Bank of America Negotiating $12bn Settlement With DOJ, States

Bank of America Negotiating $12bn Settlement With DOJ, States

While the bank is pushing for a settlement in that neighborhood, there are calls by numerous groups for a payment considerably larger than the $12 billion that Bank of America Corp (NYSE:BAC) is offering. If the $12 billion is accepted, that would bring the bank up to $18 billion in settlements for its conduct prior to the crisis.

About $5 billion of that number, if accepted, is expected to go towards consumer relief that would help homeowners reduce their principles and consequently their monthly payment. Some of that money would also go towards blight removal in struggling neighborhoods where Bank of America Corp (NYSE:BAC) customers used their loans.

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Many believe that Bank of America Corp (NYSE:BAC)’s conduct was worse than JPMorgan Chase & Co. (NYSE:JPM)’s and last year the latter bank paid a record $13 billion for its own actions in the run-up to the financial crisis.

Bank of America Corp (BAC): Sides remain a ways apart

While the news is filled with stories of the DOJ going after foreign banks including Credit Suisse Group AG (ADR) (NYSE:CS) and Deutsche Bank AG (NYSE:DB) (ETR:DBK), the Department of Justice hasn’t forgotten about domestic offenders.

To put that number in perspective, a $12 billion fine would exceed the bank’s profit of $11.43 billion in 2013. Under the stewardship of new CEO Brian Moynihan, that $11.43 billion is the most the bank has made in six years. A fine of this size would certainly slow the momentum that he has built up at Bank of America Corp (NYSE:BAC).

In April, during a quarterly earnings report, the bank announced a surprising loss as it set aside money for the fines that it knows it will incur in the near future so shareholders won’t be taken aback dramatically when the settlement is announced.

It’s Bank of America Corp (NYSE:BAC) that has been pushing the idea of paying over half of the funds in “soft money” or consumer relief, rather that “hard money” or fines to the government.

While the negotiations have heated up with representatives of the bank meeting the last two weeks, the sides remain far apart and it’s difficult to say when a settlement might be reached. If a deal can’t be reached, the Department of Justice will have to decide whether or not to file a civil lawsuit against Bank of America Corp (NYSE:BAC).

Attorney General Eric Holder has repeatedly said that he would like to resolve a number of high-profile probes of firms for their behavior prior to the financial crisis if only for his legacy.

Investor reaction

Investors, for their part, aren’t tremendously surprised by the size of the potential settlement.

Bill Smead, chief investment officer of Smead Capital Management in Seattle, which owns 2,625,338 Bank of America shares, said “it would only make sense that it would rival or exceed JPMorgan’s.”

A bit of optimism also had him saying, “The bad news is all six to eight years old, and the good news is all in the future,” he said. “As a long-term stockholder, that’s what you want. You want the bad news to be backward-looking and the good news to be forward-looking.”

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