NOT for the first time, the tough talk was merely a prelude to a hefty settlement. Brian Moynihan, Bank of America’s boss, had vowed to engage in “hand to hand combat” with investors suing to recover losses on mortgage-backed securities (MBSs) peddled before the housing market collapsed. He had even likened them, none too diplomatically, to buyers of a Chevy who thought they had a Mercedes. In the end, though, BofA rolled over surprisingly quickly in order to relieve the worst of its housing-related headaches, the very worst of which came from its ill-advised purchase of Countrywide.
The bank will pay $8.5 billion to investors in more than 500 Countrywide-linked securitisations who had claimed that the loans breached basic underwriting standards. The deal is backed by the loans’ trustee, Bank of New York Mellon, and 22 of the biggest out-of-pocket money managers, including BlackRock and PIMCO.
The forceful involvement of these big investors—lucrative BofA clients in a host of areas—was an incentive for the bank to agree terms. So was the fact that the Federal Reserve Bank of New York, too, was a plaintiff, thanks to securities inherited in the rescue of AIG. But for all his combative rhetoric, Mr Moynihan has been keen to draw a line under BofA’s problems since taking over from the hapless Ken Lewis 18 months ago. He has shoved dodgy loans into a “bad bank” and restructured key businesses, while completing the integration of Merrill Lynch, an investment bank acquired during the crisis. But analysts saw MBS lawsuits as the biggest of the legacy risks dragging the bank’s share price below its book value.
Some risks remain. The settlement deals with much of the Countrywide dross but it doesn’t cover loans handled by other BofA divisions or those securitised after being sold to third parties. Merrill faces $11 billion of residential-mortgage claims, reckons Christopher Whalen of Institutional Risk Analytics, a ratings firm. And BofA still has lots of haggling to do with Fannie Mae and Freddie Mac, the housing-finance agencies that guaranteed piles of duff loans, and with private bond insurers. The final bill will be far higher than the cheque written this week. The bank plans to set aside a further $12 billion for mortgage-related charges and thinks another $5 billion may be needed on top of that, though given the waywardness of BofA’s past estimates, it could be more. The prices paid at the time for Countrywide and Merrill were, as it turns out, just downpayments.
The capitulation will worry other large banks, even though they are less exposed than BofA, which services one in five American mortgages. The two most vulnerable are Wells Fargo and JPMorgan Chase—again, largely thanks to crisis-era acquisitions (of Wachovia and Bear Stearns, respectively). Bear Stearns alone faces $18 billion in securities-fraud claims, out of an industry total of roughly $200 billion, calculates Mr Whalen.
Worse, new legal challenges are emerging all the time, the latest big one coming from the federal agency that oversees credit unions, some of which were felled by bad mortgage investments. Mortgage servicers are also bracing for combined fines of between $5 billion and $20 billion as part of a settlement with state attorneys-general over foreclosure practices (remember robosigning?)
BofA has not yet set aside reserves for this hit. Nor has it fully faced up to the losses on its mortgage and home-equity loan portfolios, which could grow amid still-falling house prices. But Mr Moynihan deserves praise for biting the bullet on MBSs. He is determined to end talk of his firm having replaced Citigroup as America’s clumsiest bank. Still, it will be quite some time before BofA itself looks more like a gleaming C-Class than a lumbering old banger.
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