July 16, 2014

BofA resumes settlement talks with Justice Department

Bank of America has resumed talks with the U.S. Department of Justice to resolve a variety of civil probes, indicating momentum may be building for the Charlotte bank’s largest mortgage settlement yet.

Bank of America has resumed talks with the U.S. Department of Justice to resolve a variety of civil probes, indicating momentum may be building for the Charlotte bank’s largest mortgage settlement yet.

The news came on the day the bank said its second-quarter profit fell 43 percent from a year ago as it recorded $4 billion in legal expenses – higher than the $471 million set aside a year earlier. Most of the $4 billion will boost the bank’s reserves for potential litigation costs, executives said.

A portion will cover a separate $650 million settlement announced Wednesday to resolve all of Bank of America’s outstanding mortgage-bond litigation with insurer American International Group.

But the bulk of the reserve increase is for previously disclosed mortgage-related matters, the bank said, providing few additional details.

“Clearly, the (Department of Justice case) is the most significant matter out there remaining,” Bruce Thompson, the bank’s chief financial officer, told reporters.

The bank renewed talks with the Justice Department on Tuesday, a source familiar with the negotiations told the Observer Wednesday.

The two parties have failed to agree on settlement terms. The bank has offered a settlement totaling at least $12 billion, made of a combination of cash and consumer relief. That’s less than the $17 billion the Justice Department has reportedly been seeking.

Last month, U.S. Attorney General Eric Holder turned down a request by the bank for him to meet with CEO Brian Moynihan because the two sides were too far apart for a meeting to be productive, a person familiar with the matter told the Observer.

Bank executives declined to share details about the settlement’s status when asked about it during an earnings call Wednesday with analysts.

“We can’t discuss that,” Moynihan said.

Bank of America, the second-largest U.S. bank, has spent more than $60 billion to resolve financial crisis-era legal issues, more than any other lender has spent to resolve similar matters.

The Justice Department continues to exact billions in settlements from banks for activities that contributed to the 2008 collapse of home prices.

On Monday, Citigroup announced a roughly $7 billion settlement with the government to end mortgage probes. Late last year, JPMorgan Chase & Co. agreed to a $13 billion settlement with the government to resolve a similar dispute.

Talks between Bank of America and the Justice Department stalled around June 9, a person familiar with the matter told the Observer last week.

Bank of America spokesman Lawrence Grayson declined to comment Wednesday. A Justice Department spokesperson could not be reached for comment.

The proposed settlement is expected to end a variety of probes into potential misconduct regarding bonds that were sold to investors and backed by home loans that went bad and contributed to the financial crisis.

“This is the last big legal headwind (for Bank of America) related to the housing crisis,” said Dan Marchon, bank analyst for Raymond James & Associates. “It’s a huge positive once they get that out of the way.”

AIG settlement

The deal with AIG announced Wednesday resolves yet another crisis-era legal hurdle for the bank.

Under the agreement, the insurer will dismiss federal lawsuits against Bank of America and withdraw its objection to an $8.5 billion settlement the bank agreed to in order to resolve claims over losses from soured home loans.

When AIG first filed suit in August 2011, seeking $10 billion in damages, Bank of America’s shares plunged more than 20 percent to $6.51. Weeks later, Warren Buffett stepped in with a $5 billion investment in a much-needed show of confidence in the bank.

Now nearly three years later, with the bank’s stock back above $15, Moynihan noted that the bank is settling the matter for $650 million, much less than some had initially expected.

It remains unclear what impact the AIG deal will have on the $8.5 billion settlement receiving final approval.

That agreement, struck in 2011, involves roughly two dozen large investors, including BlackRock, Freddie Mac and MetLife. The case centers on Countrywide Financial Corp. mortgages that were turned into bonds and sold to investors.

Investors claimed Countrywide misrepresented the quality of the mortgages, which went bad in the housing crisis. Bank of America bought Countrywide in 2008.

As part of the deal with AIG, Bank of America has agreed to stop seeking to collect mortgage insurance proceeds from AIG’s mortgage insurance subsidiaries.

Drag on earnings

In a theme familiar to Bank of America since the financial crisis, legal costs are still weighing on earnings. The bank said the $4 billion in litigation expenses cost it about 22 cents per share after taxes.

For the quarter, the bank posted a profit of $2.3 billion, or 19 cents a share, down from $3.6 billion a year ago. Wall Street consensus expectations were for profit of 29 cents a share, not including the litigation expenses.

The quarter marked a return to profitability for Bank of America, after it posted a loss in the first quarter as it logged $6 billion in litigation expenses.

Second-quarter results show Bank of America continues to grapple with challenges facing its big-bank peers, such as lower demand from homeowners to refinance mortgages amid higher interest rates. The bank’s overall revenue fell 4 percent to $21.7 billion as it made fewer home loans.

On Wednesday, Moynihan said that while the U.S. economy had a slow start at the beginning of the year, growth has picked up recently and there is improved “financial health” among the bank’s customers.

“The revenue is showing stability in most of the core businesses,” he said. “We have a view into the key indicators of an improving economy, which shows signs everywhere of improvement.”

Bank of America was the last of the four largest U.S. banks to report second-quarter earnings. JPMorgan and Citigroup also posted a lower profit in the quarter from a year ago.

Profit at Wells Fargo was higher than a year ago. The San Francisco-based bank earned $5.7 billion, an increase of 4 percent.

Bank of America shares fell 30 cents Wednesday, or 1.9 percent, closing at $15.51.

Staff writer Rick Rothacker contributed.

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