Bank of America, the second-largest bank by assets held and the fifth-largest company in America, has agreed to settle charges by the National Credit Union Administration (NCUA) for $165 million involving the sales of mortgage-backed securities that caused corporate credit unions to fail. Bank of America disclosed in February that it has reached a preliminary agreement with the NCUA — to be covered by the bank’s reserves — but did not announce the amount at the time.
Bank of America — as of Dec. 31, 2012 — held $2.210 trillion in assets.
This settlement adds to the bank’s growing list of legal troubles. The bank has suffered more than $40 billion in losses from its home mortgage business since the 2008 financial collapse, mostly due to the bank’s purchase of Countrywide Financial, one of the largest culpable parties in the subprime mortgage scandal.
The bank and the regulator have declined to give any new information on the settlement beyond what was disclosed in February. The bank announced $14 billion in settlement in January. It paid $3 billion to settle a loan-by-loan review of past foreclosures, paid $11.6 billion to resolve allegations from Fannie Mae that the bank improperly sold bad mortgages and offered to sign a $8.5 billion settlement to resolve claims regarding private buyers of toxic securities.
The cost of bad business
NCUA is not only seeking recovery from Bank of America. Currently, the regulator has lawsuits against JPMorgan Chase, Barclays, Credit Suisse, Goldmans Sachs, Royal Bank of Scotland, Citigroup, Deutsche Bank and HSBC. NCUA has settled with Citigroup, Deutsche Bank and HSBC for $170 million, with Deutsche Bank paying around $145 million.
The remainder will be heard in a consolidated hearing April 29 in federal court.
«We have a statutory obligation to secure recoveries for credit unions and ensure that consumers remain protected,» Debbie Matz, the chairman of the regulator’s board, said in the statement announcing the Bank of America settlement. «We will continue to expend every possible effort to fulfill that important responsibility.»
To date, the major banks have had to pay in excess of $100 billion in legal fees due to activities leading up to and occurring since the subprime crisis. The big six banks have paid so far $62.6 billion in settlements, according to SNL Financial. Bank of America (BofA), so far, has paid $41.6 billion, with Wells Fargo coming second at $8.3 billion and JPMorgan Chase third at $7.8 billion. Citigroup, Goldman Sachs and Morgan Stanley makes up the remainder of the six.
In addition, it is expected that $24.7 billion will have to be paid in additional payments for flawed mortgages and a minimum of $14 billion will have to be paid in other settlements pending in court or yet to be filed.
These fines are largely paid from mandated reserves on deposits and insulatory funding to protect the bank from market instabilities. Previously, Bank of America attempted to raise user fees on cash withdrawals and other banking services, only to receive massive backlash from the public. Despite this, commercial lending to large companies has grown past the Federal Reserve’s expectations, even though housing and personal lending remains stagnant or slow-growing.
Many feel that the banks are shielding themselves from losses due to future lawsuits and are holding on to capital that may be needed to protect shareholders’ profits or to protect themselves from a shrinking ratio of deposits to loans.
Bank of America accounted for most of its legal bill in 2012, settling with Fannie Mae, paying $2.4 billion in the Merrill Lynch & Co. class-action settlement, and $400 million with bond insurer Syncora Holdings Ltd. Most recently, media outlets reported on the release made by the Federal Reserve Bank of New York of the $62 million settlement between BofA and Maiden Lane II from July 2012 which had previously been confidential.
The release, which is expected to strengthen BofA’s defense against AIG claims, mentions that Maiden Lane II released BofA from claims on the related securities. The bank announced Jan. 7 that it was settling with the Office of the Comptroller of the Currency and the Federal Reserves in the Independent Foreclosure Review for $2.9 billion, which was accounted for in its 2012 year-end results.
In 2011, BofA settled claims with Bank of New York Mellon as trustee for investors in private-label residential mortgage-backed security for $8.6 billion. The bank also accounted for its $11.8 billion share in the National Mortgage Settlement in its 2011 results. In 2010, the bank settled with Fannie Mae and Freddie Mac for $2.8 billion to settle repurchase claims over first-lien mortgage sales by legacy Countrywide Financial.
Fiscal fallout and how the banks game the system
The $100 billion bill does not cover the possible fallout over manipulation of the London Interbank Offering Rate (LIBOR), which — according to Macquarie Research — may cost the banks $176 billion more. While the low end of this is only $8 billion, it is still $8 billion in legal funds that are nearly exhausted. With new scandals and lawsuits emerging every day, the banks may find themselves in an undefendable posture.
But this seems unlikely. In 2012, the banking industry posted a $141 billion profit. This is despite that Rajat Gupta, a former Goldman Sachs board member, pleading guilty to insider trading on June 15, HSBC being condemned by the Senate on July 16 for permitting money laundering, BofA laying off 30,000 employees in September and JPMorgan Chase admitting that it has lost billions on bad bets on credit derivatives.
It has been also argued the BofA intentionally kept it reserves — or capital held as insurance against all deposits — low to limit its response to legal actions. As pointed out in the New York Times, BofA — in 2011 — settled a case with Pimco and Blackrock for $8.5 billion. The case involved liability on more than $400 billion in Countrywide loans, resulting in tens of billions in losses. The actual losses range from $70 billion to more than $100 billion, meaning that BofA settled for pennies on the dollar. Bank of America contends that its reserves are reasonable, based on its estimated probable payouts.
In keeping its reserves low, BofA and the other banks are exploiting a system that already favors them. “This is an accounting arbitrage,” said Manal Mehta, a hedge fund manager who has been on a lonely crusade for years to follow the complexities of these cases.
“The accounting rules give you a lot of latitude in setting reserves,” he says. Bank of America is ‘hiding behind that.’”
In other news, BofA and Societe Generale SA have moved to appeal New York State Judge Barbara Kapnick’s ruling to uphold the 2009 restructuring of bond insurer MBIA. The banks argue that the restructuring shifted $5 billion — which would have otherwise went to insure risky mortgage debt — to a guaranty for municipal bonds. The New York State Insurance Department approved the split.