Bank of America (NYSE: BAC) Stock Mostly Flat as BofA Nears $16.5 Billion Settlement By Diane Alter

August 07, 2014 at 16:49 PM EDT

Bank of America Corp. (NYSE: BAC) stock rose slightly Thursday morning by 1% to $15.44 on news the bank is near a more than $16.5 billion settlement over mortgage-backed securities that helped ignite the 2008 financial crisis, but BAC stock has since given back those gains in afternoon trading. The post Bank of America (NYSE: BAC) Stock Mostly Flat as BofA Nears $16.5 Billion Settlement appeared first on Money Morning - Only the News You Can Profit From .

Bank of America's tentative deal with the U.S. Department of Justice is said to have been reached on July 30 in an evening phone call between Attorney General Eric Holder and BofA Chief Executive Officer Brian Moynihan.

The phone call was prompted by reports that Justice Department officials in New Jersey were preparing to file a complaint against BofA's brokerage unit Merrill Lynch, acquired during the financial crisis, if BofA failed to raise its settlement offer.

That same day, Bank of America suffered yet another setback when a federal judge ordered the Charlotte, N.C.-headquartered bank to pay $1.27 billion in damages over thousands of flawed mortgages sold by its Countrywide Financial arm. The award eclipsed the $848 million sought by the Justice Department.

Prosecutors alleged that Countrywide removed safety measures designed to catch mortgage fraud from loans as part of a program known as "Hustle." It then sold the mortgages to Fannie Mae and Freddie Mac. According to the complaint, the mortgage-finance companies were liable for more than $1 billion in losses when the housing market bubble burst.

Following the defeat, BofA reportedly requested last Wednesday's call with Holder. It was then that the country's second-biggest bank by assets finally raised its payment offer to reach a tentative deal.

Here's a look at the events leading up to what could be the largest federal settlement to date in the history of corporate America...

Behind BofA's Big Offer

Negotiations came to a standstill in June after the Justice Department and BofA failed to agree on a settlement.

BofA had offered to pony up more than $12 billion, with most of the money going toward consumer relief.

Federal prosecutors, however, wanted more.

In its defense, and in an attempt to reduce its accountabilities relating to its Countrywide and Merrill Lynch units, BofA argued that federal regulators strong-armed it to go through with the Merrill acquisition. Indeed, Merrill was teetering on bankruptcy at the time and BofA rescued it.

With Countrywide's mortgages, BofA claimed it did not assume legal liabilities stemming from scores of loans it made before it came under BofA's umbrella.

BofA bought Countrywide in 2008 for $2.5 billion. The Countrywide bid was a bet the U.S. housing market was nearing a bottom. Regulators saw BofA as a savior for the shaky mortgage lender and believed Countrywide's failure could pose a major risk to the economy. BofA directors unanimously backed the acquisition.

Estimates are that BofA will have to shell out an eye-popping $17 billion in the latest settlement before all is said and done. So far, the bank has agreed to pay about $9 billion in cash to the Justice Department, states, and government offices. Funds have also gone to assist struggling homeowners reduce their mortgage payments.

If finalized, the deal would be the largest penalty ever paid by a single company. A done deal would hike BofA's legal tab stemming from the financial crisis era to a whopping $66 billion.

A finalized agreement would also be another big win for the Justice Department, which has been harshly criticized for its efforts (which some call a witch hunt) to hold Wall Street accountable for its transgressions.

A number of banks have been on the hook for billions of dollars related to mortgages issued before, during, and after the 2008 financial meltdown. Here's a look at four settlements.

Big Banks' Billion-Dollar Settlements

On July 14, Citigroup Inc. (NYSE: C) agreed to pay $7 billion to resolve a U.S. government probe into shoddy mortgage-backed securities it sold before 2008. The $7 billion included $4 billion in cash to the U.S. Department of Justice, $2.5 billion in consumer relief, more than $200 million to the Federal Deposit Insurance Corporation (FDIC), and roughly $300 million to settle probes by five states.

On Nov. 19, 2013, JP Morgan Chase & Co. (NYSE: JPM) agreed to a whopping $13 billion settlement with the U.S. government to settle charges the bank overstated the quality of mortgages it was selling in the run-up to the financial crisis. It was the largest such settlement at the time. Under terms of the deal, the largest U.S. bank paid $4 billion toward consumer relief. The remaining $9 billion went to settle federal and state civil claims stemming from entities involved in the mortgage securities. The state of New York received $613.8 million, California $298.9 million, Illinois $100 million, Delaware $19.7 million, and Massachusetts $34.4 million.

In January 2013, Bank of America reached a $10.3 billion settlement with Fannie Mae over questionable home loans it sold to the government-backed mortgage financer during the housing bubble that eventually burst in 2008. Under terms of the deal, BofA paid Fannie $3.55 billion in cash. It also repurchased 30,000 questionable (money-losing) mortgages from Fannie for $6.75 billion. The loans had been bundled into mortgage-backed securities and then bought and guaranteed by Fannie Mae.

On Jan. 7, 2013, federal regulators announced an $8.5 billion settlement involving 10 banks over alleged foreclosure abuses. Brokered by the U.S. Federal Reserve and the Office of the Comptroller of the Currency, the deal included $3.3 billion in direct payments to borrowers as well as $5.2 billion in other assistance, like loan modifications and forgiveness of deficiency judgments. Firms involved included Aurora, BofA, Citi, JPMorgan Chase, MetLife Bank, PNC Financial Services Group Inc. (NYSE: PNC), Sovereign, SunTrust Banks Inc. (NYSE: STI), U.S. Bancorp (NYSE: USB), and Wells Fargo & Co. (NYSE: WFC).

Although BAC stock rose slightly this morning by 1% to $15.44 immediately after news of the impending settlement was released, by mid-afternoon shares had given back those modest gains and had slipped by 0.53% to $15.12.

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