Bloomberg is reporting that US prosecutors seek more than $13 billion from Bank of America Corp (NYSE:BAC) to settle federal and state probes into the bank’s opaque mortgage backed securities products that led up to the 2008 financial crisis.

Bank of America Corp (NYSE:BAC) Settlement larger than JP Morgan fine

The settlement could be larger than that with JP Morgan Chase & Co (NYSE:JPM) when an additional $9.5 billion fine from the Federal Housing Finance Agency settlement is considered.

At issue are home loans that were packaged into opaque mortgage backed securities where the real risk in the investment was hidden in complexity.  In BAC’s defense, many of the loans were inherited when the second largest US lender purchased subprime-lender Countrywide Financial Corp. and Merrill Lynch & Co., the report said.

It is unclear if the Charlotte, North Carolina, bank has set aside cash reserves for the penalty.  The report noted that on April 16 reserves for mortgage-related matters were boosted by $2.4 billion.  Bank of America Corp (NYSE:BAC) has spent more than $50 billion since the financial crisis to settle claims related to the opaque mortgage derivatives centered around the 2008 crash, most of these suspect mortgages related to the 2008 purchase of Countrywide.

Bank of america Corp BAC
Bank of america Corp BAC

Task force coordinates investigations

In 2012 President Barack Obama commissioned a task force to coordinate investigations into improper mortgage-bond underwriting by banks, with Associate Attorney General Tony West been overseeing the investigations and negotiations.

Other banks in the line of fire include Citigroup Inc., Credit Suisse Group AG (NYSE:CS) and Wells Fargo & Co., as current talks are aimed at resolving civil probes by federal and state prosecutors in California,New York and New Jersey, the report noted.

“The negotiations are still in early stages and if an agreement isn’t reached, the government could sue the bank, according to the people,” the report said. “The size of any settlement would depend in part on how much the bank is willing to pay in cash versus other remedies such as mortgage write-downs or consumer relief,” one of the unidentified sources was quoted in the article saying.

An agreement on the matter is expected to be announced in weeks, the report said.

Moshe Orenbuch, a banking analyst at Credit Suisse states in a new report sent to clients:

We would note that Bank of America Corp (NYSE:BAC) originated roughly 2x the RMBS volume as JPM from 2005-08. Using JPM’s November 2013 settlement as a proxy, we estimate that BAC could see penalties of $3-4Bn and payments to agencies and state AGs of $5-6Bn. That said, BAC bolstered its litigation reserve by $2-3Bn in 1Q’14, which would imply an est. incremental $5-7Bn impact to earnings or ~$0.35-$0.55/shr.  This equates to a 30-40bp hit to BAC’s B3 Tier 1 common ratio of 9.9% and 20bps to the leverage ratio. We estimate that BAC could also be subject to borrower relief programs (similar to the JPM settlement) of another $3-5Bn which is likely accounted for in existing loan loss reserves and actions already taken. We believe that this is likely the last of the major mortgage issues, but these litigation costs have essentially kept book value flat for two years.