2:32 PM EST JUN 6, 2014
By Devlin Barrett
Bank of America Corp. is in talks to pay at least $12 billion to settle civil probes by the Justice Department and a number of states into mortgage-backed securities sold to investors before the financial crisis. Here’s what’s behind the case.
What do authorities allege banks did wrong?
Investigators haven’t made any findings public yet, but the concern has been a number of major banks may have packaged mortgages into securities that didn’t meet their own quality standards – too many lousy loans in the bunch. When the housing market collapsed, those securities lost a great deal of value, fueling the financial crisis of 2008.
How does Bank of America fit in?
The government struck a similar deal with J.P. Morgan last year for $13 billion. Analysts reckon that Bank of America and units like Countrywide, which the bank bought in 2008, issued a lot more mortgage securities than J.P. Morgan did. So any Bank of America settlement, including $6 billion the bank has already agreed to pay in a separate deal, will likely be bigger. Negotiations with other major banks, including Citigroup, are expected later this year.
What is $5 billion of “consumer relief” that’s likely to be in the deal?
Justice Department officials want some of the payment to help homeowners, particularly those who owe more than their homes are worth, or those at risk of losing their homes because they can no longer afford the payments. So Bank of America may pay billions of dollars to lower customers’ principal amounts, or lower their monthly payments, or tear down abandoned eyesores in struggling neighborhoods.
Why isn’t the whole settlement consumer relief?
Because it’s cheaper for the bank to give discounts and deals to customers than write a big check to the government. Under the terms of the J.P. Morgan deal, the bank will get up to $1.43 of credit toward its settlement for every $1 of consumer relief it provides in the hardest-hit areas. So it’s a cheaper option for the bank, and the government doesn’t want the settlement to be too cheap.
How big a hit is this for Bank of America?
A $12 billion fine would exceed the bank’s 2013 profit of $11.43 billion. But shareholders have been bracing for a big settlement since the bank in April set aside a lot of money for legal expenses. CEO Brian Moynihan noted last week that the impending Justice Department settlement was a remaining wild card. “Of the big stuff,” he said, “that’s really the one that’s left out there.”