After Calm Year, Bank of America Faces Storms

For Bank of America, 2009 has been a relatively stable year. Management turmoil, Troubled Asset Relief Program (TARP) loans, and potential earnings volatility have all been handled very much business as usual, rewarded with a gain of 21.5 percent in the firm’s stock price. For America’s second largest financial institution by market cap however, things may be about to get a lot rockier in the coming months.

For a start, there’s that problem of Andrew Cuomo.  For the New York Attorney General, the bank’s usual placative mantra of “we’re co-operating fully” only seems to be an incentive to delve deeper in his investigation into which board members knew what at the time of the Merrill Lynch deal last year. Wednesday, Cuomo issued subpoenas to five current and former directors of the bank.

“I would be very concerned if I was a director of Bank of America,” Cornelius Hurley, a professor at Boston Law School told the New York Times.

A judge this week rejected a settlement between the bank and the Securities and Exchange Commission (SEC) over the SEC’s investigation into potential securities violations at BofA during the time of the Merrill deal. That could result in a lengthy legal process extending into next year.

The bank will also have to pay its $45 billion in TARP funds back in installments, rather than as a lump sum (as rivals Morgan Stanley, JP Morgan, and Goldman Sachs did earlier this year) according to chief financial officer Joe Prince.

That’s going to be tough if credit conditions don’t start getting on a role sometime soon. Aside from its trading revenue, income from the firm’s credit card operations is crucial to BofA’s profitability. Of the top 15 credit card issuers in the U.S., Bank of America commands a massive 21 percent market share, on a comparable scale with only Chase, which is TARP-free.

Long, drawn-out legal cases are never good news for any firm, but they’re terrible for one which already has a mountain of debt, has lost a substantial long-term investor in the last year (Singaporean Temasek), and has debt-free competition aggressively out to widen market share.