Bank of America agreed Thursday to a record nearly $17 billion deal with U.S. authorities to settle claims it sold risky mortgage securities as safe investments ahead of the 2008 financial crisis.
Under the settlement with the Department of Justice, the Securities and Exchange Commission, and other authorities including individual states, the bank will pay out $9.65 billion in cash and provide $7.0 billion in relief to consumers affected by losses tied to those securities.
The long-negotiated deal resolves a number of civil investigations against the bank and subsidiaries Countrywide Financial and Merrill Lynch, which it took over during the crisis.
“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,” the bank’s chief executive Brian Moynihan said in a statement.
But the deal does not resolve potential criminal cases, especially involving Countrywide, once the country’s largest home-loan issuer, and Countrywide officials.
According to media reports Thursday, prosecutors are building a case against Angelo Mozilo, who in the 2000s built Countrywide into one of the most powerful forces in the U.S. mortgage industry.
Countrywide, acquired by Bank of America in late 2008, is accused of massive issuance of poorly documented, highly risky “subprime” loans that went into default en masse amid the housing market crash.
The settlement took aim at hundreds of billions of dollars’ worth of low-quality home mortgages issued and pooled into securities that were sold to investors by the bank, Merrill Lynch and Countrywide as high-quality investments.
Authorities pointed out how the residential mortgage-backed securities (RMBS) plummeted in value as the housing market bubble burst in 2006-2007, and many of the mortgages in the bonds, often more than half, soured, causing investors huge losses.
Those losses mounted across major banking institutions in the United States and elsewhere and added heavily to the fall in home values across the country, ultimately snowballing into the financial crisis and the country’s deepest economic recession since the 1930s.
“The significance of this settlement lies not just in its size; this agreement is notable because it achieves real accountability for the American people and helps to rectify the harm caused by Bank of America’s conduct,” said Associate Attorney General Tony West.
The settlement included a group of states which said the bank’s actions caused huge losses to their economies and their citizens who lost their houses in the crash.
“Today’s settlement attests to the fact that fraud pervaded every level of the RMBS industry,” said U.S. Attorney Anne Tompkins for the Western District of North Carolina.
“As we deal with the aftermath of the financial meltdown and rebuild our economy, we will hold accountable firms that contributed to the economic crisis.”
Underscoring how the mortgage securities scandal affected the wider economy, the agreement includes $1 billion for the Federal Deposit Insurance Corporation, the receiver for 26 failed banks which it said were brought down in part due to RMBS losses.
The nearly $17 billion punishment was the largest of a series mega-fines levied against U.S. banks for selling extremely weak, poorly documented mortgage bonds to investors as high-quality securities.
Bank of America itself was fined $9.3 billion earlier this year over its sales of toxic mortgage securities to housing finance agencies Fannie Mae and Freddie Mac, which had to be rescued by the government in the crisis.
It was also part of a group of banks which paid tens of billions of dollars for abusing homebuyers in mortgage loan servicing and foreclosures.
The deal announced Thursday is expected to put most of the big-ticket litigation tied to the financial crisis behind for the bank.
The fine was nearly 50 percent higher than the bank’s total net income for 2013, and it said it would hit third-quarter pretax earnings by $5.3 billion, or 43 cents per share after tax.
With the settlement having been flagged for weeks, the bank’s shares gained 4.1 percent to close at $16.16.
Analyst Joe Morford of RBC Capital Markets said in a client note that the settlement “removes a significant overhang from the stock and paves the way for BofA to return to more normalized earnings run-rates sooner.”