Bank of America has agreed to pay a record $16.65bn (pounds 10bn) to settle charges it sold flawed mortgage securities in the run up to the financial crisis, in the largest ever settlement between US authorities and a single company.
"This morning we demonstrate once again that no institution is either too big or too powerful to escape appropriate enforcement action by the department of justice. At nearly $17bn, this resolution with Bank of America is the largest the department has ever reached with a single entity in American history," said associate attorney general, Tony West.
The bank will pay $9.65bn in cash to the Justice Department, six US states, and other government agencies, including the Securities and Exchange Commission (SEC). A further $7bn in aid will go to consumers struggling with home loan payments and towards demolishing derelict properties.
John Coffee, Adolf A Berle professor of law at Columbia University, said: "There is another shoe that needs to drop before we can assess this settlement. This is the largest fine but yet again we have seen an inability, or a reluctance, to name and go after the individuals responsible."
The settlement comes as United States prosecutors are preparing a civil action against Angelo Mozilo, co-founder of Countrywide Financial, the largest subprime mortgage lender ahead of the financial crisis. Bank of America bought Countrywide for $2.5bn in 2008 and has since paid tens of billions in fines related to its activities.
The Justice Department's fine comes after a series of similar deals over the mortgage-related conduct of major US banks ahead of the crisis.
In July Citigroup paid $7bn to settle its case and last November JP Morgan Chase agreed to a then record $13bn to end an investigation that alleged it routinely overstated the quality of mortgages it was selling to investors.
Many of Bank of America's issues stemmed from loans originated by Countrywide and packaged and sold to investors by Merrill Lynch, which the bank also bought in 2008. But the Justice Department also found problems with Bank of America's own mortgage securities.
"Bank of America has acknowledged that, in the years leading up to the financial crisis that devastated our economy in 2008, it, Merrill Lynch and Countrywide sold billions of dollars of RMBs [residential mortgage-backed securities] backed by toxic loans whose quality and level of risk they knowingly misrepresented to investors and the US government," attorney general, Eric Holder, said.
In three separate investigations conducted in the western district of North Carolina, the central district of California and New Jersey,the department found that Merrill Lynch knew, "based on its own due diligence, that substantial numbers of the loans it was packaging into RMBs and selling to investors failed to meet underwriting guidelines, did not comply with the applicable law, or were inadequately collateralised - all contrary to representations Merrill was making to investors," the department said in a statement.
"It's kind of like going to your neighbourhood grocery store to buy milk advertised as fresh, only to discover that store employees knew the milk you were buying had been left out on the loading dock, unrefrigerated, the entire day before, yet they never told you," said West. West said the Justice Department reserves the right to file further charges against individuals or criminal charges. "We have many tools in our tool box," said West.
He said civil charges could be effective because of the "lower burden of proof. That does not preclude us being able to use other tools in our tool box," he said.
Bloomberg reported on Wednesday that the US attorney's office in Los Angeles is preparing an action against Mozilo, 75, the former chief executive of mortgage lender Countrywide, and up to 10 other employees. Mozilo paid a $67.5m penalty to the SEC in 2010 to settle charges that he misled Countrywide investors about the quality of loans being underwritten at the company. He earned $535m from 1999 to 2008, according to compensation-research firm Equilar Inc.
"There is no sound basis, in law or fact, for the government to bring a claim against Mr Mozilo," David Siegel, Mozilo's lawyer, told Reuters in an email.
"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," said Bank of America's chief executive officer Brian Moynihan.
The bank said the settlement will cut third-quarter pretax earnings by $5.3bn.
The Bank of America's corporate centre in Charlotte, North Carolina. It has agreed to pay a record $16bn in the settlement with authorities Photograph: Bloomberg