Bank of America to Pay $8.5 Billion to Settle Claims from Powerful Investors That Lost Money on Mortgage-backed Securities

BofA Near $8.5 Billion Settlement on Securities

July 29, 2011

Reuters - Bank of America Corp is close to a deal to pay $8.5 billion to settle claims from a group of powerful investors that lost money on mortgage-backed securities, a person familiar with the matter said on Tuesday.

The deal could embolden investors holding mortgage-backed securities filled with now-toxic home loans to pursue claims against other large mortgage lenders such as Wells Fargo & Co and JPMorgan Chase & Co, analysts said.

A settlement, first reported by The Wall Street Journal, would be the largest in the banking industry to date. It would also require approval by Bank of America's board, which met on Tuesday to discuss it, according to the source.

"If you're an investor, you now know this is a potential lottery ticket, and the only way you lose is by not playing," said Matt McCormick, a portfolio manager at Cincinnati-based Bahl & Gaynor Investment Counsel. "You have to think this is the first settlement we'll be seeing in a long line."

After news of a possible settlement, shares rose as much as 3.5 percent from their $10.82 close but later eased to trade around $10.95 after-hours, up about 1 percent.

The largest U.S. bank by assets has been fighting claims by a group of 22 investors over the housing-related securities it packaged and sold before the financial crisis.

This investor group includes BlackRock Inc, MetLife Inc and the Federal Reserve Bank of New York, in a dispute dating back to the fall. It had threatened to take the matter to court, but both sides delayed a trial early this year to continue settlement negotiations.

Bank of America was not immediately available for comment. BlackRock declined to comment.

Bank of America's possible settlement extends beyond the case brought by the initial group of investors, and could resolve "significant parts" of its exposure to repurchase claims from private investors, the person familiar said.

The settlement would exceed the bank's earnings for the last three years, according to the company's 2010 annual report. It could also more than triple the $2.5 billion that Bank of America paid in 2008 for Countrywide Financial Corp, once the nation's largest mortgage lender.

"HAND-TO-HAND COMBAT"

Last Fall, Bank of America Chief Executive Brian Moynihan has said the bank would contest any repurchase claims, and described the process as "hand-to-hand combat."

But as the bank entered into settlement agreements with bond insurers and the two government-backed mortgage investment companies, Moynihan softened that stance, and said the bank would settle when fighting would offer little for shareholders.

In January, Bank of America announced $2.8 billion settlements with mortgage financiers Fannie Mae and Freddie Mac covering essentially all of their outstanding mortgage repurchase claims.

Three months later, the bank announced a $1.6 billion settlement with bond insurer Assured Guaranty Ltd, which had sought to hold the bank responsible for poor underwriting by Countrywide.