After months of lowball offers and heels dug in, it took only 24 hours for Bank of America to suddenly cave in to the government, agreeing to the largest single federal settlement in the history of corporate America.
The tentative deal - which people briefed on the matter said would cost the bank more than $16 billion to settle investigations into its sale of toxic mortgage securities in the runup to the financial crisis - started to take shape last week after the Justice Department rejected yet another settlement offer from the bank. Then, a wild card entered the fray.
Judge Jed S. Rakoff, a longtime thorn in the side of Wall Street and Washington, issued an unexpected ruling in another Bank of America case that eroded what was left of the bank's negotiating leverage. Rakoff, of U.S. District Court in Manhattan, ordered the bank to pay nearly $1.3 billion for selling 17,600 loans, many of which were defective. Bank of America had previously lost that case, which involved its Countrywide Financial unit, at a jury trial.
The bank's top lawyers and executives, who made the ill-fated decision to fight that case in Rakoff's court rather than settle, appeared to recognize that another courtroom battle would not only be futile but extremely expensive, according to two of the people briefed on the matter. The remaining investigations, which by contrast involved billions of dollars in securities backed by home loans, could have cost the bank multiples more than Rakoff's penalty, perhaps even more than a settlement with the Justice Department.
With the bank reeling from the judge's decision, Attorney General Eric Holder Jr. delivered the final blow. Holder, who had rebuffed earlier requests for a meeting with the bank's chief executive, decided to open the lines of communication.
In a phone call July 30 with the CEO, Brian T. Moynihan, Holder delivered a simple demand: Raise your offer or be sued the very next day. Holder, the people briefed on the matter said, provided a deadline of 8 a.m. Eastern time the next day.
Around 7:50 a.m. on July 31, one of the people said, a bank lawyer called to offer $9 billion in cash and more than $7 billion in so-called soft-dollar relief to consumers. That offer, which provided the crux of the tentative settlement, was within striking distance of the Justice Department's initial demands. It also was far in excess of what JPMorgan Chase and Citigroup paid to settle similar cases.
Bank of America's decision to back down, despite its earlier bare-knuckle brawls with the government, showed the limitations of legal arguments it has clung to for years. The bank, seeking to placate shareholders who feared that the bank would pay through the nose, has long argued that it should not be penalized for the misdeeds of Countrywide Financial and Merrill Lynch, the companies it bought in the financial crisis.
In the case of Merrill, the bank argued that federal regulators pressured it to go through with the acquisition. With Countrywide, Bank of America claimed that it did not assume legal liabilities stemming from many of the loans that it had made before its acquisition, an argument that gained traction in some courts but fell flat with the Justice Department.
Even though the deal would award an eye-popping penalty to the Justice Department and various state attorneys general, it would bring a measure of closure to the bank, which has already paid tens of billions of dollars to settle lawsuits by private investors and regulators over its mortgage operations. The deal, capping the bank's largest remaining legal issue from the financial crisis, would in turn accelerate Bank of America's effort to return to the business of being a bank.
One such step toward normalcy came on Wednesday, after Bank of America announced an increase in its dividend for the first time in seven years. The move came after the Federal Reserve blessed its revised plan to weather a severe financial storm.
The bank said its quarterly dividend would increase to 5 cents a share, from a penny a share.
Earlier this year, the Fed approved Bank of America's capital plan, which included the 4-cent dividend increase and $4 billion in share repurchases. But in April, the bank said it had discovered a significant error in the way it calculated a crucial measure of its financial health.
The mistake, which had gone undetected for several years, led the bank to report that it had $4 billion more capital than it actually had. After Bank of America disclosed its error to the Federal Reserve, the regulator required the bank to suspend the share buyback and the planned quarterly dividend increase.
In May, the bank resubmitted a revised capital plan, and on Wednesday, the Fed approved, clearing the way for the dividend increase.
The talks with the Fed coincided with the bank's effort to resolve the mortgage cases with the Justice Department. Those settlement negotiations began inauspiciously.
The bank, insisting it should not have to pay a huge sum for the sins of Countrywide and Merrill, was stuck on a $3 billion cash offer for weeks. The Justice Department countered with more than $10 billion, a yawning gap that led federal prosecutors in New Jersey to begin drafting a lawsuit.
The U.S. attorney in New Jersey, Paul J. Fishman, was prepared to accuse Merrill of duping investors into buying toxic mortgage securities.
The threat of a lawsuit prompted the bank to soften its stance a bit, raising its offer to $4 billion. Yet the first major capitulation did not come until last Wednesday morning, when the bank's lawyers arrived at the Justice Department in Washington armed with what they thought could be a knockout offer to settle. The bank raised its offer to $7 billion in cash and $14 billion overall.
The Justice Department, which held firm at more than $10 billion in cash and $17 billion overall, balked at the offer.
And after Rakoff's decision - followed by Holder's discussion with Moynihan - the bank appeared to be left with no choice but to settle for nearly all of the Justice Department's demands on the cash portion of the settlement.
The deal, the people said, would resolve Fishman's investigation. It would also put to rest another mortgage-related lawsuit that the Justice Department filed last summer in North Carolina.
The settlement, however, could still fall apart. The two sides continue to negotiate a statement of facts outlining the bank's misconduct, the people briefed on the matter said. They are also discussing how to divide the so-called soft-dollar relief for consumers.
Despite the huge penalty, critics contend that the government crackdown has amounted to little more than a slap on the wrist. No Bank of America employee will face charges, and the case against the bank is civil, rather than criminal.
"The DOJ can be counted on to brag that the settlement dollar amount with Bank of America sets yet another record and claim, again, that this shows DOJ is tough on Wall Street," said Dennis Kelleher, head of Better Markets, a nonprofit group critical of Wall Street. "But, unlike other recent settlements, will DOJ provide the public with the key information on investor losses, Bank of America profits, the names of involved executives, specific laws broken and the actual systemic illegal schemes and activities?"
@ 2014 New York Times News Service