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BoA sets aside $14 billion to settle mortgage mess

30 june 2011, 16:40
Bank of America said Wednesday it would set aside $14 billion to settle claims from angry investors for losses on dodgy mortgage-backed securities whose collapse triggered the 2008 financial crisis, AFP reports.

Hoping to put its disastrous 2008 purchase of mortgage lender Countrywide Financial behind it, Bank of America said it would pay a record $8.5 billion to a group of 22 large private investment groups who invested in securities which held poorly documented or substandard home loans from Countrywide.

The other $5.5 billion was for pending liabilities to other investors not included in the settlement.

It was the largest settlement by a financial services firm stemming from the financial crisis, which was kicked off by a crash in the market for complex investment products that packaged together millions of poorly documented, often high-risk mortgages.

The company noted in its statement that the $8.5 billion settlement remains subject to court approval, leaving room for holders of the securities not among the 22 investment groups to object to it.

As a result of the deal and the set-asides, Bank of America said it would report a net loss in the second quarter of up to $9.1 billion, a sharp reversal from the first quarter's $1.7 billion gain.

The bank posted a net loss of $2.2 billion last year, after huge write-offs mostly related to housing.

"This is another important step we are taking in the interest of our shareholders to minimize the impact of future economic uncertainty and put legacy issues behind us," said Bank of America chief executive Brian Moynihan.

"We will continue to act aggressively, and in the best interest of our shareholders, to clean up the mortgage issues largely stemming from our purchase of Countrywide."

Bank of America, the largest bank in the United States in terms of deposits, has been dogged by questions about how much the mess stemming from its Countrywide acquisition would ultimately cost.

"B of A bought a rogue company," said Dick Bove, an analyst at Rochdale Securities.

"They never understood what they bought and why, and as a result they took a massive loss. The size of the settlement shows that they simply did not understand the size of the problem."

Bank of America shares were up about 2.6 percent to $11.11 in afternoon trading after the news.

Over the last six months, Bank of America has announced three agreements aimed at reducing its exposure to legacy issues linked to Countrywide, formerly one of the country's largest home loan financiers.

In January, the bank announced agreements with two of its largest counterparties, Fannie Mae and Freddie Mac.

The 22 investment groups taking part in Wednesday's settlement represented 530 separate residential mortgage-backed securitization trusts which had a principal valuation of some $424 billion.

They included major banks, insurance firms and investment houses including Goldman Sachs, BlackRock, PIMCO, Metropolitan Life and ING Bank.

Also in the group was the US Federal Reserve's New York branch, through the "Maiden Lane" entities created to hold risky assets after investment bank Bear Stearns collapsed in 2008 and the government took over giant insurer AIG.

The huge settlement may encourage new lawsuits against other banks that also sold risky mortgage-backed securities before the crisis, warned Thomas Mitchell, an analyst with Miller Tabak.

"We expect to see increased legal action by investors against investment banks who sponsored non-standard mortgage securities in the 2004-2008 period," Mitchell said.

Ratings agency Moody's Investors Service said the settlement cost more than expected but that it cleared out a looming liability that had weighed on Bank of America's credit rating.

"While the settlement and additional provisions will negatively affect BAC's earnings and capital ratios in the current quarter, the bank's capital ratios will remain above the level of a year ago," Moody's said.

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