This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
See Cramer's multi-million dollar portfolio for FREE and get his new book Get Rich Carefully! Learn More

Bank of America -- Expect the Unexpected: Street Whispers

Updated to include Moody's comments in the 13th graph.

NEW YORK (TheStreet) -- Bank of America's (BAC) surprise $2.43 billion shareholder settlement on its crisis-time acquisition of Merrill Lynch on Friday is the next in a string of unexpected billion dollar losses and wrecked quarters. Investors should continue to expect negative surprises as the bank and its chief executive Brian Moynihan struggle to move past the crisis.

In fact, Friday's larger than expected legal settlement and an expected hit to Bank of America's third quarter earnings and capital levels give investors a clear signal why the bank's shares aren't expected to recover materially from the crisis anytime soon.

The loss -- combined with the steep discount that Bank of America trades relative to its liquidation value -- highlight a future unexpected surprises that could legal settlements, writedowns or provisions against future liabilities. Until investors have numerical certainty on Bank of America's various exposures, some analysts see little reason for shares to recover substantially.

Jim Sinegal, a large cap bank analyst with Morningstar, sees Bank of America's larger than provisioned for Friday shareholder settlement as yet another reason why legal issues stemming from the crisis will take a long time to resolve and will depress the bank's normalized earnings outlook and share prices for quarters to come.

"It's something that has been hanging over the stock for a long time and I don't think that's going to change anytime soon," says Sinegal of future legal costs, highlighted by the bank's ongoing litigation over mortgage securities with Fannie Mae and Freddie Mac. "The stock really doesn't recover until it's behind them," he adds.

Because Friday's settlement over Merrill Lynch came in roughly $1.2 billion more than Bank of America had provisioned for, the bank will wipe out roughly six months of progress on capital and depress overall 2012 profitability while cutting 28 cents from the Bank of America's third-quarter earnings. Both KBW and Wells Fargo analysts now forecast the bank will post a loss for the third quarter.

Earnings excluding charges, litigation and the improvement in its credit spreads, earnings may range between 15 cents and 30 cents, respectively, analysts said.

"The $2.4 billion settlement came in higher than expected as some part of [the third quarter's] $1.6 billion in litigation expense comes from an additional BAC/MER case accrual," wrote KBW analyst Jefferson Harralson, in a Friday note to clients. "We are left to guess that the case was settled for $0.8 to $1.2 billion more than what had been accrued," he added.

Although Bank of America shares are up nearly 60% year-to-date, the top performer on the Dow Jones Industrial Average those gains represent a recovery from post-crisis lows hit in 2011 and still keep the bank's shares at half of post-crisis highs near $20 a share hit in 2010.

Stock quotes in this article: BAC, JPM 

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
DOW 16,501.65 -12.72 -0.08%
S&P 500 1,875.39 -4.16 -0.22%
NASDAQ 4,126.9670 -34.4910 -0.83%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto
Advertising Partners

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs