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Bank Of America Job Cuts Fail To Address Looming Legal Costs, Experts Say

First Posted: 09/13/11 09:25 AM ET Updated: 11/13/11 05:12 AM ET

NEW YORK -- Bank of America's announcement that it plans to shed 30,000 jobs doesn't address the bank's most pressing concerns, experts said Monday.

The job cuts come as part of an initiative known as Project New BAC, the first phase of which aims to save $5 billion in annual costs by 2014, the bank announced Monday. But shareholders have been preoccupied in recent months with something other than overhead costs -- namely, the lawsuits from investors and government regulators that potentially threaten the bank with billions in losses. The company's stock price has fallen about 50 percent this year as speculation has swirled that it doesn't have enough capital to defend against losses, despite the bank's persistent statements to the contrary.

But experts say Project New BAC, which also included a shake-up of top management, doesn't address these legal concerns -- and say it may be for naught.

"What Bank of America should be doing is spending all their energy cleaning up legacy liabilities," said Manal Mehta, a partner at the San Francisco-based hedge fund Branch Hill Capital. "At this point, whatever progress they make in streamlining the company could easily be overshadowed by the loss of a critical legal ruling."

The layoffs and other cost-cutting measures, Mehta said, may turn out to be "pointless."

Bank of America spokesman Jerry Dubrowski objected to that characterization, saying the issue of legal liabilities shouldn't be part of an assessment of the effort to cut costs.

"If anyone is trying to connect Project New BAC to litigation, they are missing the point. This isn't about that," Dubrowski said. "This is about making the company a simpler company, a more efficient company and ultimately a more profitable company."

The bank has been plagued over the past year by lawsuits largely stemming from its 2008 acquisition of Countrywide Financial, the subprime mortgage lender that sold loans investors say didn't meet basic standards. Such legal costs turned what would have been a profit into a record $8.8 billion loss during the second quarter of this year, as the bank set aside money to settle claims.

And the legal woes aren't over. After the bank announced it had struck a deal for an $8.5 billion settlement with investors this summer, New York Attorney General Eric Schneiderman moved to block the settlement, saying another bank involved in the mortgage transactions had behaved improperly. Another state attorney general, a group of investors and a federal regulator also lodged complaints.

Bank of America, the nation's biggest bank by assets, is also in talks with all 50 state attorneys general and a host of federal agencies to resolve allegations that it illegally foreclosed on homeowners. The penalty being discussed for the group of big banks in those talks could be around $20 billion, The Huffington Post reported in June.

In August, the insurance company AIG sued Bank of America over losses on $28 billion of mortgage securities, seeking $10 billion. And early this month, the Federal Housing Finance Agency sued the bank on behalf of the mortgage giants Fannie Mae and Freddie Mac, seeking compensation on tens of billions in mortgage investments that went sour.

Bank of America chief executive Brian Moynihan spoke about legal threats during a conference with investors Monday in New York.

"It wasn't unexpected that people would intervene," he said of the $8.5 billion deal that was held up this summer. "We will put this settlement through the court systems. As we told you back when we made the settlement in June, that settlement will take 12 to 18 months from that time frame to get final."

But the chief's words, and the bank's subsequent statement about Project New BAC, drew criticism from some finance professionals.

"The money he's talking about saving wouldn't even pay the lawyers," said Christopher Whalen, managing director of the financial research firm Institutional Risk Analytics.

In a report from IRA, Whalen argued Monday that Bank of America must be restructured in order to resolve the legal claims. The parent company should be placed in bankruptcy, wiping out shareholders and replacing them with bondholders, he added in an interview.

"No amount of layoffs or other cost-savings by the management of BAC will resolve the crisis of confidence affecting the bank," Whalen wrote in the confidential report, referring to Bank of America by its stock ticker symbol.

Project New BAC aims at "delivering long-term value for shareholders," the bank said in its Monday release. The company has also been selling assets this year, earning several billions on those transactions.

Job cuts are set to happen over "the next few years," the bank said. The cuts represent more than 10 percent of its total workforce as of the end of June, according to a recent filing with the Securities and Exchange Commission.

Bank of America's declaration that it would cut 30,000 jobs was the biggest single workforce reduction announcement by a U.S.-based employer so far this year, according to a Monday report from the consulting firm Challenger, Gray & Christmas.

It dwarfs the nearly 11,000 job cuts announced by the Borders bookstore in July, and it's the largest planned cut since the U.S. Postal Service announced 30,000 cuts last year, Challenger said.

But it may not be enough to give investors faith in the bank. Bank of America shares hardly budged after Moynihan's conference Monday morning, and then slumped downward in the afternoon as the Standard & Poor's 500 Index declined. The stock ended the day 1 percent above Friday's close.

This type of cost-cutting is fundamentally misguided, said Amar Bhide, a professor of international business at the Fletcher School of Law and Diplomacy at Tufts University. It addresses only known costs, Bhide said.

"The only costs you're taking into account are the upfront costs, not the costs of things going bad," he said. "In finance, the costs of things going bad swamp the upfront costs."

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