Bank of America, the second-largest U.S. bank, agreed to pay $9.3 billion to settle a lawsuit arising out of troubled mortgage-backed securities it cobbled together and sold to several federal housing agencies such as Fannie Mae and Freddie Mac.
The settlement, announced on Wednesday, includes $6.3 billion in cash and $3.2 billion in securities that Bank of America will purchase from the two housing entities. In this light and despite having now allegedly resolved around 88 percent of its total exposure to securities at issue, Bank of America's first-quarter profits could take a substantial hit from the deal.
The settlement with the housing finance agency is the latest in a string of deals that regulators have reached with big banks that sold mortgage securities backed by subprime mortgages, which quickly soured during the housing and financial crises. Including this latest settlement, the housing finance agency has recouped $16 billion in cash payments from banks and financial firms that sold mortgage-backed securities. The regulator, which filed 18 lawsuits, still has claims pending against seven banks and financial institutions.
Better Markets, a nonprofit organization that promotes the public interest in financial reform in the domestic and global capital and commodity markets, rightly points out that these billions of dollars in payments often arise from the too-big-to-fail banks’ fraudulent illegal conduct in inflating the housing bubble by creating, selling and distributing worthless mortgages, securities and derivatives. And yet, one can look around and see the results: in the middle of a financial and economic crisis that is sweeping the European Union and the US, “the perpetrators of those crimes pocketed tens of billions in bonuses in the years before the crash and use shareholder money now to pay for their fraud, while the people get stuck paying the bill”.
Please read here Better Markets Financial Reform Newsletter.
Cartoon by Aongus Collins.