As widely reported yesterday in press leaks, the US Department of Justice today followed through and announced that Bank of America Corp (NYSE:BAC) agreed to pay $16.65 billion in various fines to settle charges the bank’s affiliates were aware the mortgage derivatives they sold were flawed but did not tell investors.  The derivatives in question were a significant cause of the 2008 market crash and the resulting recession that has cost the US economy $12.8 trillion, according to estimates from Better Markets.

Bank Of America BAC

Bank of America’s investigation

The DoJ investigation revealed that “Merrill Lynch (a subsidiary of Bank of America) knew, based on its own due diligence, that substantial numbers of the loans it was packaging into RMBS and selling to investors failed to meet underwriting guidelines, did not comply with the applicable law, or were inadequately collateralized — all contrary to representations Merrill was making to investors,” Associate Attorney General Tony West said in prepared remarks outlining the settlement.

Bank of America “admits publicly its repeated failure, and the repeated failures of its affiliates Merrill Lynch and Countrywide, to disclose to investors key facts about the actual quality of the loans they packaged up into residential mortgage backed investment securities, or RMBS,” West said.

After the largest punitive settlement was announced, Bank of America stock shot up nearly 1.5 percent higher on the news.  A key concern in regards to punishing banks, officially voiced by Lanny Breuer, the former head of criminal prosecution at the US Department of Justice, was that in doing so the banks and economy could be destabilized.

“These loans contained material underwriting defects; they were secured by properties with inflated appraisals; they failed to comply with federal, state, and local laws; and they were insufficiently collateralized,” said US Attorney General Eric Holder, whose “Holder Doctrine” is credited with paving the way for the Department of Justice to ignore criminal actions by the banks.

“Bank of America has acknowledged that, in the years leading up to the financial crisis that devastated our economy in 2008, it, Merrill Lynch, and Countrywide sold billions of dollars of RMBS backed by toxic loans whose quality, and level of risk, they knowingly misrepresented to investors and the U.S. government,” Attorney General Eric Holder said in prepared remarks.

Bank of America’s settlement with DoJ

The settlement requires the bank to pay $9.65 billion in cash to the Justice Department, six states, and other government agencies, including the Securities and Exchange Commission. The bank will also provide $7 billion worth of aid for struggling consumers, through actions such as modifying mortgages for borrowers who owe more than their homes are worth, or demolishing derelict properties. Critics charge the banks were already engaged in such aid and this portion of the fine has little punitive value.

“The problem is that the government is allowing the bankers that were dishonest and cheated people to be the ones responsible to provide $7 billion worth of aid to struggling consumers,” Helen Davis Chaitman, a lawyer and author of the book JPMadoff, said in a statement to ValueWalk.  “Since the present administration has embraced a policy of allowing criminal bankers to remain as officers of the banks where they committed crimes, it is difficult to believe these banks will actually honor their obligations to consumers.”

While some at the DoJ appeared to be congratulating themselves on a record fine, financial reform advocates see this as nothing more than punishing shareholders while allowing the individual large bank executives who broke the law to continue to operate with impunity. One issue with the bank settlements is that they do not put on public display the evidence in the case that would expose the real extent of the criminal issue.

“Most Americans would prefer that instead of collecting a fine from BOA that the DOJ collect and display all of the information and practices that transpired at Countrywide and Bank of America Corp (NYSE:BAC) ultimately leading to this supposed form of justice. Let’s not forget, transparency is the only real disinfectant,” said Larry Doyle, a former JPMorgan executive and author of the book In Bed With Wall Street. “Regardless of the size of a fine, justice that is misdirected is ultimately justice denied.” 

While DoJ’s West seemed pleased with the settlement, both he and US Attorney General Eric Holder hinted at future action to come.

“I want to be very clear: the size and scope of this multibillion-dollar agreement go far beyond the ‘cost of doing business,’” Holder was quoted as saying. “This outcome does not preclude any criminal charges against the bank or its employees.”