In a follow-up to the investigations leading to the financial crisis of 2007-2008, Bank of America (NYSE:BAC) and the Department of Justice are close to agreeing on a deal that will resolve the bank's alleged misconduct in the foreclosure fiasco that affected the entire nation. According to the landmark deal, Bank of America will pay up to $17,000,000,000.00 as settlement.
$9 Billion In Cash - Back to the Government and Homeowners
Although the agreement, which could occur as early as this month, has yet to be finalized, the bank has agreed to shell out about $9 billion in cash. The money will go to the federal government, various states, and a number of government entities related to the matter. Additional funds will go to provide consumer relief: American homeowners struggling with their mortgages will be offered reduced mortgage balances.
Significantly More than JPM's Landmark Settlement
In a previous settlement between J.P. Morgan Chase and the Department of Justice a little less than nine months ago, the fine was a record $13 billion. The current deal between Bank of America and the DOJ will eclipse that previous record figure. In both cases, the issues are similar-the megabanks intentionally sold shoddy mortgages to naïve investors.
The Deal Unfolds
A few weeks ago, Bank of America was asking to pay only around $13 billion. The bank contended that it was being unfairly targeted by the DOJ-because its mortgage woes were not a result of the bank's shoddy mortgage lending practices, but a consequence of acquiring two mortgage lenders, Merrill Lynch and Countrywide Financial, who perpetuated the toxic mortgages. Additionally, the bank had asked that at least half of its fine not be paid in cash but instead be paid in the form of providing consumer relief. However, the DOJ refused to back down on its penalties or agree on a softer payment structure.
One reason for the DOJ's tough stance is because government agencies have come under increased criticism as being too lenient with the big banks whose irresponsible conduct resulted in the nation's financial crisis, one that had global repercussions. Earlier, big banks were considered too big to fail and too big to jail. The main reason the government acted cautiously was based on a fear of what would happen to the economy as a whole if a major bank went out of business. However, prosecutors eventually figured out a formula of structured payments to make the big banks pay in full for their assorted violations.
Bank of America Making Good on Promise to Shareholders
Although the settlement is a record-breaking one, which forced the bank to accept full responsibility for its acquisitions, it reflects a positive direction for CEO Brian Moynihan, who appears to finally be making good on his stance to face the bank's legal woes.
Moynihan has already informed the bank's shareholders that this is the last big crisis faced by the bank, which to date has paid out close to $60 billion since the economy sputtered in 2008.
Most of the expenses have been in buying back mortgage securities and settling lawsuits. In fact, Bank of America has paid out more than any other major bank (see above).
What This Settlement Means for Shareholders: Time To Buy In Sight
Assuming this settlement gets worked out, the BAC shareholders should begin to see a turnaround for the institution's stock, which has been understandably flat YTD.
Already today, pre-market, BAC is up 1.45%.
As we analyze in detail in our previous article, upon settlement, investors should likely see a boost to BAC stock--and the beginnings of a comprehensive turnaround for the megabank.
We reiterate our stance that the time for a deep value play could be in sight for BAC.
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