|Bank of America denies claims that it enriched itself at the expense of investors by servicing sour loans [Reuters]
Bank of America and its Countrywide unit will pay $8.5bn to settle claims that lenders sold poor quality mortgage-backed securities that went sour when the housing market collapsed.
The deal, announced on Wednesday, comes after a group of 22 investors demanded that the Charlotte, North Carolina bank repurchase $47bn in mortgages that its Countrywide unit sold to them in the form of bonds.
The group, which includes the Federal Reserve Bank of New York, Pimco Investment Management, and Blackrock Financial Management, argued that Countrywide enriched itself at the expense of investors by continuing to service bad loans while running up servicing fees.
Bank of America, which bought Countrywide in 2008 for $4bn, has denied those claims.
Brian Moynihan, Bank of America's CEO, said that the settlement would minimise "future economic uncertainty" in the banking business and "clean up the mortgage issues largely stemming from our purchase of
For several months, Bank of America battled claims based on estimates "that were much different from ours," Moynihan said. But at this point, it made more sense to settle than to keep fighting, he said.
"We have said consistently if people are reasonable and can get to a reasonable assessment of their claims and it's in the best interest of shareholders, we will settle," Moynihan told Wall Street analysts in a conference call.
But the pact needs court approval, and investors who were on the sidelines are being urged by an advocate to put up a fight or else accept the settlement.
"The numbers are silly small," said Bill Frey of Greenwich Financial, a firm that structures asset-backed securities. He has been organising mortgage bond investors such as pension funds and hedge funds to demand Wall Street banks buy back soured home loans that were packaged into bonds.
"This settlement is an attempt to whitewash the problem," said Frey.
He said angry investors are bombarding him with emails about the deal. Frey said the silver lining of the settlement offer is that it should force a resolution. Either the majority of investors at the centre of the settlement accept it, or they will have to fight for a better deal.
Keith Horowitz, Citibank analyst, said the settlement, which amounts to only 2 per cent of the original principal balance, removes one of the largest investor risks for Bank of America.
"We think this could prove to be a step forward" for Bank of America, Horowitz said. It would show investors that the bank can manage through crisis without raising additional capital.
As a result of the settlement, Bank of America put its second-quarter loss at $8.6bn to $9.1bn. Excluding the settlement and other charges, the bank expects to post a quarterly loss of $3.2bn to $3.7bn.
Shares of Bank of America Corp jumped more than 4 per cent, or 48 cents to $11.30 before the market opened, with investors happy that the bank can put very big uncertainty behind it.
Investors may now be more confident that they can get similar concessions from other major US banks that created markets for mortgage-backed securities with questionable pedigrees.
Stocks in the financial sector were rising in electronic trading Wednesday, likely because the Bank of America deal presents a framework for others to follow.