Mortgage-related litigation costs rose to $350 million in the third quarter vs. $100 million in the second quarter, and several analysts focused on the issue right away following the bank's third-quarter earnings release Wednesday.
Still, the shares rallied 2.25% on the day, and many news reports chose to highlight declining costs vs. last year as opposed to the rise in costs vs. the previous quarter.
While $350 million is, of course, chump change when you earn $2.5 billion in a quarter, as Bank of America just did, one could interpret the rise in legal expenses as an indication of trouble on the horizon.Bank of America has still set aside just the minimum $8.5 billion to cover a critical and controversial proposed settlement with a large group of mortgage backed securities investors. Opponents to the deal include, most notably, AIG (AIG). The settlement has been the subject of 31 days of court hearings so far. CLSA analyst Mike Mayo has argued the bank should set aside another $16 billion to $22 billion in case the settlement is not approved. FBR Capital Markets analyst Paul Miller has also expressed skepticism the $8.5 deal may unravel. But the market was in a bullish mood Wednesday anticipating Congress' agreement to raise the federal borrowing limit. And even over the past few weeks, a rise in legal costs at JPMorgan Chase (JPM) that looks to be outpacing both analyst and press expectations has nonetheless been met with a yawn by investors. It is tempting to argue the bear case is already priced in. More likely, though, investors are merely in a forgiving mood. Bank of America investors will just have to hope it lasts until the final word on the Bank of America settlement is handed down. -- Written by Dan Freed in New York. Follow @dan_freed