Bank Of America, Department Of Justice Continue To Bump Heads Over Penalty

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By Troy Kuhn

Bank of America Corp (NYSE:BAC) and the Justice Department continue to negotiate the penalty that the bank must face over its sale of shoddy residential mortgage securities in the buildup to the 2008-09 financial crisis. The two parties, however, continue to disagree over the size and scope of the punishment.

BAC and Justice Department met for another round of negotiations in Washington on Tuesday. The bank offered to settle for $13 billion, an amount that the DOJ turned down. The settlement amount includes both cash and consumer relief, and will be the largest-ever banking-related settlement. The department's latest settlement offer was $17 billion, which the bank wanted nothing to do with. The two parties also diverged on the mode of payment: the bank wants to make a "soft" payment - like modifying mortgages that benefit consumers in financial distress - while the Department of Justice wants the bank to increase the cash portion.

The bank settled with American International Group Inc. (NYSE: AIG) on Tuesday for $650 million - $10 billion had previously been demanded - in a private lawsuit over long-running securities. According to the bank, it has resolved 95% of the residential mortgage-related litigation it was facing. To date, the bank has expensed up to $60 billion since the crisis to settle lawsuits related to mortgage securities.

In the event that the bank doesn't pay a large enough penalty, the Department of Justice will take it to court. It would file this litigation based on the premise that the bank misguided investors about the quality of the loans tied to residential mortgage-backed securities. The agreement is crucial for both parties. The DOJ wants to assure policy makers that it is taking strict action against the financial sector for the pre-crisis misconduct, and the bank of course wants to put this mass of litigation behind it.

The bank reported its second quarter earnings yesterday, and said that the litigation expenses included were associated with previously disclosed mortgage issues, which included both the AIG and DOJ settlements. The cost incurred was $4 billion, far higher than the $471 million set aside by the bank for this purpose last year.

The Department of Justice recently settled with Citigroup Inc. (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM) for $7 and $13 billion, respectively, over the sale of mortgage securities.

Disclosure: No positions.