Bank of America has finally reached a settlement to pay a whopping $16.65 billion to the government for selling badly-designed mortgage-backed securities in the run up to the financial crisis.
Those mortgage-backed securities had been advertised to investors, including public pension funds and federally-insured financial institutions, as safe, strong investments with little risk. But the financial crisis saw those investments lose billions and billions of dollars. Securitization — which was supposed to decrease risk by spreading it out throughout the system, for example by bundling up lots of different mortgages together into mortgage-backed securities, and then selling those securities to investors — in reality turned the minor risk of mortgagees defaulting on their loans into a systemic risk that crashed the economy.
Many (but not all) of these mortgage-backed securities were created by Countrywide and Merrill Lynch, two firms Bank of America acquired during the financial crisis at pennies on the dollar. But those firms' assets came with the added burden of responsibility for their prior activities, for which Bank of America is now paying a steep price.
The settlement — which according to The Wall Street Journal is approximately equal to the firm's profits for the last three years — is the single largest settlement ever reached between the U.S. and a single company.
The terms of the settlement involve the bank paying $9.65 billion to government agencies, including the Justice Department, several states, and other government agencies. Much of that money will go to paying down the national debt.
And those payments are in addition to providing $7 billion worth of aid to customers through a variety of actions such as modifying mortgages for borrowers who owe more than their homes are worth, and donating money to housing counseling agencies.
The settlement is similar to other deals with major players in the financial industry for similar conduct. In July, Citigroup paid out $7 billion, and late last year JP Morgan Chase paid $13 billion.