Bank of America Announces $8.5 Billion Settlement

Bank of America, the largest US financial institution by assets, announced on Wednesday it would set aside some $14 billion to settle claims related to its questionable practices regarding mortgage backed securities that were among the leading causes of the financial collapse of 2008. Additionally, the bank announced it had agreed to pay $8.5 billion to a group of 22 large investor groups who invested in securities containing poorly documented or substandard home loans from Countrywide, which BofA acquired in 2008. The additional $5.5 billion is being set aside to settle claims to investors that didn’t join in with the group.

The settlement is the largest by any financial firm stemming from the 2008 financial crisis, which led to the worst economic downturn in the nation since the Great Depression of the 1930s. The crash was essentially set off by the crash of complex mortgage backed securities containing millions of faulty, high-risk mortgages. As a result of the settlement and additional liability reserves, BofA said it would be osting a net loss of as much as $9.1 billion for the second quarter, in stark contrast to the bank’s first quarter net income of $1.7 billion.

The bank already posted a $2.2 billion loss for all of 2010 as a result of massive amounts of write-offs, mostly from assets related to housing. “This is another important step we are taking in the interest of our shareholders to minimize the impact of future economic uncertainty and put legacy issues behind us,” the bank’s CEO, Brian Moynihan, said in a statement. “We will continue to act aggressively, and in the best interest of our shareholders, to clean up the mortgage issues largely stemming from our purchase of Countrywide.”

BofA officials noted in the announcement that the settlement will require court approval, meaning that holders of the securities in question not among the 22 groups can still object to it. One of those investors, Bill Fray, who heads Greenwich Financial Services, called the settlement amount excessively small. He estimated that the full value of the faulty securities Countrywide sold at $100 billion, and said he would be happy to take part in a challenge to the settlement.

Over the last six months, Bank of America has announced three separate agreements aimed at reducing its exposure to legacy liabilities related to Countrywide, which at one time was one of the nation’s largest mortgage lenders. The 22 groups involved in Wednesday’s settlement represent some 530 separate trusts who hold some $424 billion worth of mortgage backed securities. Some of the larger investors represented were Goldman Sachs, BlackRock, PIMCO, and even the New York branch of the US Federal Reserve.