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Bank of America Corp and the Volcker Rule
Posted by: Pushpa Naresh (IP Logged)
Date: December 12, 2013 04:36PM
Bank of America Corp. (BAC), post-Volcker rules, will be part of the banking community which will have some heavy-duty pruning of the services it offers to remain complaint. For one, Bank of America and others such a Citigroup Inc. (C) will have to cut down on their trading portfolios. This is because the Volcker rule has now fixed that only 3% of the trading on hedge funds and privately held equity funds can be owned by banks.
Cost of Loss Will Be Billions
Bank of America, like other banks, will stand to lose several billion dollars as it will now not be able to leverage other "activities" which would help it overcome losses. It will not be able to adopt aggressive market making or hedging or underwriting.
It is another matter that banks will seek legal recourse to overcome some of the permissible seals.
The need for the Volcker Rule was the result of the recent spate of activities that investment banks such as Bank of America or JPMorgan Chase & Co. (JPM) have adopted, which have helped these banks make money by hedging, underwriting and similar banking practices.
The quick-fix remedy which banks have adopted for the transgressions has been settling with the regulatory bodies and legal suits.
The latest of such settlements for Bank of America has been the $500 million payout the bank will make to investors in a class-action suit, filed before the District Court of Mariana Pfaelzer. In the suit investors had sought the direction from the court for claims against Countrywide for mortgage-backed securities they invested in during the period of 2004 to 2007.
Bank of America Purchased Countrywide in 2008
The bank has until now been able to offer support for nearly three-fourth of the issues related to the mortgage-based securities that Countrywide had mishandled.
However, the FDIC raised objections to Bank of America’s objections, and the judge hearing the case has supported the settlement. In a separate settlement, Bank of America has made a settlement with regard to return of funds to investors, due to misuse of Freddie Mac.
Bank of America Defaults on Mortgage Settlement
Though the banks have been quick to work settlements, especially with respect to the false mortgage claims, they have not upheld their side of the deal.
It was not just Bank of America Corp but JPMorgan too which have defaulted on several compliance issues that theywere expected to fulfill as part of the settlement.
Currently, a watchdog has been appointed to help the process of settlement. Headed by Joseph Smith, the panel has filed that the trio of defaulters — Bank of America , Citigroup Inc. (C) as well as JPMorgan — had on two counts of 29 not complied with requirements.
Though the banks claimed that the defaults were largely due to the long processes they adopted, Smith opines that the expensive nature of the remedies have led to the distractions. Illustrating the nature of defaults, Smith claimed that banks were not quick in notifying customers on documents which were missing from their loan applications for modifying their loan.
Additionally, it was found that Bank of America had not been able to justify if a loan that the bank had ordered to foreclose was active or not.
JPMorgan or Bank of America, investment banking service providers, do require more than stringent Volcker rules to ensure quality service and liability on investors and loan seekers.
Stocks Discussed: BAC, C, JPM,