5 billion settlement fails to go through, that might actually turn out to be beneficial for the bank, said Richard Bove, an analyst at Rochdale Securities in Florida.

Bove said the settlement would send a signal that BofA is willing to resolve lawsuits with cash payments, which could expose the bank to a wave of new litigation.

By contrast, he said the cost of fighting thousands of lawsuits could end up being less than the proposed settlement. At the same time, the cost of a drawn out legal battle with one of the world's largest banks may prove too expensive for many investors, he said.

"It's entirely to Bank of America's advantage to walk away from this deal and let everyone sue them," said Bove.  To top of page

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