Tomahawk, WI 01/08/2014 (BasicsMedia) – Bank of America Corp (NYSE:BAC) is still having to deal with the acquisition issues of Countrywide Financial. The bank had embarked on an acquisition spree in the hey-days of 2008. The financial markets were on an upswing, the economy was booming and it was felt that the good days were here to stay.

 The Real Acquisition Cost:

During such optimistic times, Bank of America’s acquisition of Countrywide Financial appeared to be a good choice.  After all, the bank would gain from the customer base as well as expertise of Countrywide Financial. However, the bust exposed several key weaknesses of Countrywide, the primary one being the miss-selling of mortgage loans to several financial institutions, some of them from 2004 onwards. The bust affected several other financial institutions as well with Freddie Mac and Fannie May being taken over by the federal government. Freddie Mac and Fannie May were creating a secondary market for mortgages. This resulted in mayhem in the financial markets.

BAC had to pay a heavy price for its acquisition as the bank had to pay for penalties, interest costs as well as incur legal expenses to fight the cases. Some analysts estimate that the bank has paid at least 10 times the acquisition costs to settle such issues. There are many such cases still pending. Bank of America can at least take solace that it is nt the only one in this soup.

What should the bank do?

As far as the legal issues are concerned, there is really very little the bank can do. It is already negotiating some tough terms to reduce its liabilities. Apart from this, the bank needs to concentrate on its core strengths and businesses. The prime responsibility remains in increasing its revenues and improving the profit margins. Bank of America has done better than some of its peers but still lags behind many of them. With efficiency ratio of 76% against a target of 65%, BAC still has a long way to go. Many peers also have a better efficiency ratio. Of course, BAC’s efficiency ratio is bogged down by the penalties and the associated legal costs.

The current focus on restructuring and cost cutting also needs to be taken forward. As also the focus on business. One major advantage for BAC is that it stands to gain from lower as well as higher mortgage rates.

Though the stock is currently trading near its 52-week high, there is still potential for an upswing. Even the analysts have upgraded the stock to a ‘Buy’ recently.

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