Bank of America (BofA) has agreed to pay nearly US$17bn to settle US federal and state allegations it sold risky, mortgage-backed securities to investors before the 2008 financial crisis.
The deal will resolve a US government investigation that stems largely from BofA’s purchases of Merrill Lynch and Countrywide Financial Corp, which were both hard hit when the crisis developed.
A settlement was hammered out during months of negotiations between BofA’s lawyers and prosecutors for the US Department of Justice (DoJ), as well as direct talks between the bank’s chief executive (CEO) Brian Moynihan and attorney general Eric Holder.
The deal concludes the latest in a series of DoJ legal actions focused on financial institutions whose marketing and sale of risky mortgage-backed securities contributed to a US real estate market collapse six years ago. Reports suggest that more than US$9bn of the total payment is likely to be in cash.
It is the largest settlement to date between the federal government and a single company. The previous record was set last November, when JP Morgan Chase agreed a US$13bn payment to settle allegations that it sold toxic mortgage investments.
In negotiations with the DoJ, lawyers for BofA argued the bank was being unreasonably punished for the actions of Merrill and Countrywide, which together issued most of the questionable mortgage securities at the centre of the probe.
However, prosecutors retorted that the bank had benefited from Merrill and bought Countrywide without any urging from the government. The bank also lobbied unsuccessfully to pay most of the settlement in consumer aid to homeowners, which would impact less heavily on the bank’s bottom line.
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