Bank of America has agreed to a legal settlement with the Department of Justice (DOJ) to avoid prosecution for the hundreds of billions of dollars in bad mortgage loans that it and its subsidiaries sold to unwitting investors in the run-up to the financial crisis, according to multiple new reports. The total on-paper cost of the deal is reportedly at least $16 billion and perhaps as high as $17 billion, which makes it the largest corporate legal settlement with the government in U.S. history.
But that record price tag is deceptive. The deal is unlikely to cost Bank of America anywhere close to that amount.
Much of the deal will be tax deductible and half of its technical cost is made up of actions on behalf of homeowners that are in the bank’s best interests to begin with, not cash outlays that cost the bank money. While details are scarce, the deal includes roughly $9 billion in cash payments and $7 to $8 billion in “consumer relief” actions such as mortgage write-downs and refinancing for struggling borrowers according to reports in the New York Times, Wall Street Journal, and Bloomberg. Consumer relief provisions don’t require the bank to spend money they wouldn’t already spend in the normal course of business, and helping people stay in their homes and keep making payments is better for the bank’s revenue than foreclosures would be anyhow.
By structuring the settlement this way, DOJ is replicating the basic dynamics of last year’s headline-grabbing deal with JP Morgan. Initial reports called that a $13 billion deal and praised it as the largest in history in the same way Thursday’s headlines are describing the new Bank of America deal. But the JP Morgan deal actually cost the bank less than half of that sticker price. The government boasted of forcing $9 billion in direct payments, but $7 billion of that was tax deductible, and $4 billion of it wasn’t even new money but rather a reflection of a previous, separate settlement with the Federal Housing Finance Agency (FHFA). It is not yet clear whether Bank of America’s deal price tag includes a recent FHFA settlement or if this is all new money. But either way, the government’s decision to pursue civil settlements rather than criminal cases against banks that inflated the toxic mortgage bubble means that shareholders pay the price while executives who oversaw the misconduct earn large bonuses.
The consumer relief provisions are the bright spots of these settlements. Requiring banks to relax loan terms, reduce principal amounts, and destroy blighted vacant properties that are hurting property values doesn’t actually hurt banks in any way, because those actions tend to enhance the long-term value of the banks’ portfolios.
But those actions are an unmitigated good for homeowners. If they ever actually happen. The $4 billion in consumer relief contained in the 2013 JP Morgan deal has yet to materialize, according to the non-profit foreclosure activist group Home Defenders League (HDL). Since the consumer relief promised the last time the DOJ bragged about a mortgage settlement hasn’t arrived in about nine months, HDL isn’t enthusiastic about reports that Bank of America will be helping homeowners out either.
“If you let a thief buy his way out of jail, you should really make sure the check doesn’t bounce,” HDL national campaign director Kevin Whelan said in an email. “Even a record $17 billion settlement is a small fraction of the damage done by B of A and Countrywide. But it could do real good for a lot of families,” Whelan said. “The fact that the JP Morgan Chase settlement has not delivered any noticeable relief to families makes us skeptical.”
Even at face value, the reported settlement is minuscule compared to the harm caused by Bank of America companies. The on-paper cost of the deal is less than 7 percent of the value of the mortgage deals Bank of America and its subsidiaries Countrywide and Merrill Lynch made before the crisis that have since gone bad. (Bank of America bought Countrywide and Merrill Lynch at the height of the crisis.) Those three companies issued just shy of a trillion dollars in mortgage-backed securities in the run-up to the financial collapse, and $245 billion of those products have gone bad, according to Bloomberg.
Bank of America had pushed for a much smaller settlement for months, arguing that it should not have to pay for the sins of the firms it bought at bargain-bin prices when the economy was reeling. But a court ruling last month regarding Countrywide’s most notorious mortgage swindle caused the bank to change its tune, according to the New York Times. Judge Jed Rakoff ordered the bank to pay about $1.3 billion for one tranch of defective mortgages sold under a program that Countrywide nicknamed “Hustle” because of its fraudulent nature. Having lost one court case over Countrywide’s notorious misdeeds, the Times says, Bank of America decided to stop resisting federal officials’ settlement demands.
After tax deductions, the settlement could easily shrink below the roughly $15 billion in profits the company has reported since 2011. And because the financial crisis sucked something like $14 trillion out of the economy and destroyed tens of trillions of dollars in wealth for homeowners, the DOJ can hardly claim to have delivered a proportional response.
The department’s claims about the Bank of America settlement are likely to draw political scrutiny. A bipartisan bill from Sens. Elizabeth Warren (D-MA) and Tom Coburn (R-OK) would require government officials to state the full tax deductibility and true cost of corporate legal settlements in all public statements about them. That bill, inspired by the revelations that JP Morgan’s sweetheart deal with the DOJ didn’t come close to the portrait that Attorney General Eric Holder painted of it, was passed out of committee late last month.