Bank settles securities suit for $16.65 billion

An IMC specialist works at his post where Bank of America is traded on the floor of the New York Stock Exchange Thursday, Aug. 21, 2014. The government has reached a $16.65 billion settlement with Bank of America over its role in the sale of mortgage-backed securities in the run-up to the financial crisis, the Justice Department announced Thursday.(AP Photo/Richard Drew)
An IMC specialist works at his post where Bank of America is traded on the floor of the New York Stock Exchange Thursday, Aug. 21, 2014. The government has reached a $16.65 billion settlement with Bank of America over its role in the sale of mortgage-backed securities in the run-up to the financial crisis, the Justice Department announced Thursday.(AP Photo/Richard Drew)

WASHINGTON -- The government has reached a $16.65 billion settlement with Bank of America over its role in the sale of mortgage-backed securities in the run-up to the financial crisis, the Justice Department announced Thursday.

The deal calls for the bank, the second largest in the U.S., to pay a $5 billion cash penalty, another $4.6 billion in remediation payments and provide about $7 billion in relief to struggling homeowners.

"This constitutes the largest civil settlement with a single entity in history, addressing conduct uncovered in more than a dozen cases and investigations," Attorney General Eric Holder said at a news conference in Washington. "The size and scope of this multibillion-dollar agreement go far beyond the 'cost of doing business.'"

The settlement is by far the largest deal the Justice Department has reached with a bank concerning the 2008 mortgage meltdown. In the last year, JPMorgan Chase & Co. agreed to a $13 billion settlement while Citigroup reached a separate $7 billion deal.

Shares of Bank of America rose 64 cents, or 4.1 percent, to close Thursday at $16.16.

At the news conference, Holder said the bank and its Countrywide and Merrill Lynch subsidiaries had "engaged in pervasive schemes to defraud financial institutions and other investors" by misrepresenting the soundness of mortgage-backed securities.

According to one example laid out by the government, Bank of America knew that a significant number of loans packaged into $850 million in securities were experiencing a marked increase in underwriting defects. Notwithstanding the red flags, the bank sold these residential mortgage-backed securities to federally backed financial institutions, the government said in a 30-page statement of facts that is part of the settlement.

In California, Countrywide concealed from investors the company's use of "shadow guidelines" that permitted loans to riskier borrowers than Countrywide's underwriting guidelines would otherwise allow, according to the statement of facts.

In addition, over a period of years, "Countrywide and Bank of America unloaded toxic mortgage loans on the government sponsored enterprises Fannie Mae and Freddie Mac with false representations that the loans were quality investments," said Preet Bharara, the U.S. attorney for the southern district of New York.

"It's kind of like going to your neighborhood grocery store to buy milk advertised as fresh, only to discover that store employees knew the milk you were buying had been left out on the loading dock, unrefrigerated, the entire day before, yet they never told you," Associate Attorney General Tony West said during the news conference.

The government said the civil settlement does not release individuals from civil charges, nor does it absolve Bank of America, its current or former subsidiaries and affiliates, or any individuals from potential criminal prosecution.

Bank of America Chief Executive Officer Brian Moynihan said in a statement that the company believes the settlement "is in the best interests of our shareholders and allows us to continue to focus on the future."

The bank said in a filing Thursday that the deal likely will reduce its third-quarter pretax earnings by $5.3 billion, or about 43 cents a share after taxes. Bank of America, based in Charlotte, N.C., had already had its second-quarter earnings hit by litigation costs related to mortgage securities cases. Its net income of $2 billion in April-June was down 43 percent from $3.6 billion a year earlier.

Of the $16.65 billion the bank is paying in the settlement, almost $10 billion will be paid to settle federal and state civil claims by entities related to residential mortgage-backed securities, collateralized debt obligations and other types of fraud.

An independent monitor will determine whether Bank of America is satisfying its obligations under the settlement.

"In the run-up to the financial crisis, Merrill Lynch bought more and more mortgage loans, packaged them together and sold them off in securities -- even when the bank knew a substantial number of those loans were defective," said U.S. Attorney Paul Fishman, whose jurisdiction covers New Jersey. "The failure to disclose known risks undermines investor confidence in our financial institutions."

The Bank of America settlement will resolve allegations that the bank and companies it later bought misrepresented the quality of loans they sold to investors. Most of the problem loans were sold by Countrywide Financial and Merrill Lynch before Bank of America bought them during the 2008 financial crisis.

Information for this article was contributed by Pete Yost, Marcy Gordon and Jeff Horwitz of The Associated Press and by Tom Schoenberg, Hugh Son and David McLaughlin of Bloomberg News.

Business on 08/22/2014

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