Bank Of America Settles With Investors

Bank of America will pay $8.5 billion to settle claims by investors who lost money on mortgage-backed securities. The securities at issue were put together and sold by Countrywide, and they became Bank of America's problem when the bank acquired the mortgage giant in 2008.

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Bank of America said today that it will pay eight and a half billion dollars to settle a lawsuit stemming from the collapse of the mortgage market. Investors claim they were misled about the value of certain mortgage-backed securities sold by Countrywide Financial, which was later bought by Bank of America.

And as NPR's Jim Zarroli reports, the company's legal troubles aren't over yet.

JIM ZARROLI: When Bank of America bought Countrywide in 2008, it thought it was getting a real deal, a chance to take over one of the giants of the mortgage business. But the purchase has caused the company no end of trouble, says bank analyst Nancy Bush.

Ms. NANCY BUSH (NAB Research): Ooh boy, it was one of the great stinkers of banking history.

ZARROLI: The mortgage business was crashing even as the purchase was taking place, and Countrywide turned out to be a cesspool of legal liabilities because of the mortgages it sold and underwrote. And as the company that purchased it, Bank of America had inherited responsibility for them.

Last year, 22 institutional investors sued the company over some securities they'd purchased from Countrywide.

Jacob Frankel is a securities lawyer.

Mr. JACOB FRANKEL (Attorney): These were bundled securities of high-risk mortgages that the various financial institutions had put together, repackaged and sold as investment vehicles to sophisticated investors.

ZARROLI: The investors alleged that Countrywide had misled them about the quality of the mortgages underlying the securities. And they said Countrywide hadn't kept accurate records of the loans it made.

The investors who filed the suit included some of the biggest and most prominent names on Wall Street, including the bond firm PIMCO and the insurance giant MetLife.

Mr. FRANKEL: What makes this litigation unique is that you have the major institutions suing other financial institutions.

ZARROLI: Bank of America first vowed to vigorously defend itself against the suit, but Nancy Bush, contributing editor at SNL Financial, says the company ultimately decided it wasn't worth the fight.

Ms. BUSH: This continues to be the major issue that was hanging over that company. So I think they felt that they may have to eat a little bit of crow because of this. But I think they felt it was worthwhile.

ZARROLI: Bush says the decision to settle will be good for the mortgage industry as a whole and, ultimately, even for consumers. Ever since the financial crisis, U.S. banks have been operating under a lot of uncertainty over regulation and legal challenges. Slowly, she says, that's being eliminated. And the settlement announced today is another big step forward.

Ms. BUSH: It gives us just a little piece of clarity. And when you have, you know, sort of taken the sword of Damocles away from the biggest player in the industry, then I think it does help somewhat.

ZARROLI: That's not to say Bank of America's troubles are over. The settlement announced today will wipe out the profit the company has earned this year. And the company still faces legal challenges. Bank of America said it will have to set aside more money to settle other claims from Fannie Mae and Freddie Mac, and from unspecified private investors. And the company is under investigation by state attorneys general over its foreclosure practices.

Bank of America is trying to move beyond the financial crisis, but doing so is proving enormously costly.

Jim Zarroli, NPR News, New York.

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