Bank of America Corp. will pay a record $16.65 billion to resolve government claims over soured home loans in what is probably the last major settlement stemming from the mortgage meltdown.
The deal also largely closes the chapter on the bank's fateful decision in 2008 to snatch up two troubled firms — giant Calabasas mortgage lender Countrywide Financial Corp. and Wall Street investment bank Merrill Lynch & Co.
The acquisitions brought an avalanche of legal problems. The Countrywide purchase, described as the worst deal in banking history, has led to more than $60 billion in losses and legal settlements.
Meanwhile, federal prosecutors in Los Angeles are preparing a civil lawsuit against Countrywide's former boss, Angelo Mozilo, and as many as 10 former employees of what was once the nation's largest mortgage lender, according to a person familiar with the matter.
BofA's settlement, the largest ever by a single U.S. company, consists of $9.65 billion in fines and $7 billion in aid to communities and homeowners hit hard by the housing market crash that triggered the recession.
"I want to be very clear: The size and scope of this multibillion-dollar agreement go far beyond the cost of doing business," Atty. Gen. Eric H. Holder Jr. said in describing what he called "pervasive schemes to defraud financial institutions and other investors."
And yet even a historic penalty won't hurt the bank's profits beyond the current quarter, underscoring the size and power of the nation's biggest banks. Despite an expected $5.3-billion charge, analysts expect BofA to report a third-quarter profit.
Most of the settlement will be paid with reserves the bank has already set aside for legal costs. BofA earned $2 billion in the first six months of this year.
Investors pushed the bank's stock up 4.1% to $16.16 at Thursday's close.
The three banks are the largest in the U.S. With about $2.2 trillion in assets, BofA is second behind JPMorgan. Altogether, the six largest banks have paid about $125 billion in settlements related to the financial crisis.
Most of the BofA settlement covers problems related to mortgages from Countrywide and Merrill Lynch, but the bank admitted to problems of its own.
Bank employees sometimes changed mortgage applicants' financial information multiple times to get loans approved — including one instance in which data were resubmitted 40 times, according to the settlement's statement of facts.
Associate Atty. Gen. Tony West said employees of BofA or the firms it acquired misled investors about the quality of the mortgages that backed the securities.
"It's kind of like going to your neighborhood grocery store to buy milk advertised as fresh, only to discover that store employees knew the milk you were buying had been left out on the loading dock, unrefrigerated, the entire day before," West said.
The deal settles claims from the Justice Department, the Securities Exchange Commission and other federal agencies, as well as California, New York and four other states.
California will receive $300 million from the settlement to reimburse its two biggest public pension funds, the California Public Employees' Retirement System and the California State Teachers' Retirement System.
Included in the consumer aid will be write-downs of principal of mortgages and interest rate reductions. The bank also pledged to help fund the development of affordable rental housing.
As an example, West said, a borrower who owes $250,000 on a mortgage on a home worth only $150,000 could see the loan reduced to about $112,000. The bank also could reduce borrowers' interest rates to 2%.
But investors reacted with relief that the long-running settlement negotiations were finished, pushing the bank's stock up 4.1% to $16.16.
"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," BofA Chief Executive Brian Moynihan said.
Federal and state officials are punishing BofA shareholders instead of holding executives and employees at Countrywide and Merrill Lynch accountable for those firms' problems, said Richard Bove, vice president of equity research at Rafferty Capital Markets.
"The shareholders are being made to pay for something someone else did," he said.
But public interest advocates said BofA got off too easy. Only about $5 billion of the deal is not tax deductible by BofA, reducing the benefit to taxpayers, according to the U.S. Public Interest Research Group.
Dennis Kelleher, president of Better Markets, a nonprofit advocate for stronger financial regulations, said there's not enough information in the settlement to know if it is adequate compensation. He said the deal should have been reviewed by a judge.
The group sued the Justice Department this year, arguing that the JPMorgan settlement was unconstitutional because courts did not review it.
"We still have no idea how many tens of billions of dollars Bank of America's clients and customers lost from this fraud, no idea," Kelleher said. "We do not know the name of a single individual involved and not a single individual is held accountable. Banks don't commit crimes, bankers do."
Prosecutors have not given up, however.
Any civil action brought by the U.S. attorney in Los Angeles against Mozilo would be the government's latest attempt to hold the former Countrywide chief executive accountable for helping to inflate the housing bubble with risky subprime mortgages.
Federal prosecutors dropped a criminal investigation of Mozilo in 2011 after deciding that his role in the mortgage collapse didn't rise to the level of a crime.
A year earlier, Mozilo agreed to settle an SEC investigation by paying $22.5 million in fines and turning over $45 million in allegedly ill-gotten gains. The latter amount was to be covered by Bank of America.
"There really is no sound basis in law or fact for any claim to be brought against Mr. Mozilo," said his lawyer, David Siegel. A spokesman for the U.S. attorney's office declined to comment.
Bank of America's decision to acquire Countrywide still baffles some.
"It's hard to say what, if anything, of a positive nature Countrywide added to BofA," said independent banking consultant Bert Ely. "It certainly brought an enormous amount of losses."