Bank of America’s $8.5B MBs Settlement is the Largest by Any Firm

The Wall Street Journal has reported that Bank of America will pay $8.5 billion to settle claims by some high profile investors who were victimized by mortgage backed securities (MBS) that they bought prior to the collapse of the housing market in 2007. This settlement will mark the largest settlement by any financial firm as of this date and exceeding the total profits of the Charlotte, NC based bank since the financial crisis of 2008.

The settlement will end a battle with a group of institutional investors that held mortgage backed securities worth $105 billion at the time of purchase, including BlackRock, Incorporated, MetLife, Incorporated, PIMCO, Goldman Sachs and the Federal Reserve Bank of New York. The battle began some nine months ago when the investors sent a letter to Bank of America stating that the mortgage backed securities (MBS) they purchased from Countrywide Financial, subsequently taken over by the bank, were filled with toxic loans that failed to meet Countrywide’s promises about the quality of the loans or the collateral. It is important to emphasize that this all started simply because of a letter and not a lawsuit! Obviously, Bank of America felt that they had some considerable exposure since they are settling claims based on a letter and not after protracted litigation. Not only that but, this represents their third settlement this year involving repurchase claims.

According to the settlement plan, Bank of America is to give $8.5 billion in cash to Bank of New York Mellon, which was the trustee for the bondholders for distribution to the investors to allegedly settle nearly all of the Countrywide issued mortgage backed securities (MBS) that had an original unpaid principal balance of $424 billion. Bank of New York Mellon has filed a petition in Manhattan seeking approval of the settlement with Bank of America, the parent of Countrywide, for all past and future losses associated with the MBS. The court has set a hearing date on the settlement for November 17, 2011. If the settlement gets the approval of the court, it will be a raw deal for investors, since the settlement would only represent some 2 or 3 cents on the dollar for those victimized.

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