Bank of America Pays Record $17B for Toxic Mortgages

WASHINGTON (The Deal) -- Bank of America  (BAC) reached a settlement Thursday with state and federal regulators for a record $16.65 billion over toxic mortgage securities issued by the bank and the two financial institutions it acquired in the runup to the financial crisis.

The settlement is the largest ever reached between U.S. regulators and a single company. It's also the latest in a string of crisis-related deals the largest U.S. banks have struck with regulators in the wake of the 2008 financial crisis. The total cost of crisis-related settlements to the largest banks reportedly has reached over $100 billion.

The Bank of America settlement had been delayed in recent months due to disagreements because the Charlotte, N.C.-based bank and regulators were disputing whether it should be held liable for toxic mortgages originated by two institutions it had acquired--Merrill Lynch and Countrywide Financial.

Bank of America completed its acquisition of Countrywide in July 2008 and Merrill Lynch in January 2009, which by then was under financial duress as the financial crisis worsened. Bank of America, like some other big banks, has argued that federal regulators pressured it during the crisis to buy troubled institutions to help stem the crisis and that they are being unfairly punished for crimes they did not commit.

Federal regulations allow the government to hold the acquiring company responsible for misconduct that occurred at the businesses they acquired. Nevertheless, Robert Khuzami, chief of the SEC's enforcement unit between 2009 and 2012, said in a previous interview that just because the law and regulations permit such an action, doesn't mean that the government should automatically do so.


As part of the settlement, Bank of America agreed to pay $245 million to the SEC over disclosure failures. According to the SEC, Bank of America admitted that it failed to disclose material uncertainties to investors in its financial reports about the future costs to the institution related to requirements that it may need to repurchase residential mortgages it had sold to government-seized housing refinance giant Fannie Mae.

The SEC said the settlement involved over $2 trillion in mortgage sales made by the bank and "certain companies it had acquired" from 2004 to the first half of 2008.

"Bank of America failed to make accurate and complete disclosure to investors and its illegal conduct kept investors in the dark," Rhea Dignam, the SEC's Atlanta office regional director, said in a statement. "Requiring an admission of wrongdoing as part of Bank of America's agreement to resolve the SEC charges filed today provides an additional level of accountability for its violation of the federal securities laws."

SEC Chairwoman Mary Jo White recently developed a new policy to pursue admission of wrongdoing in some cases where a settlement is reached, to some extent reversing the agency's prior practice of allowing companies and individuals to settle lawsuits without admitting or denying allegations. It is possible such an admission could lead to further civil litigation.

The settlement also includes $800 million - $300 million in cash, and $500 million in consumer relief - that will be allocated to New York State as part of a deal with New York Attorney General Eric Schneiderman also related to alleged misrepresentations to the public about toxic mortgages originated by Bank of America and the two institutions it acquired. The settlement with New York requires Bank of America to assist some homeowners with mortgages insured by the Federal Housing Administration who were ineligible for relief under previous settlements.

Part of the agreement also included a $1 billion settlement between Bank of America and the Federal Deposit Insurance Corp. The FDIC said the settlement resolved "misrepresentations" in offering documents for 155 residential mortgage-backed securities purchased by failed banks in receivership.


Critics have asked why no CEOs of large financial institutions have been sent to jail for allegedly causing the crisis. The settlement comes as regulators are reportedly working on a civil lawsuit against Angelo Mozilo, the former CEO of Countrywide, who many considered a central player in advancing the crisis. Mozilo settled with the SEC in 2010 as part of a deal where he agreed to pay $68 million in fines and be banned from serving as an officer or director of a public company.

Bank of America CEO Brian Moynihan said in a statement Thursday, "We believe this settlement, which resolves significant remaining mortgage-related exposures, is in the best interests of our shareholders, and allows us to continue to focus on the future."

The bank said the settlement was expected to reduce 2014 third-quarter earnings by $5.3 billion with a negative impact on earnings per share of $0.43.

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