Bank of America Corp. was sued by American International Group Inc. for more than $10 billion over an alleged "massive fraud" on mortgage debt, causing the bank's shares to tumble 20.3 per cent amid worries it cannot manage a deepening litigation morass.
Shares of the largest U.S. bank fell to their lowest since March 2009, wiping out roughly one-third of the bank's market value, or in excess of $32 billion, over the last three trading days.
The shares declined $1.66 to $6.51 in New York trading, after earlier falling to $6.31.
"A lot of people think the bank will have to raise capital, and any major capital raise will be massively dilutive," said Paul Miller, an analyst at FBR Capital Markets. "The bank just can't get its hands around the liabilities it's facing."
Monday's slide came amid the broad market decline that followed Standard & Poor's downgrade of the U.S. credit rating. AIG's shares fell $2.52, or 10 per cent, to $22.58.
The lawsuit may complicate Bank of America chief executive Brian Moynihan's effort to contain losses from the bank's $2.5-billion purchase in July 2008 of Countrywide Financial Corp., the U.S.'s biggest mortgage lender.
That purchase, engineered by Moynihan's predecessor Kenneth Lewis, is now considered a disaster for Charlotte, N.C.-based Bank of America because of the costs of litigation and writing down bad loans.
Moynihan "inherited a ton of excess baggage," including Countrywide, which has become "a sinking ship," said Michael Mullaney, who helps invest $9.5 billion at Fiduciary Trust Co., in Boston, which has sold nearly all its shares in the bank. "Bank of America's stock price will remain under duress."
Tony Plath, a finance professor at the University of North Carolina at Charlotte, said investors may be surmising that drastic action will be needed.
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