Bank of America has agreed a record $16.65bn (£10bn) deal with US regulators over the mis-selling of mortgage-backed bonds ahead of the financial crisis.
The deal with the Department of Justice and a number of individual state regulators dwarfs those reached in the past year by Citigroup ($7bn) and JPMorgan Chase ($13bn).
The settlement was reached through a joint federal and state working committee of regulators set up by President Obama two years ago. It included representatives from New York, California and New Jersey.
It is expected that $9.7bn of the settlement will be in the form of cash payments or fines, with a further $7bn in so-called “consumer relief”, which includes such elements as reducing the balance of borrowers’ mortgages.
The deal also requires Bank of America to acknowledge that it made serious misrepresentations about the quality of residential mortgage-backed securities issued by itself and by Countrywide Financial and Merrill Lynch.
These two organisations were bought or bailed out by the bank at the height of the 2008 financial crisis.
The US Attorney General, Eric Holder, said: “I want to be very clear: the size and the scope of this multibillion-dollar agreement goes far beyond the ‘cost of doing business’.”
Bank of America, which employs 14,000 people in Europe and the Middle East, a division that is run from London, expects the deal to cut third-quarter earnings by about $5.3bn before taxes.
Its chief executive, Brian Moynihan, said: “We believe this settlement, which resolves significant remaining mortgage-related exposures, is in the best interests of our shareholders, and allows us to continue to focus on the future.”
Under Mr Moynihan, Bank of America had already tallied up almost $55bn of charges relating to mortgages, almost all of which were due to Countrywide.
No individuals were charged as part of the Department of Justice’s deal yesterday. But former Countrywide executives, including co-founder Angelo Mozilo, face the likelihood of individual civil suits being launched against them by American prosecutors, according to reports.
Bank of America’s $4bn takeover of Countrywide in 2008 is widely seen as the worst acquisition ever, having cost the bank more than 10 times the purchase price in losses and legal settlements.
In March, it paid $9.5bn to settle claims from the Federal Housing Finance Agency.
Yesterday’s deal is expected to be the last major case faced by the bank over mortgage-backed securities.
“Regulators wanted a pound of flesh, and they got it,” said Joel Conn at Lakeshore Capital. He said the settlement meant a “major cloud that has been lifted” from the bank.