Can BofA Pay Cash to Put the Financial Crisis Behind It?
The Justice Department is seeking a settlement with Bank of America Corp. (NYSE:BAC), mere months after the agency reached a similar agreement with BofA competitor JP Morgan Chase & Co., in which the bank paid more than $13 billion to settle charges that it misled investors regarding the quality of securities attached to certain home loans during the beginnings of the financial crisis in 2007 and 2008. Now, the Justice Department is in talks with Bank of America about a similar settlement, in which BofA would pay $10 billion, or possibly more, according to sources who spoke with CNBC.
The settlement being negotiated between the Justice Department and the bank is a global settlement, one which would resolve numerous outstanding investigations. Should a deal be reached, Bank of America would effectively put to rest current investigations into its sale of mortgage-backed investments during the financial crisis, according to The New York Times.
The settlement, if it succeeds, will come on top of another agreement in which Bank of America agreed to pay $6.3 billion to resolve Federal Housing Finance Agency claims, and spent another $3.2 billion in order to buy back mortgage bonds; the bank agreed to the settlement last month, and sources say that the deal could come within the next two months, according to Bloomberg. Even more recently, the bank paid $6 billion to pay for additional legal costs, CNBC reports.
The company has since swung into a first quarter loss, and Bank of America’s Chief Financial Officer Bruce Thompson has reportedly called the bank’s future legal costs “hard to predict,” prompting nervous investors to sell off shares during the company’s investor call on April 17.
Many of the loans sold by Bank of America early in the financial crisis were acquired when the bank bought Countrywide Financial Corp. and Merrill Lynch, two subprime lenders. “Bank of America owns Countrywide, which was the biggest and most problematic mortgage originator, and Merrill Lynch was the one packaging many of those loans into bonds – together, that’s a huge liability,” said Pri de Silva, a senior banking analyst at CreditSights Inc. in New York, per Bloomberg.
Bank of America, the country’s second-biggest lender, is one of eight banks currently under investigation by the Justice Department regarding the quality of bonds backed by home loans during the early part of the financial crisis. Other banks that have faced scrutiny include Citigroup Inc., CreditSuisse Group AG, and Wells Fargo & Co.
Bloomberg reports that if a settlement between Bank of America and the government isn’t reached, the agency could sue the bank, though the negotiations regarding a potential settlement are still in the early stages.
The settlement talks between Bank of America and the government have become more frenzied recently, as the bank seeks to put the litigations to rest; currently the bank has spent $50 billion since the financial crisis in order to resolve claims related to the faulty mortgages, most of which were related to Bank of America’s 2008 purchase of the subprime lender Countrywide.
But Paul Miller, a banking analyst who spoke with Bloomberg, says that Bank of America may be out of the woods soon with regards to the bank’s series of multi-billion dollar settlements. “This is the last big check — they’ve been sued in every direction they could,” Miller, an analyst with FBR Capital Markets Corp. said. “Banks are an easy target: they’re making money, nobody likes them and they can’t fight it.”
The New York Times notes that it remains unclear whether the settlement with the Justice Department would provoke Bank of America to take more litigation losses in the coming quarters, and the bank has not disclosed the amount of money it has set aside in order to pay for the remaining litigations.