Bank of America (NYSE: BAC) Still Risky Investment

Bank of America (NYSE: BAC) continues to be a difficult read. The stock has posted gains of nearly 12% since hitting their 52-week low in late October amid the mortgage foreclosure debacle. The firm’s shares have also outperformed the other three mega-commercial banks: Citigroup (NYSE: C), JPMorgan Chase (NYSE: JPM) and Wells Fargo (NYSE: WFC).

So, why aren’t more people extolling the benefits of investing in BofA? All signs seem so point to the continued concerns about its exposure to foreclosures that may have had improper documentation. The firm could be embroiled in a legal controversy for years, and one fund manager even said that BofA could be forced to raise more capital to cover potential legal expenses.

Iridian Asset Management has started taking a deep look into their potential losses, and estimate that if BofA had to buy back a significant chunk of delinquent loans, a best-case scenario would be a pre-tax loss of at least $50 billion over a period of a few years. A worst-case outcome could be a pre-tax loss of $113 billion.  Based in Westport, Conn., Iridian does have a short position in BofA which leads us to take this estimate with a grain of salt. Jeff Silver and Ben Hunt, two managing directors with Iridian, issued these estimates in their firm’s third-quarter letter to shareholders.

Gary Townsend, president and CEO of Hill-Townsend Capital LLC, a hedge fund in Chevy Chase, Md.,thinks the potential losses are much lower than Iridian’s estimates. He has said that he estimates that BofA will be faced with a loss no greater than $12 billion. He adds that the stock has probably hit bottom. Again, we must take this with a grain of salt since his fund is Long BofA.

Glenn Tongue, managing partner with T2 Partners, an investment firm in New York, commented “Countrywide was certainly one of the worst players in the mortgage market with respect to underwriting. We have long been skeptical of the liabilities related to foreclosures. But Bank of America is extremely complicated to understand.”

The key issue arising out of all of this is that uncertainty continues to surround Bank of America. Without removing the uncertainty, it will be difficult to obtain a clear picture of where the firm is headed and what their exposure is. Townsend added that “With Bank of America, it seems like one thing after another. There’s no question that all the acquisitions it did turned out to be problematic.” Perhaps we will see a time in the new future where BofA will need to unwind some of those acquisitions to raise capital, or return to their core line of business as we are currently seeing with Citigroup.