The $16.65 billion Bank of America Settlement

The Securities and Exchange Commission today announced a massive global settlement between Bank of America and the US Justice Department, other federal agencies (including the Securities and Exchange Commission, the Federal Housing Administration, and Ginnie Mae), and six states, to resolve claims connected to toxic residential mortgage-backed securities, collateralized debt obligations and an origination release on residential mortgage loans.  At issue are $245 billion in soured home loans, only $10 billion of which were from Bank of America. The rest were sold, packaged in bonds, by three firms BofA acquired in 2008 — the giant Calabasas high-risk lender Countrywide Financial Corp., Wall Street fixture Merrill Lynch & Co., and First Franklin Financial Corp., a big San Jose subprime specialist that Merrill had purchased in 2006.

In settling the various claims, Bank of America admitted that it failed to inform investors during the financial crisis about known uncertainties to future income from its exposure to repurchase claims on mortgage loans.  Additionally, Bank of America also is resolving a securities fraud lawsuit that the SEC filed last year related to residential mortgage-backed securities (RMBS) offerings.  The SEC reports that Bank of America has agreed to settle the two cases by paying $245 million as part of a major global settlement in which Bank of America will pay $16.65 billion to resolve various investigations involving violations of laws regulated by other federal agencies ($9.65 billion in cash and approximately $7 billion worth of consumer relief).

According to the SEC’s order, Regulation S-K requires public companies like Bank of America failed to disclose in the Management’s Discussion & Analysis (MD&A) section of its periodic financial reports any known uncertainties that it reasonably expects will have a material impact on income from continuing operations.  Bank of America failed to adhere to these requirements by not disclosing known uncertainties about the future costs of mortgage repurchase claims when filing its financial reports for the second and third quarters of 2009.  These uncertainties included whether Fannie Mae, a mortgage loan purchaser from Bank of America, had changed its repurchase claim practices after being put into conservatorship, the future volume of repurchase claims from Fannie Mae and certain monoline insurance companies that provided credit enhancements on certain mortgage loan sales, and the ultimate resolution of certain claims that Bank of America had reviewed and refused to repurchase but had not been rescinded by the claimants.

Bank of America, as part of the settlement, admitted that “it failed to make accurate and complete disclosure to investors and its illegal conduct kept investors in the dark,” according to Rhea Kemble Dignam, regional director of the SEC’s Atlanta office.  This admission of wrongdoing, it has been stated by the SEC “provides an additional level of accountability for its violation of the federal securities laws.”

In the SEC’s original case against Bank of America filed in August 2013, the agency alleged that Bank of America knew that its wholesale channel loans – described internally as “toxic waste” – presented vastly greater risks of severe delinquencies, early defaults, underwriting defects, and prepayment.  The global settlement has Bank of America paying disgorgement of $109.22 million, prejudgment interest of $6.62 million, and a penalty of $109.22 million while consenting to permanent injunctions against certain violations of the Securities Act.  The settlement is subject to court approval.  To settle the new case, Bank of America agreed to pay a $20 million penalty while admitting to facts set out in the SEC’s order, which requires Bank of America to cease and desist from causing any violations and any future violations of of the Securities Exchange Act.  Although Countrywide Financial no longer exists, co-founder Angelo Mozilo is not in the clear, as prosecutors attempt to still hold him responsible for his company’s role in the U.S. housing bubble.

Bank of America already has settled its liability for Fannie and Freddie claims for more than $5.8 billion. Adding that to its proposed settlement with the Justice Department would bring its settlements to well over $22 billion — the largest settlement by a single entity in American history, according to the Justice Department.  The settlement doesn’t release the bank from criminal charges and the Justice Department reserved the right to file both criminal and civil charges against individuals.  Follow this link to a great graphic showing the various bank settlements since 2008.

Today’s settlement with the U.S. Justice Department will cut Bank of America’s third-quarter pretax profit by about $5.3 billion, or 43 cents a share after tax, Bank of America has reported.  Nonetheless, Bank of America shares rose 3.1 percent to $16 in earlier trading today.  It has been estimated that Bank of America’s net income will surge past $17 billion next year, the most since 2006 and up from $11.4 billion in 2013, according to the average of 15 analysts’ estimates in a Bloomberg survey.

Well, looks like everything is back on track for the banks.  Pretty sure we can say that the fallout from the financial crisis is not “settled” with the public, as the effects continue to materialize.

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