Aug. 22--Bank of America has been fined a record pounds sterling 10bn by the US government for mis-selling bundles of toxic mortgage debt.
Attorney General Eric Holder said the banking giant and subsidiaries Merrill Lynch and Countrywide had committed 'fraud' against the US people.
The news may well set nerves jangling at the UK's biggest lenders, including Royal Bank of Scotland, HSBC and Barclays.
They are also being investigated by the US authorities for mis-selling so-called mortgage-backed securities in the run up to the financial crisis.
They also face a raft of civil lawsuits from investors, with RBS having already set aside pounds sterling 1.9bn in preparation for a hefty bill.
In a Department of Justice press conference, Holder described the settlement as 'a historic step forward in our ongoing effort to protect the American people from financial fraud – and to hold accountable those whose actions threatened the integrity of our financial markets and undermined the stability of our economy'.
As part of the settlement, Bank of America, Merrill Lynch and Countrywide admitted they sold billions of dollars of mortgage-backed securities 'backed by toxic loans whose quality, and level of risk they knowingly misrepresented to investors and to the US government'.
Of the pounds sterling 10bn ($16.65bn) settlement pounds sterling 4.2bn will be paid in relief to struggling homeowners, borrowers and communities affected by the bank's misconduct.
The remainder will be paid to settle claims lodged by the Department of Justice and US states.
The bill dwarfs the previous record set last November when JP Morgan reached a pounds sterling 7.8bn ($13bn) settlement with the US government.
Citigroup paid pounds sterling 4.2bn ($7bn) to settle similar claims last month.
The implosion of mortgage-backed securities was one of the triggers of the global financial crisis. Bundles of risky mortgages were packaged up and widely sold by banks around the world.
When the US housing market collapsed these investments turned sour and banks and investors were left nursing huge losses.
Bank of America and Countrywide over several years also unloaded toxic mortgage loans on the US government-sponsored lenders Fannie Mae and Freddie Mac, claiming the loans were quality investments.
Most of the problem loans were sold by Merrill Lynch and Countrywide before Bank of America bought those institutions during the 2008 financial crisis.
In an announcement to the stock market, Bank of America said the settlement – which exceeds the pounds sterling 6.9bn profit made last year – is expected to reduce third-quarter pre-tax earnings by pounds sterling 3.2bn.
But there was no apology from chief executive Brian Moynihan.
He 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.'
He added that 'the claims relate primarily to conduct that occurred at Countrywide and Merrill Lynch prior to Bank of America's acquisition of those entities'. The settlement does not protect Bank of America from future criminal action against the bank and individuals.
The hardline stance taken by the US government has been noted by RBS, Barclays (up 0.1p to 220.8p) and HSBC (up 0.1p to 640.9p) which are also being investigated.
Analysts do not believe any penalties they face will be on the same scale. But of a list of lawsuits and potential fines for wrongdoing, RBS (up 0.9p to 361p) boss Ross McEwan is known to be most concerned about potential US settlements.
(c)2014 Daily Mail (London, )
Visit the Daily Mail (London, ) at www.dailymail.co.uk/home/index.html
Distributed by MCT Information Services