Bank of America Settles RMBS Suit for Nearly $17B

The bank has agreed to pay more than $9 billion in a cash penalty and $7 billion in aid to homeowners for selling flawed mortgage securities prior to the crisis.

Bank of America has agreed to pay a record fine of $16.65 billion to settle a residential mortgage-backed securities (RMBS) lawsuit with the US Department of Justice.

According to US Attorney General Eric Holder, the bank will pay $9.65 billion in fines as well as $7 billion of relief to homeowners.

“As part of this settlement, Bank of America has acknowledged that, in the years leading up to the financial crisis that devastated out economy in 2008, it, Merrill Lynch, and Countrywide sold billions of dollars of RMBS backed by toxic loans whose quality, and level of risk, they knowingly misrepresented to investors and the US government,” Holder said in a statement. “By holding Bank of America accountable for its actions, it returns hard earned money our members and employers contributed to the system.”—Henry Jones, chair of CalPERS Investment Committee.

The Charlotte, North Carolina-based bank had acquired Countrywide, one of the nation’s biggest subprime mortgage lenders, and investment bank Merrill Lynch in 2008. All three companies had been accused of selling misrepresented mortgage-backed securities.

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Holder said Bank of America “knowingly, routinely, falsely, and fraudulently” sold loans with “material underwriting defects” as reliable investments.

“Worse still, on multiple occasions—when confronted with concerns about their reckless practices—bankers at these institutions continued to mislead investors about their own standards and to securitize loans with fundamental credit, compliance, and legal defects,” he said.

The bank’s chief executive Brian Moynihan said the settlement “resolves significant remaining mortgage-related exposures” and “allows us to continue to focus on the future.” According to the New York Times, the bank had spent nearly $70 billion on legal issues related to mortgage securities since the financial crisis.

The federal prosecutors said no individuals at the bank would be criminally charged as part of the civil settlement.

The largest US public pension plan is said to also benefit from Bank of America’s settlement. The California Public Employees’ Retirement System (CalPERS) announced it could receive up to $250 million in damages from the bank.

“By holding Bank of America accountable for its actions, it returns hard earned money our members and employers contributed to the system,” said CalPERS Investment Committee Chair Henry Jones.

Related Content:ABP Settles RMBS Suit with Goldman Sachs

The first risk-transfer transaction by a pension in a pooled liability-driven investment (LDI) vehicle has been carried out by a UK fund.

The Western United Group Pension Scheme has transferred £280 million of its assets and liabilities to Rothesay Life, adding to the £220 million already taken on by the specialist insurer in two previous transactions. The latest transaction took the form of a bulk annuity and the fund is now expected to wind up.

Immediately before this final deal was transacted, the pension had held its assets in an LDI transition fund run by F&C Investments. “This allowed the scheme to transition out of their pooled LDI holding whilst mitigating out of market risk and saving hundreds of thousands of pounds in transaction costs,” the asset manager said.

Additionally, the transition fund allowed the pension to deliver a pre-specified portfolio of bonds to the insurer, which was beneficial to the price stability of the buy-out.

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Alex Soulsby, head of LDI at F&C Investments, said: “Transitions of this nature have ordinarily been the preserve of large segregated portfolios. The transition LDI fund allows pooled LDI clients to achieve the same benefits, overcoming one of the more significant hurdles to investing in LDI in the first place.”

The deal takes the total of assets and liabilities transferred this year towards record levels. Last month, consultants LCP said 2014 could see £10 billion de-risked by pensions, while Rothesay Life Managing Director Tom Pearce said his firm, which has carried out six of the 10 largest deals in the UK, continued “to see growing demand for full buyouts from corporates.”