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Bank of America Will Pay $8.5B to Avoid Revealing Its Big Bad Loans

Bank of America (BAC) is close to paying $8.5 billion to 22 high-profile investors in mortgage-backed securities because its other option was admitting the true size of its bad debt.

The deal means BofA will only pay pennies on every one of the $105 billion it owes the investor group, which includes Pimco Investment Management (LTPZ), and Blackrock Financial Management (BLK), MetLife (MET) and the Federal Reserve Bank of New York. The settlement still has to be approved by a New York court. If it does it could prevent other mortgage-bond investors from pursuing a higher payout in the future. There are a lot of those other investors, so expect to see challenges in court.

The 22 firms which reached this agreement were originally part of a larger group of investors seeking repayment-in-full for the debt assumed by BoA when it took over Countrywide Financial in 2008 for $4 billion. At the time, Countrywide had $1.5 trillion in mortgages.

The allegedly damning evidence
According to Debtwire, a respected private news service for financial professionals, the investors allegedly had evidence proving BofA/Countrywide had misrepresented the quality of the mortgage loans on which their derivatives were built. Making that alleged evidence public would have forced BofA to admit that the loans were largely worthless and that its debts far outweighed its assets. This would have caused a run on the bank and investors would have gotten little or nothing for these securities.

The BlackRock and PIMCO-led faction of investors split off and negotiated the current deal with BofA -- which, it turns out, conveniently sidestepped the need to make their alleged evidence public. The deal allows all sides to cover their financial asses. BlackRock, Pimco et al. are now able to fulfill fiduciary duties to their investors, while BofA gets to stay in business despite not living up to its debt obligations.

Big settlement, but not that big
In its current form, the settlement will be the largest so far by a financial-services company to date. It exceeds BofA's total profits since the onset of the financial crisis in 2008. On the other hand, it's a drop in the bucket compared to the $10 trillion in estimated U.S. mortgage losses from 2007-2010.

In the end, the already rich people who bought the bogus loans will get some money back from the people who made the bogus loans. The very definitely not-so-rich people who were by-and-large conned into getting these loans continue to get screwed.

The attorneys generals of all 50 states are closing an investigation into abuses by the biggest mortgage servicers. The states want the big banks to pay up to $30 billion in fines and penalties. That would still be mere pennies on each loan made by BofA alone.

Illustration: WikiCommons