Bank of America has agreed in principle to pay between $16 billion and $17 billion to settle with the U.S. Justice Department over the sale of faulty mortgage bonds, a person familiar with the talks told the Observer on Wednesday.
The news came the same day the bank announced it would raise its quarterly dividend for the first time in seven years, after the Federal Reserve signed off on its revised capital plan.
The Charlotte bank increased its overall settlement offer after Bank of America CEO Brian Moynihan and U.S. Attorney General Eric Holder talked by phone last week, the person said. Roughly $9 billion of the amount would be in cash, with the rest in consumer relief.
The deal, which would resolve a variety of probes with federal and state authorities, is not finalized and could still fall apart, the person said, adding that it is unclear when or if an accord could be announced.
The pact would surpass JPMorgan Chase’s $13 billion settlement over soured mortgage bonds as the biggest civil settlement between the U.S. government and a company.
Bank of America spokesman Lawrence Grayson declined to comment. A Justice Department spokesman also declined to comment.
Talks between the bank and the Justice Department have gone on for months, as both sides have failed to agree on the overall settlement figure, as well as how much would be in hard cash versus consumer relief.
Last week, the bank’s attorneys met with Associate U.S. Attorney General Tony West and Paul Fishman, U.S. attorney for New Jersey, in Washington, D.C., the person said. Fishman’s office has prepared a lawsuit that could be filed if the bank and Justice Department fail to reach a settlement.
At the meeting, the bank raised its offer to $14 billion in an overall settlement, up from $13 billion, the person said. Later, Moynihan spoke by phone with Holder to further discuss a deal. After the call, the bank agreed in principle to a settlement figure between $16 billion and $17 billion, the person said.
On Wednesday, the bank’s attorneys met with West in Washington to further hammer out details, the person said.
The bulk of the problem bonds were issued by Countrywide Financial, which then-Bank of America CEO Ken Lewis bought in 2008 as the housing market was crumbling. Others were issued by Merrill Lynch, which the bank acquired in 2009.
Bank of America, Merrill Lynch and Countrywide issued $965 billion in bonds to private investors from 2004 to 2008, more than any of its competitors, with about three-fourths originated by Countrywide, according to securities filings. Of the $245 billion in bonds that defaulted or became severely delinquent, about 4 percent were issued by Bank of America.
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 case was “the most significant matter out there remaining,” the bank’s chief financial officer, Bruce Thompson, told reporters last month.
Despite the eye-popping numbers in the latest agreement, critics are likely to say the bank got off light, considering the government’s bailout of the financial sector and the economic fallout from the crisis.
“The greed, recklessness and illegal behavior of Bank of America and other Wall Street firms caused a horrendous recession which cost millions of Americans their homes, jobs and life savings,” said Sen. Bernie Sanders, I-Vt., in a statement Wednesday. “ This is a very modest settlement.”
Dividend still lags 2008
Also on Wednesday, Bank of America said it was raising its quarterly dividend to 5 cents per share from the penny per share it has paid since the financial crisis.
The bank had originally won Fed approval for the 4-cent increase in March, but had to postpone the hike in April when it discovered a roughly $4 billion accounting error. The disclosure was an embarrassment for the bank, raising questions about whether the institution was too complex to manage.
Under its new capital plan, Bank of America is giving shareholders the same dividend increase, but scrapping a $4 billion buyback of its common stock. The dividend is payable Sept. 26 to shareholders of record as of Sept. 5.
“This is a milestone day,” said Matt McCormick, a portfolio manager with Bahl & Gaynor Investment Counsel, a Cincinnati investment firm that manages $12 billion. “A dividend increase is a clear sign of current and future financial strength.”
The increased payout, however, is a far cry from the 64 cents per quarter the bank was paying as recently as the fall of 2008. Where the bank once doled out more than $10 billion a year in dividends to shareholders, it paid just $428 million last year.
“I don’t think it’s anything to light a Roman candle about,” Tom Lockhart, 86, a retired Charlotte attorney and longtime shareholder, said of the dividend hike. “To increase from a penny per share to five cents, what difference does that make?”
Lockhart said he lost confidence in the bank after executives shed little light on how the bank miscalculated its ratios when questioned at the annual shareholder meeting in May. Lockhart was also upset that Moynihan received a 17 percent raise in 2013, upping his total compensation to $14 million.
“It ought to be clawed back and put back in the company,” he said.
Bank of America has said the problem with its original capital plan dated to the 2009 Merrill Lynch acquisition and how the bank calculated regulatory capital ratios after accounting for a type of debt known as structured notes. The error involved notes that had matured or were redeemed before the purchase.
The Fed said the bank addressed the errors in its resubmission and reviewed its regulatory capital reporting process as required by the Fed.
The bank said the dividend increase “reflects the significant progress the company has made to strengthen the balance sheet and build capital and liquidity.”
The dividend postponement in April was the latest misstep for the bank during the Fed’s annual stress testing process, which is designed to make sure banks have enough capital to weather another economic downturn.
In 2011, Moynihan told investors he expected the Fed would approve a modest dividend increase, only to have regulators reject the proposal.
The bank’s shares, which fell more than 6 percent on the dividend news in April, rose about 1.3 percent to $15.20 Wednesday. The shares are still down nearly 5 percent since the miscalculation came to light.
The shares rose slightly in after-hours trading, as news of the settlement agreement emerged.