Thursday, August 21, 2014

Bank of America Agrees to Pay Record $16.65 Billion in Obama-Holder Housing Settlement Shakedown

Look, we know what happened.

Many analysts, including Gretchen Morgenson of the New York Times, in Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon, indicated that Democrat-leftist policies pushed government-backed financial institutions, such Fannie Mae, to issue sub-prime home loans to unqualified minorities. This dates back to the Clinton years. Democrats called for "partnerships" between government and the private sector, which ultimately removed all limits on mortgage lending, feeding an unchecked real-estate bubble and ultimately the worst financial collapse since the Great Depression.

But now here comes Barack Obama's shakedown Attorney General, who strong-armed B of A into this record shakedown payout.

The announcement is at the corrupt DOJ website, "Bank of America to Pay $16.65 Billion in Historic Justice Department Settlement for Financial Fraud Leading up to and During the Financial Crisis" (via Memeorandum).

And at the Wall Street Journal, "Record Bank of America Settlement Latest in Government CrusadeBank Agrees to Pay $16.65 Billion in Cash and Consumer Aid":
On Thursday, the bank agreed to pay $16.65 billion to settle the government's accusations it sold flawed mortgage securities in the run up to the 2008 crisis, the largest settlement ever reached between the U.S. and a single company.

For the U.S. government, the deal is a chance to put an exclamation point on a string of crisis-era enforcement actions and lawsuits that have cost big U.S. banks tens of billions of dollars. The Charlotte, N.C. lender will have to pay $9.65 billion in cash to the Justice Department, six states and other government agencies. The bank also will provide $7 billion in consumer aid by modifying mortgages for borrowers who owe more than their homes are worth, demolishing derelict properties or other relief.

For Bank of America, the settlement is a bitter coda to its decision in 2008 to buy two companies, Countrywide Financial Corp. and Merrill Lynch & Co., as they teetered during the housing crisis. Bank of America Chief Executive Officer Brian Moynihan, who has spent his 41/2 years as CEO wading through litigation, has told investors this is the last of the big crisis-era problems. His next challenge: proving the bank has the mettle to make money in an era of weak loan demand and low interest rates.

In a statement, Mr. Moynihan said the settlement "is in the best interests of our shareholders, and allows us to continue to focus on the future." Giant legal charges have depressed the bank's earnings for years, frustrating some investors. The bank said the settlement will cut third-quarter pretax earnings by $5.3 billion, or 43 cents a share after tax.

Shares in the company rocketed more than 4%, to close at $16.16, as investors welcomed the resolution of a long-running legal headache.

The Justice Department's case against Bank of America provides perhaps the clearest window yet into the behavior that fueled the 2008 financial crisis: Lenders knowingly providing credit to borrowers who couldn't afford the loans and selling those mortgages to unwitting investors. Borrowers ultimately defaulted, sending them into foreclosure and saddling investors with hefty losses.

Many of the mortgage securities in question were made by Countrywide and Merrill Lynch. But the government found problems with Bank of America's own mortgage securities as well, including efforts to circumvent underwriting standards by changing applicants' financial information.

In at least one instance, an underwriter at Bank of America made more than 40 attempts to win an "accept" rating from an internal Countrywide system—known as CLUES—that would allow Bank of America to make a loan, according to a statement of facts signed by the U.S. and Bank of America.

"One underwriter characterized what she was doing as trying to 'trick' the CLUES system into giving an 'accept' rating," according to the document.

The ramifications of originating weak loans was predicted by former Countrywide CEO Angelo Mozilo, who warned in an Aug. 1, 2005 email to other executives that real-estate developers were anticipating a condo-market collapse in areas like South Florida and Las Vegas, and said the firm should avoid putting certain loans on its own balance sheet. Mr. Mozilo was worried the large increase in monthly payments required by many of the Countrywide-issued mortgages ultimately would cause borrowers to default.

"The simple reason is that when the loan resets in five years there will be enormous payment shock and the borrower is not sufficiently sophisticated to truly understand the consequences then the bank will be dealing with foreclosure in potentially a deflated real estate market. This would be both a financial and reputational catastrophe," Mr. Mozilo wrote, according to Justice Department documents.

Prosecutors in Los Angeles are preparing to file civil charges against Mr. Mozilo and other former Countrywide executives, according to a person familiar with the situation. Mr. Mozilo's lawyer, David Siegel, said, "There is no sound or fair basis, in law or in fact, to pursue any claims against Angelo Mozilo."

Countrywide, in particular, has morphed from trophy to albatross for Bank of America. The bank had a history of gobbling up competitors when it bought Countrywide in 2008 and the deal launched it to the top of the mortgage world.

The purchase, though, has brought legal headaches and regulatory scrutiny, including a multistate settlement over alleged predatory lending practices just months after Bank of America bought the lender. The bank's mortgage unit hasn't turned a profit in years.

The settlement comes on the heels of similar, but smaller, deals over precrisis mortgage-related conduct with Citigroup Inc. C +2.55%  for $7 billion and J.P. Morgan Chase JPM +1.49%  & Co for $13 billion. The Justice Department is expected to turn its attention next to other banks accused of selling flawed mortgage securities, including Goldman Sachs Group Inc. GS +0.64%  and Wells Fargo& Co., according to people familiar with the matter. Those cases are expected to be smaller than the previous three settlements.


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