The U.S. is preparing to sue Bank of America Corp. after reaching an impasse in talks to resolve government probes of the lender’s sales of mortgage-backed bonds before the financial crisis, a person familiar with the matter said.
The Justice Department broke off negotiations earlier this week because it was dissatisfied with the bank’s offer to pay more than $12 billion, which included at least $5 billion in consumer relief, according to the person, who asked not to be identified because the discussions are private.
The department’s latest settlement request was for about $17 billion, though negotiators were willing to consider less, the person said. The amount would come on top of the $9.5 billion the bank agreed to pay in March to resolve Federal Housing Finance Agency claims.
U.S. prosecutors have increasingly demanded record penalties from banks for wrongdoing ranging from tax evasion to sanctions violations. The U.S. secured the largest criminal tax penalty ever last month with Credit Suisse Group AG’s $2.6 billion payment. Prosecutors are also seeking $10 billion from BNP Paribas SA to resolve a probe into transactions involving sanctioned countries, people familiar with the matter have said.
A lawsuit against Bank of America isn’t imminent and is unlikely to be filed this week in part because Associate Attorney General Tony West, who has been leading negotiations with the bank since March, is on government business in Alaska, the person said.
Lawrence Grayson, a Bank of America spokesman, and Brian Fallon, a Justice Department spokesman, declined to comment.
Bank of America, the second-biggest U.S. lender, is among at least eight banks under investigation by the Justice Department and state attorneys general for misleading investors about the quality of bonds backed by mortgages as housing prices plummeted. Many of the loans were inherited by the Charlotte, North Carolina-based bank when it purchased subprime lender Countrywide Financial Corp. and Merrill Lynch & Co.
The New York Times reported yesterday that negotiations between the parties had broken off.
The talks were aimed at resolving civil probes by federal and state prosecutors in California, New York and New Jersey, two people have said. An agreement also would have included a U.S. lawsuit pending in North Carolina federal court.
Bank of America hasn’t specified how much money it has set aside for the case. The lender said April 16 that it increased reserves for mortgage-related matters by $2.4 billion.
In the FHFA settlement, Bank of America agreed to pay $6.3 billion in cash to Fannie Mae and Freddie Mac to resolve lawsuits alleging it misrepresented loans packaged into bonds that were bought by the U.S.-owned mortgage firms. The company also said it would repurchase about $3.2 billion of mortgage bonds from the government-sponsored enterprises.
The size of any settlement with the Justice Department depends in part on how much the bank would be willing to pay in cash versus other remedies such as mortgage writedowns or consumer relief, a person with knowledge of the probe told Bloomberg News in April.
JPMorgan Chase & Co. (JPM), the biggest U.S. bank, reached a $13 billion global settlement over similar issues in November. That accord, which included a $4 billion agreement with the FHFA, encompassed loans New York-based JPMorgan acquired through its purchases of Bear Stearns Cos. and Washington Mutual Inc.’s banking operations.
JPMorgan, as part of its settlement, agreed to offer $4 billion in aid to consumers, such as loan modifications and principal forgiveness.
Bank of America probably is being held responsible for a far larger amount of securities than JPMorgan, Sanford C. Bernstein & Co. said in April. Countrywide alone issued $716 billion of mortgage bonds. The fines JPMorgan agreed to pay the Justice Department last year were tied to $115 billion of mortgage bonds.