"The past is never dead. It's not even past." Faulkner's famous line neatly sums up the bear case on Bank of America. The excesses of the credit boom, the sceptics think, are not yet buried.
The bears may yet be right but they have had a miserable 2012 and their ranks have thinned of late: BofA was the Dow's best performer, rising more than 100 per cent. Europe calmed down and U.S. housing rallied, helping all U.S. banks. BofA's bounce has been especially dramatic, though: it exited the crisis worse off than many rivals after its ill-fated purchase of mortgage lender Countrywide. BofA's shares ended 2011 trading at 0.4 times tangible book value amid fears that a rights issue was on the way. That never materialised. Instead, the bank ended the third quarter with an estimated tier one common capital ratio of almost 9 per cent under Basel III – above JPMorgan and Wells Fargo.
Other developments have been more controversial. Take the bank's decision to exit the correspondents business, where lenders buy and service loans originated by other parties. BofA says that this business is riskier and less profitable than just originating loans itself. Bad timing? The move came just in time for a Federal Reserve-induced refinancing boom. In the first nine months of 2012, BofA's share of mortgage lending fell to 4 per cent, from 15 per cent the year before, notes Inside Mortgage Finance.
Investors' biggest worry is a visit from ghosts of the boom – in the form of costly legal settlements or forced repurchases of bad mortgage loans. BofA says potential liabilities will not exceed $6-billion beyond what has already been reserved.
This year, the Fed will give the results of the latest stress tests, which determine how much capital can be returned to shareholders. A strong show of confidence from regulators would provide some assurance that BofA can keep its past in the past.