Is Bank of America Corp’s Deal With U.S. Regulators Dead in the Water?

Despite Bank of America Corp (NYSE: BAC  ) CEO Brian Moynihan's determination to put the bank's mortgage morass behind it, the latest settlement negotiations with U.S. regulators have come to a screeching halt. Worse yet, according to a report by the New York Times, the two sides seem quite far apart, and the stalemate may continue indefinitely.

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Crisis-era issues come back to stir the pot
With Moynihan's recent comments about resolving outstanding legal problems at a recent financial conference – followed quickly by news that the bank and the Department of Justice were in negotiations – gave me the impression that this last, huge legal issue might be wrapped up quickly. Alas, it was not to be.

There appear to be at least two stumbling blocks in the road to resolution: the amount of the penalty Bank of America will pay, and festering resentment on B of A's part toward the government for its actions during the financial crisis.

Bank of America was pressured by Treasury and Federal Reserve officials in 2008 to purchase the ailing investment firm Merrill Lynch in hopes of averting another failure like that of Lehman Brothers. Now, many of the mortgage-backed securities B of A is expected to resolve were created by Merrill, and the bank is balking at the big price tag attached to that clean-up. 

That big settlement amount is the other huge roadblock. While Bank of America has offered $12 billion to put paid to this – hopefully – last big legal dispute over toxic mortgage bonds, the DOJ want more. Quite a bit more, in fact: $17 billion, which would top JPMorgan Chase's recent $13 billion penalty, and result in the largest big-bank payout ever. 

Also at issue is how the penalty will be parsed out. While Bank of America seemingly wants more of the settlement to go toward consumer relief, the government wants both – help for troubled borrowers, as well as a nice big pot of money for its own coffers. 

Is the deal dead?
The NYT article notes that the chief negotiator for the DOJ is on the road at the moment, so no movement on this issue is to be expected for a few days. The bank has offered to sit down at the table again, so perhaps it is willing to up the ante a bit.

Truth be told, the idea that the buyer of Countrywide would emerge from this settlement with a smaller penalty than JPMorgan Chase incurred last year just didn't seem realistic. Also, using government pressure to take over Merrill as a bargaining chip likely won't hold any more water with U.S. negotiators than did the cries of indignation over JPMorgan's similar situation with Bear Stearns. The Bank of Dimon still paid a huge tab to put all those Bear-related issues to rest, despite the fact that the government encouraged that deal, as well.

How much is Bank of America willing to pay to end this impasse? We should find out soon. Moynihan truly wants to put an end to these problems, and I seriously doubt he will give up. This deal may be in a world of pain, but it isn't dead yet.

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  • Report this Comment On June 12, 2014, at 8:36 PM, Henryfib wrote:

    Countrywide and Merrill were purchased with agreement with the U.S. government to help and aid the 2008 crisis. The Bank did not originate these mortgages nor did they sign them. That fact has to be considered or Merrill could go into bankruptcy and that is what the Bank is considering. Is Merrill worth 17 billion? What will bankruptcy cost the Bank; they have to be considering this move.

  • Report this Comment On June 12, 2014, at 11:26 PM, ronbeasley wrote:

    The $5 billion difference amounts to a $.50 per share one time hit. Reactions and concerns are, as usual, way overblown.

  • Report this Comment On June 13, 2014, at 8:41 AM, rayzur9 wrote:

    Agree with both posts above. Lets see evidence of the pressuring, and bring it to light. Tired of the witch hunt consequences for following uncle sam's orders. Who in countrywide was litigated against for the toxic mortgages? (crickets chirping)

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