BoA to pay $8.5bn over toxic bonds

Bank of America, the US financial giant which acquired Countrywide, the nation's largest subprime mortgage lender, at the peak of the credit crunch, will pay $8.5bn (£5.2bn) in the biggest-ever settlement of claims over toxic mortgage bonds.

And it said it would put aside an additional $5.5bn to cover further liabilities, in a move it hopes will allow the company to finally draw a line under a crisis that took it twice to the brink of collapse.

The size of the settlement stunned Wall Street, but BoA shares led the banking sector higher as investors decided the move helped lift a cloud of uncertainty that threatened to hang over the industry through years more legal fighting.

Countrywide did more than almost any other lender to infect the financial system with mortgages handed to unsuitable borrowers, without the necessary paperwork and in contravention of its stated underwriting standards. The investors who purchased securities backed by Countrywide and other BoA mortgages have been suing to require the bank to buy the bad loans back.

Some of the most powerful investment firms in the world were on the other side of the legal tussle with BoA, which the bank's chief executive, Brian Moynihan, had originally promised to fight with "hand-to-hand combat". The parties to the settlement include Pimco, BlackRock and the New York branch of the Federal Reserve, which took mortgage-backed securities as collateral during its Wall Street bailout operations.

Mr Moynihan said that it would have been "much more adverse to the company" to keep fighting. "It is our job, management's job, to eliminate risk," he said. "We will continue to act aggressively, and in the best interest of our shareholders, to clean up the mortgage issues largely stemming from our purchase of Countrywide."

BoA had already agreed other smaller settlements earlier this year, including a $3bn deal with the nationalised mortgage finance houses Fannie Mae and Freddie Mac.

The effects of soaring delinquencies and foreclosures on US mortgages were felt across the financial system, because mortgages had been packaged into securities that were sold around the world. Those securities, too, were packaged into still more financial products, and losses spread quickly to banks and investors around the world, ultimately triggering a full-on panic in 2008.

Now US judges are battling their way through a thicket of lawsuits, as banks and investors fight over who has legal liability for the losses on mortgage securities and their derivatives.

BoA, through its own operations and those of the firms it acquired, accounts for about one in five of the mortgage securities sold between 2005 and 2007. Its settlement could put pressure on other big players – notably JPMorgan Chase and Wells Fargo – to follow suit.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Collections Agent

£14000 - £16000 per annum: Recruitment Genius: This company was established in...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: SThree are a global FTSE 250 ...

Reach Volunteering: Trustees with Finance, Fundraising and IT skills

Voluntary and unpaid, reasonable expenses reimbursable: Reach Volunteering: St...

Day In a Page

Isis profits from destruction of antiquities by selling relics to dealers - and then blowing up the buildings they come from to conceal the evidence of looting

How Isis profits from destruction of antiquities

Robert Fisk on the terrorist group's manipulation of the market to increase the price of artefacts
Labour leadership: Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea

'If we lose touch we’ll end up with two decades of the Tories'

In an exclusive interview, Andy Burnham urges Jeremy Corbyn voters to think again in last-minute plea
Tunisia fears its Arab Spring could be reversed as the new regime becomes as intolerant of dissent as its predecessor

The Arab Spring reversed

Tunisian protesters fear that a new law will whitewash corrupt businessmen and officials, but they are finding that the new regime is becoming as intolerant of dissent as its predecessor
King Arthur: Legendary figure was real and lived most of his life in Strathclyde, academic claims

Academic claims King Arthur was real - and reveals where he lived

Dr Andrew Breeze says the legendary figure did exist – but was a general, not a king
Who is Oliver Bonas and how has he captured middle-class hearts?

Who is Oliver Bonas?

It's the first high-street store to pay its staff the living wage, and it saw out the recession in style
Earth has 'lost more than half its trees' since humans first started cutting them down

Axe-wielding Man fells half the world’s trees – leaving us just 422 each

However, the number of trees may be eight times higher than previously thought
60 years of Scalextric: Model cars are now stuffed with as much tech as real ones

60 years of Scalextric

Model cars are now stuffed with as much tech as real ones
Theme parks continue to draw in thrill-seekers despite the risks - so why are we so addicted?

Why are we addicted to theme parks?

Now that Banksy has unveiled his own dystopian version, Christopher Beanland considers the ups and downs of our endless quest for amusement
Tourism in Iran: The country will soon be opening up again after years of isolation

Iran is opening up again to tourists

After years of isolation, Iran is reopening its embassies abroad. Soon, there'll be the chance for the adventurous to holiday there
10 best PS4 games

10 best PS4 games

Can’t wait for the new round of blockbusters due out this autumn? We played through last year’s offering
Transfer window: Ten things we learnt

Ten things we learnt from the transfer window

Record-breaking spending shows FFP restraint no longer applies
Migrant crisis: UN official Philippe Douste-Blazy reveals the harrowing sights he encountered among refugees arriving on Lampedusa

‘Can we really just turn away?’

Dead bodies, men drowning, women miscarrying – a senior UN figure on the horrors he has witnessed among migrants arriving on Lampedusa, and urges politicians not to underestimate our caring nature
Nine of Syria and Iraq's 10 world heritage sites are in danger as Isis ravages centuries of history

Nine of Syria and Iraq's 10 world heritage sites are in danger...

... and not just because of Isis vandalism
Girl on a Plane: An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack

Girl on a Plane

An exclusive extract of the novelisation inspired by the 1970 Palestinian fighters hijack
Why Frederick Forsyth's spying days could spell disaster for today's journalists

Why Frederick Forsyth's spying days could spell disaster for today's journalists

The author of 'The Day of the Jackal' has revealed he spied for MI6 while a foreign correspondent