Next Financial Crisis Case: Bank of America

Now that the Citigroup mortgage settlement is out of the way, the Justice Department has turned to Bank of America, the second-largest bank in the United States. It, too, is in trouble over sales of low-quality mortgage bonds leading into the financial crisis. But it would appear that the bank has learned little about negotiating with the U.S. government. One lesson that can be taken from the cases of other banks, from JPMorgan Chase to Credit Suisse and BNP Paribas and on to Citigroup, would appear to be: You have very little leverage.

In June, the DOJ told Bank of America that it wanted $17 billion to resolve the most recent set of mortgage claims, considerably more than the $12 billion the bank was offering, according to Bloomberg News. The bank is believed to have issued $965 billion in mortgage securities prior to 2008, according to a Sanford Bernstein research report cited by Bloomberg. Most of it comes from Countrywide Financial, which Bank of America acquired in 2008 during the heat of the financial crisis. BofA’s most recent counteroffer, made during a meeting between the bank’s lawyers and prosecutors from the Justice Department, was $13 billion, according to the Wall Street Journal.

“Lawyers for Bank of America had requested the meeting,” the Journal reported, “but it ended Tuesday with no progress made toward a final deal, people familiar with the discussions said.”

If recent precedent is any guide, the bank will have to come a lot closer to what the government is asking for because the DOJ’s attitude has generally been that it is more than happy to file a lawsuit, which could potentially damage a bank’s business.

Meanwhile, BofA reported that its profit declined 43 percent in the second quarter after it spent $4 billion to cover litigation costs.

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