Bank of America Expected to Settle Huge Mortgage Case for $16.65 Billion
The Justice Department is poised to announce a $16.65 billion settlement with Bank of America over accusations that it duped investors into buying toxic mortgage securities, say people briefed on the matter — the single largest government settlement by a company in American history.
Yet even as that accord nears completion, prosecutors are preparing a separate civil case against Angelo Mozilo, the man who came to embody the risk-taking for which Bank of America is now paying dearly, a rare move against a senior executive at the center of the financial crisis.The Bank of America settlement will be a coda to a painful period for the bank and the broader financial industry. More than any other Wall Street giant, Bank of America was the source of the toxic subprime loans that helped ignite the crisis — the result of its acquisitions of Merrill Lynch and Mr. Mozilo’s Countrywide Financial. The size and scope of the expected settlement, which could be announced as soon as Thursday, reflects the extent of the damage.
The deal would resolve more than two dozen investigations from prosecutors across the country, the people briefed on the matter said, including Manhattan, Brooklyn, Los Angeles, New Jersey and North Carolina. To settle those varied investigations, some of which have not been previously reported, the bank is expected to pay a $9.6 billion cash penalty and $7 billion in so-called soft-dollar payments to aid struggling consumers. In turn, the Justice Department will forgo any potential cases against the bank over collateralized debt obligations, one of the people said, complex financial instruments the bank sold in the years before the crisis.While no bank executives will face charges as part of the settlement, the people said, the prosecutors in Los Angeles are preparing a lawsuit against Mr. Mozilo, Countrywide’s co-founder. Mr. Mozilo, who previously reached a $67.5 million settlement with the Securities and Exchange Commission, was an early target of the Justice Department.
In 2011, the United States attorney’s office in Los Angeles decided not to file criminal charges against Mr. Mozilo. But in recent months, the office’s civil division has turned the spotlight back on Mr. Mozilo, whose company originated mortgages that went to people with little income to repay them, causing devastating losses for investors who bought the loans.
But a complication has emerged: Mr. Mozilo’s lawyers have cautioned the prosecutors in Los Angeles that their client has a serious illness. The prosecutors have sought Mr. Mozilo’s health records, the people said, though for now the case remains on track.
In a statement, Mr. Mozilo’s lawyer, David Siegel, said that he would “not comment on reported rumors concerning any investigation.” He added, however, that “there is no sound or fair basis, in law or fact, to pursue any claim against Angelo Mozilo. This story has gone on more than long enough; Mr. Mozilo stands virtually alone among banking and mortgage executives to actually have been pursued by this government and already paid a record penalty” to the S.E.C.
Bloomberg News earlier reported the plans to file a lawsuit.
The persistent focus on Mr. Mozilo, 75, stems from Countrywide’s outsize role in the mortgage crisis.
The son of a Bronx butcher, Mr. Mozilo amassed great wealth as Countrywide became the nation’s largest mortgage lender. After Bank of America bought the company in 2008, the decision ultimately set off years of legal woes. In some cases, Bank of America has argued that it did not assume legal liabilities stemming from many of the loans Countrywide made before the acquisition. In all, the bank has paid more than $50 billion to settle mortgage issues with investors and various government agencies.
The $16.65 billion settlement expected on Thursday is the culmination of that reckoning.
It has been years in the making. Across the country, United States attorney offices have slowly mounted investigations into Countrywide, Merrill and Bank of America itself.
Preet Bharara, the United States attorney in Manhattan, has at least two investigations based on whistle-blower lawsuits, the people briefed on the matter said. Those investigations will be included in the settlement.
His counterpart in Brooklyn, Loretta E. Lynch, has a separate investigation. Paul J. Fishman, the United States attorney in New Jersey, does, too.
The settlement, while wrapping in all those potential cases, would also put to rest another mortgage-related lawsuit that the Justice Department filed last summer in North Carolina. A number of states, including California and New York, will take part in the settlement as well.
The Los Angeles prosecutors, while focusing on Mr. Mozilo, also built an investigation into Countrywide. The acting United States attorney there flew to Washington on Wednesday in preparation for a potential news conference, according to one of the people briefed on the matter.
Negotiators remained in suspense late Wednesday, as the Justice Department and the bank worked out the final details of the settlement and had yet to sign any paperwork, the people said. The Justice Department was still negotiating part of the consumer relief portion of the deal and the exact nature of conduct that would be covered as part of the settlement.
For the Justice Department, which has come under fire for an uneven response to the financial crisis, the case was intended as a signature moment and a warning shot to all of Wall Street. The deal would eclipse the sums that JPMorgan Chase and Citigroup paid recently to settle similar cases. And the settlement is sure to be the largest among those still to come, as the Justice Department is expected to shift its attention to banks like Goldman Sachs and Wells Fargo.
Yet the Bank of America deal — some of whose details have emerged in recent weeks — has already drawn criticism for what it lacks. In lieu of lawsuits from various United States attorney offices, the deal will include a statement of facts that outlines the bank’s misconduct in only the broadest of terms.
The bank, which presented a series of lowball offers to the government before eventually settling, narrowly avoided one of those lawsuits. Last month, as Mr. Fishman of New Jersey was completing a civil case accusing the bank’s Merrill Lynch unit of defrauding investors in mortgage securities, Bank of America raised its offer to $14 billion, half of which would come in the form of a cash penalty.
The bank was reluctant to pay more to settle the New Jersey investigation or others. Much of the misconduct, the bank contended, occurred not at Bank of America but at Countrywide Financial and Merrill Lynch, the companies that the bank bought during the financial crisis.
Bank of America’s $14 billion offer, however, failed to placate prosecutors, who have largely rejected the bank’s claim that it should not be penalized for the sins of Countrywide and Merrill. Prosecutors continued to demand more than $10 billion in cash as part of an overall $17 billion deal.
It took an intervention at the top of the Justice Department and the bank for the deal to materialize.
In a phone call on July 30 with the bank’s chief executive, Brian T. Moynihan, Attorney General Eric H. Holder Jr. demanded that the bank raise its offer by the next morning. Otherwise, he explained, the New Jersey prosecutors would file suit.
With 10 minutes to spare on July 31, a bank lawyer called the Justice Department with an offer: about $9 billion in cash and $7 billion in soft-dollar payments. The Justice Department accepted, setting in motion weeks of negotiations about the deal’s fine print.