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After Citigroup settlement, all eyes on Bank of America

New BofA Branch_01
Davie Hinshaw - dhinshaw@charlotteobserver.com
FILE - A Bank of America branch on North Tryon Street in uptown Charlotte.

Now that Citigroup has announced a roughly $7 billion settlement with the government over mortgage bonds, attention shifts to a proposed resolution with Bank of America to end similar probes.

U.S. Attorney General Eric Holder has refused to meet with Bank of America CEO Brian Moynihan, illustrating the breadth of the disagreement between the bank and the Justice Department.

Still, experts suggest a settlement is more likely for the Charlotte bank than a trial. Like most companies, Bank of America wouldn’t want to face the potential costs and negative headlines that come with a trial, experts say.

“Being sued by the Justice Department or SEC (Securities and Exchange Commission), even in a civil context, is painfully public and expensive,” said David Smyth, a Raleigh lawyer who has defended companies in civil and criminal cases.

“The last thing a bank wants to go through is have their business aired in the public domain,” said Richard Hunt, president of the Consumer Bankers Association, a trade group that represents large U.S. banks.

“Personally, I would love to see it go to trial from time to time, because I think at times the Department of Justice is bullying banks to settle and not face the negative headlines.”

The settlement has the potential to be Bank of America’s largest yet stemming from the financial crisis. According to news agency Bloomberg, talks broke down between prosecutors and the bank after it offered to pay more than $12 billion, $5 billion less than what the Justice Department was seeking.

So far, the bank’s biggest settlement related to the crisis is an $11.8 billion accord that was part of a $25 billion national mortgage settlement that resolved state and federal probes into five lenders’ foreclosure practices.

In a deal announced Monday, Citigroup and the Justice Department reached an accord to resolve government claims over the sale of securities tied to risky mortgages. Last year, JPMorgan Chase & Co. agreed to a $13 billion settlement to resolve a similar dispute.

Talks stalled June 9

Talks between Bank of America and the Justice Department stalled around June 9, a person familiar with the matter told the Observer last week. The first official meeting between the Justice Department and the bank to discuss a potential resolution of the matter was in mid-March of this year, the person said.

Bank of America spokesman Lawrence Grayson declined to comment. A representative for the Justice Department also declined to comment.

The government has been investigating the bank over potential misconduct regarding bonds that were sold to investors and backed by home loans that soured and contributed to the financial crisis.

Last year, Bank of America lost a civil lawsuit brought by the government over defective mortgages. In October, a jury found Countrywide Financial Corp., which Bank of America bought in 2008, and former executive Rebecca Mairone guilty of fraud in the sale of home loans to Fannie Mae and Freddie Mac during the run-up to the financial crisis. The mortgages were made under a program nicknamed “Hustle,” in which Countrywide knowingly sold the bad loans, the government said.

Settling the case could be a milestone for Bank of America in resolving mortgage-related legal issues stemming from the crisis. Earlier this year, Moynihan indicated that the settlement would put the biggest of its outstanding crisis-era legal challenges behind it.

Since the crisis, Bank of America has spent more than $60 billion on legal fees, settlements and agreements to buy back loans that went bad – more than any other bank has spent to resolve similar issues.

That’s money that could have gone elsewhere, such as to shareholders through dividends or stock buy-backs, said Nancy Bush, an independent bank analyst.

“They could have done a lot of other things,” she said. “They could have invested in technology. Has it been money down a rat hole? Yeah, pretty much.”

Bush said just when Wall Street thinks Bank of America has settled its last case, “there’s another one that pops up.”

Earnings due Wednesday

On Wednesday, analysts will be closely watching the bank’s legal expenses when it reports earnings results for the second three months of the year.

In the first quarter, the bank posted a loss as it felt the impact of a $9.5 billion settlement with the government over the sale of mortgage bonds to Fannie Mae and Freddie Mac.

It was the bank’s first quarterly loss since 2011.

Also during the first quarter, the bank reported that it put $2.4 billion into its reserves for future legal expenses. Analysts at the time were surprised by the big increase in reserves, but bank executives provided few details.

Bank of America shares rose 19 cents Monday, or 1.2 percent, closing at $15.57.

Roberts: 704-358-5248; Twitter: @DeonERoberts
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