Bank of America (BOA) said on Wednesday it would set aside US$14 billion to settle claims from angry investors for losses on dodgy mortgage-backed securities whose collapse triggered the 2008 financial crisis.
Hoping to put its disastrous 2008 purchase of mortgage lender Countrywide Financial behind it, BOA said it would pay a record US$8.5 billion to a group of 22 large private investment groups who invested in securities which held poorly documented or substandard home loans from Countrywide.
The other US$5.5 billion was for pending liabilities to other investors not included in the settlement.
It was the largest settlement by a financial services firm stemming from the financial crisis, which was kicked off by a crash in the market for complex investment products that packaged together millions of poorly documented, often high-risk mortgages.
As a result of the settlement and the set-asides, BOA said it would report a net loss in the second quarter of up to US$9.1 billion, a sharp reversal from the first quarter’s US$1.7 billion gain.
The bank posted a net loss of US$2.2 billion last year, after huge write-offs mostly 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,” BOA chief executive Brian Moynihan said. “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.”
The company noted in its statement that the US$8.5 billion settlement remains subject to court approval, leaving room for holders of the securities not among the 22 investment groups to object to it.
BOA shares rose 3 percent to close at US$11.14 after the news.
The 22 investment groups taking part in Wednesday’s settlement represented 530 separate residential mortgage-backed securitization trusts, which had a principal valuation of about US$424 billion.
They included major banks, insurance firms and investment houses including Goldman Sachs, BlackRock, PIMCO, Metropolitan Life and ING Bank. Also in the group was the US Federal Reserve’s New York branch.
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