Bank of America faces more bond sales probes


Wed, Oct 23, 2013 - Page 15

Bank of America Merrill Lynch, sued by US attorneys in August over an US$850 million mortgage bond, faces three additional US Department of Justice civil probes over mortgage-backed securities, two people with direct knowledge of the situation said.

The offices of US attorneys in Georgia and California are examining potential violations tied to Countrywide Financial Corp, the subprime lender Bank of America bought in 2008, said the people, who asked not to be identified because the inquiries are not public. US attorneys in New Jersey are looking into deals involving Merrill Lynch & Co, which was purchased by Bank of America in 2009, the people said.

If claims are brought, Bank of America would join JPMorgan Chase & Co in facing justice department demands that it resolve liabilities inherited while buying weakened rivals at the government’s urging during the credit crisis.

JPMorgan, the biggest US bank, reached a tentative US$13 billion agreement last week to end civil claims over mortgage-bond sales, including those handled by Bear Stearns Cos and Washington Mutual Inc operations purchased in 2008.

Bank of America, led by CEO Brian Moynihan, 54, is being examined for violations of the Financial Institution Reform, Recovery and Enforcement Act of 1989, a relic of the savings-and-loan crisis known as FIRREA, the people said. The justice department cited that statute in its August lawsuit against the firm, which is the nation’s second-largest lender after JPMorgan.

The law allows the government to sue an individual or group for fraud that affects a federally insured financial institution. It carries a 10-year statute of limitations.

Bank of America was accused of misleading investors about the quality of loans tied to US$850 million in mortgage-backed securities. While the bank had portrayed the bond as backed by prime loans vetted by its staff, most were riskier wholesale debts, meaning they were originated by outside brokers, authorities wrote.

US President Barack Obama ordered the creation of a task force last year to coordinate investigations into improper mortgage-bond underwriting by banks. As part of that effort, US attorneys in California are examining potential FIRREA violations by JPMorgan that would be included in the firm’s US$13 billion settlement, a person with knowledge of the deal said.

The US efforts are adding to more than US$100 billion in legal costs already incurred by the six biggest US banks since the credit crisis, a figure exceeding all of the dividends paid to shareholders in the past five years, according to data compiled by Bloomberg.