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Bank of America (BAC) Increases Settlement Offer, Gets Slapped with $1.27B Fine

By: , dated July 31st, 2014

Shares of Bank of America Corporation (BAC) were down -0.27 or -1.77 to $15.31 in regular trading on Thursday, after news yesterday that the bank was raising their offer to settle with the Justice Department for $1 billion more than it had previously proposed. Also, a federal judge imposed a $1.27 billion civil penalty for the bank’s involvement in selling questionable mortgages to Fannie Mae and Freddie Mac through its acquisition of Countrywide Financial in 2008.

Charlotte, North Carolina based Bank of America Corporation, is the fifth largest U.S. company by revenue and the second largest bank holding company by assets. After the bank’s 2008 acquisition of Merrill Lynch, the bank became the world’s largest wealth management company and gave the company a prominent position among investment bankers. The bank is one of the “Big Four” U.S. banks alongside Wells Fargo (WFC), JP Morgan Chase (JPM) and Citigroup (C).

On Wednesday, the bank’s lawyers met with Justice Department prosecutors in Washington D.C. to come to an agreement on the size of the potential penalty. The Justice Department’s position was for Bank of America to pay $10 billion in cash and another $7 billion in what are known as “soft dollar” payments to aid homeowners with their mortgages.

Bank of America, for its part was originally offering a total of $13 billion, which included just $4 billion in cash. Yesterday the bank raised its cash offer to roughly $7 billion and the total proposed penalty of $14 billion. The Justice Department rejected the offer and could proceed with a lawsuit against the bank if a settlement is not reached in the next few days.

Adding to the bank’s woes, yesterday, a federal judge ordered the company to pay a fine of $1,267,491,770 for the involvement of a subsidiary it bought in 2008, Countrywide Home Loans, in what the company called a “High Speed Swim Lane”, also known as “the Hustle”. The operation sold risky loans to Freddie Mac and Fannie Mae from August of 2007 to May of 2008. The jury in the case found Countrywide executives had purposely misrepresented the quality of the mortgages being sold.

U.S. District Judge Jed Rakoff stated in his 19 page ruling that, “from start to finish the vehicle for a brazen fraud by the defendants, driven by a hunger for profits and oblivious to the harms thereby visited, not just on the immediate victims but also on the financial system as a whole.”

U.S. Attorney for Manhattan, Preet Bharara noted in a statement that the verdict rendered by the jury in the case, “sent a loud and clear message to Wall Street that this kind of conduct will not be tolerated.” He added that, “This is the first case in which a bank or any of its executives has been found liable under FIRREA for mortgage fraud leading up to the financial crisis, and now it is the first case in which civil penalties have been imposed upon a bank or any of its executives following such a finding”.

Bank of America stock has been trading in a narrow range between $14 and $18 per share during the past year. With settlement of the case with the Justice Department, the bank’s stock could see further downside in the near term.

Other News About Bank of America
BofA’s Blunder: $40 Billion-Plus
In-depth article on how the purchase of Countrywide for $2.5B has already cost the bank $40B.
Bank Of America Using Fieldwork, Dioramas To Learn About Poor People
Bank to service customers with troubled finances.

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Jay Hawk Jay Hawk enjoyed a 12-year professional financial markets career incorporating extensive first hand futures and options experience obtained by trading in the stock, commodity and forex markets on U.S. exchanges. Since retiring as a full-time financial market professional, he has been actively trading stock, commodities, forex and options for his own account and managing funds for others, as well as writing financial market commentary and educational articles.

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