What the BoA Settlement Means for the Bank – and for Banking
In the U.S. Justice Department’s largest civil settlement ever with a single entity, Bank of America (BoA) agreed on August 21 to pay $16.65 billion to put to rest allegations by federal and state law enforcement agencies of mortgage-related fraud during the financial crisis era. The agreement follows on the heels of two separate Justice Department settlements last year of financial crisis-era fraud with J.P. Morgan Chase & Co. and Citigroup. Of BoA’s total tab, about $10 billion will go to settle federal and state civil claims and $7 billion to consumer relief, including principal reduction on underwater loans, new loans to creditworthy but struggling borrowers, community assistance, and affordable rental housing. In addition, the bank will accept an independent monitor to oversee compliance with the agreement. BoA had engaged in a drawn-out battle with the Justice Department over the settlement, balking at taking a big hit for Countrywide Financial Corporation and Merrill Lynch’s pre-2008 activities prior to BoA’s acquisition of the two. For many weeks, BoA held its offer below Justice Department demands until a July 30 ruling from Manhattan U.S. District Court Judge Jed Rakoff precipitated a breakthrough, according to press reports. Later the same day as Rakoff’s negative ruling against Countrywide in a separate mortgage-related fraud case, Attorney General Eric Holder called BoA CEO Brian Moynihan, threatening to file suit against BoA the next day if the bank did not raise its settlement offer, press reports noted. BoA relented and then entered into the final stretch of negotiations with the government. Whether through law enforcement or other means, a transformation in banking culture is sorely needed, say experts. “The impact of enforcement action in the mortgage arena [and in other financial areas] is a profound loss of confidence in the integrity of financial system,” says Karen Shaw Petrou, managing partner at Federal Financial Analytics, a bank consulting firm in Washington, D.C. “The challenge is to establish cultures in financial services firms that protect the customer, but it’s very difficult to mandate good behavior. It’s going to take a long time to come up with a renewed balance built into the marrow of the financial system, which is controlled through the trading side of the business, which is focused on the short-term.