Bank of America Rallies as It Gets Riskier

NEW YORK (TheStreet) -- Bank of America (BAC) shares hit a new 52-week high after the bank announced it had received regulatory approval for $10.5 billion in repurchases of common and preferred shares, even as some observers believe it is $16 billion to $22 billion under-reserved for legal risks.

Shares were up 3.76% to $12.56 in late morning trading following Thursday's announcement by the bank that it would buy back $5 billion in common shares and $5.5 billion in preferred shares. The announcement came after the Federal Reserve completed its annual "stress tests" of the 18 largest U.S. banks. Other banks, including Regions Financial (RF) and Wells Fargo (WFC), also received Fed approvals to deploy "excess" capital.

While the Bank of America approval was not unexpected, it may prove hasty if the bank does not receive the OK for an $8.5 billion settlement of litigation over mortgage-backed securities it sold that investors say weren't as advertised.

Bank of America reached a settlement deal in that case in 2011 with several large institutions, including Goldman Sachs (GS), BlackRock (BLK), PIMCO and the Federal Reserve Bank of New York, though the deal has been opposed by the state attorneys general of New York and Delaware, three Federal Home Loan banks and insurer AIG (AIG).

A legal expert and an accounting expert brought together by CLSA analyst Mike Mayo in a recent investor conference call argued the bank needs another $16 billion to $22 billion in reserves to cover the chance that a judge throws out the settlement.

It could be a year or more before investors know what happens with the settlement, but in the meantime, the fact that Bank of America got the OK to deplete its capital through buybacks might not be the best cause for celebration.

-- Written by Dan Freed in New York.

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