Justice Department, Bank of America remain at odds over mortgage settlement

July 16

A top official at the Justice Department took a swipe at Bank of America amid renewed negotiations to resolve an investigation into the bank’s sale of faulty mortgage securities.

The government has been in protracted talks with the second- largest U.S. bank over its role in the housing meltdown that sparked the 2008 financial crisis. Negotiations stalled last month after the two sides could not agree on the structure of the deal.

Bank of America offered to pay more than $12 billion, with most of the money going toward consumer relief, but Justice demanded a stiffer penalty, according to people familiar with the talks who were not authorized to speak publicly.

Bank chief Brian Moynihan sought a meeting in June with Attorney General Eric J. Holder Jr., who declined the offer because the sides were too far apart, the people said.

In the wake of Citigroup’s $7 billion settlement with Justice, Bank of America lawyers met with prosecutors Tuesday but came no closer to a deal, the people said.

In a speech before the Exchequer Club of Washington on Wednesday, Associate Attorney General Tony West made a thinly veiled reference to Moynihan’s request and insisted that Justice would not back down in its stance.

“Resolving these cases will require more than simply seeking a meeting with the attorney general,” said West, the lead negotiator in the Citgroup deal. “It will require taking true responsibility for misconduct that contributed to the Great Recession.”

The third in command at Justice added: “If an institution is unwilling to admit its wrongful conduct in a statement of facts, or balks at paying a substantial penalty that reflects that conduct, or refuses to do right by those affected, then we will not shrink from litigating.”

Bank of America declined to comment on the statement or its talks with Justice.

From 2004 to 2008, Bank of America, including its Merrill Lynch unit, packaged and sold $965 million worth of mortgage securities under investigation, according to estimates from Sanford C. Bernstein analyst John McDonald. Most of those securities came from Merrill, which Bank of America picked up for $50 billion in 2008.

Analysts have questioned whether the bank should be held fully liable for those securities when the government encouraged the acquisition.

JPMorgan made a similar argument about its purchase of Bear Stearns during negotiations with Justice to no avail.

Since negotiating the $13 billion JPMorgan Chase settlement last year, West has stressed that Justice expects banks to acknowledge their misdeeds and help struggling communities recover from the impact of their behavior through consumer relief.

Justice has been clearing out a pipeline of cases against banks for packaging shoddy home loans into residential mortgage-backed securities (RMBS) and selling them to unsuspecting investors.

When the housing market crashed, the securities were worthless and the losses nearly toppled the financial system. Lenders retreated from the market. Stock markets plummeted, and home values took a nose dive.

“Millions of Americans who had no idea what an RMBS was felt the pain of this conduct. Families lost homes. Communities were ravaged by foreclosures. This debacle hurt everybody,” West said.

The devastation brought about by the financial crisis led the Obama administration in 2009 to assemble a mortgage task force made up of federal and state attorneys to go after crisis-era crimes.

The task force launched a working group in January 2012 to investigate misconduct in the mortgage-backed-securities market.

People familiar with the investigations say the group has ongoing probes into six banks for allegedly misleading investors about the quality of the securities they sold: Wells Fargo, Goldman Sachs, Morgan Stanley, Royal Bank of Scotland, UBS and Deutsche Bank.

“We’re not letting up, and we’re not going away,” West said. “We will continue to pursue these cases and follow the facts wherever they lead and enforce the law fairly but aggressively should we uncover evidence of unlawful conduct.”

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