Bank of America Corp. has agreed to fork over nearly $17 billion to settle government claims over toxic mortgage securities that helped trigger the Great Recession, according to people close to the negotiations with the Justice Department.
The agreement — $9 billion in cash penalties and the rest in mortgage modifications and other consumer relief — remained tentative Wednesday, these people said. It would be by far the largest in a series of billion-dollar settlements with the "too big to fail" banks over the subprime mortgage meltdown.
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.
Bank of America had initially resisted paying a figure that high. It argued that the penalty was too severe for bad investments sold by others, although it eventually raised its settlement offer to $13 billion and then $14 billion.
Then, after a trial the bank lost, a New York judge last week ordered it to pay $1.3 billion for mortgages sold in a 2007 Countrywide program nicknamed "the hustle." At that point, Bank of America Chief Executive Brian Moynihan threw in the towel and got in touch with U.S. Atty. Gen. Eric Holder.
"It removed the theoretical element of what happens if you fight this kind of thing," said one person familiar with the negotiations.
Three people briefed on the negotiations with the U.S. Justice Department said details were still being negotiated on exactly what admissions Bank of America would make and how more than $7 billion in consumer relief would be allocated. The people declined to be named because of the confidential nature of the talks.
"This thing could still fall apart," one source said, adding that it was unlikely the deal would be finalized before next week.
The pending agreement follows a series of similar deals with major Wall Street firms investigated by a task force of federal and state officials focused on mortgage-backed securities sold before the financial crisis.
Citigroup Inc. settled last month for $7 billion, and JPMorgan Chase & Co. agreed in November to pay $13 billion, a record at the time. The JPMorgan Chase agreement included $4 billion to settle claims related to money-losing bonds purchased by government-sponsored mortgage firms Fannie Mae and Freddie Mac.
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 JPMorgan-comparable settlements to well over $22 billion — the largest settlement by a single entity in American history, according to the Justice Department.
Like the previous deals, Bank of America's agreement was expected to include payments not only to the Justice Department but to a range of other federal agencies as well as to states.
The settlement could bring an end to years of losses and legal expenses that followed the decision by Ken Lewis, former chief executive at BofA, to buy Countrywide and Merrill during the 2008 financial crisis.
The Charlotte, N.C., bank already has run up about $60 billion in losses and legal settlements related to Countrywide. The takeover has often been described as the worst deal in the history of banking.
At a banking industry conference in late May, Moynihan said that the expected settlement with the Justice Department would largely put the Countrywide debacle behind the bank. Describing "the big stuff," Moynihan said: "That's really the one that's left out there."
News of the tentative deal touched off fresh criticism from legislators who have criticized the government as going too easy on the big banks.
"The greed, recklessness and illegal behavior of Bank of America and other Wall Street firms caused a horrendous recession which cost millions of Americans their homes, jobs and life savings," said Bernie Sanders, the independent U.S. senator from Vermont.
"Given the reality that, as part of the bailout, the Bank of America received more than $1 trillion in virtually zero-interest loans, and that nobody from the company has yet gone to jail, this is a very modest settlement."