B of A agrees to pay $16B to $17B in settlement

Deal related to sale of faulty mortgage bonds

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Bank of America has agreed in principle to pay between $16 billion and $17 billion to settle with the U.S. Justice Department over the sale of faulty mortgage bonds, a person familiar with the talks said Wednesday.

The news came the same day the bank announced it would raise its quarterly dividend for the first time in seven years, after the Federal Reserve signed off on its revised capital plan.

The Charlotte, N.C., bank increased its overall settlement offer after Bank of America CEO Brian Moynihan and U.S. Attorney General Eric Holder talked by phone last week, the person said. Roughly $9 billion of the amount would be in cash, with the rest in consumer relief.

The deal, which would resolve a variety of probes by federal and state authorities, is not finalized and could still fall apart, the person said, adding that it is unclear when or if an accord could be announced.

The pact would surpass JPMorgan Chase’s $13 billion settlement over soured mortgage bonds as the biggest civil settlement between the U.S. government and a company.

Bank of America spokesman Lawrence Grayson declined to comment. A Justice Department spokesman also declined to comment.

Talks between the bank and the Justice Department have gone on for months, as both sides have failed to agree on the overall settlement figure, as well as how much would be in hard cash versus consumer relief.

Last week, the bank’s attorneys met with Associate U.S. Attorney General Tony West and Paul Fishman, U.S. attorney for New Jersey, in Washington, D.C., the person said. Fishman’s office has prepared a lawsuit that could be filed if the bank and Justice Department fail to reach a settlement.

At the meeting, the bank raised its offer to $14 billion in an overall settlement, up from $13 billion, the person said. Later, Moynihan spoke by phone with Holder to further discuss a deal. After the call, the bank agreed in principle to a settlement figure between $16 billion and $17 billion, the person said.

On Wednesday, the bank’s attorneys met with West in Washington to further hammer out details, the person said.

The bulk of the problem bonds were issued by Countrywide Financial, which then-Bank of America CEO Ken Lewis bought in 2008 as the housing market was crumbling. Others were issued by Merrill Lynch, which the bank acquired in 2009.

Bank of America, Merrill Lynch and Countrywide issued $965 billion in bonds to private investors from 2004 to 2008, more than any competitors, with about three-fourths originated by Countrywide, according to securities filings. Of the $245 billion in bonds that defaulted or became severely delinquent, about 4 percent were issued by Bank of America.

Bank of America, the second-largest U.S. bank, has spent more than $60 billion to resolve financial crisis-era legal issues, more than any other lender has spent to resolve similar matters. The Justice Department case was “the most significant matter out there remaining,” the bank’s chief financial officer, Bruce Thompson, told reporters last month.

Despite the eye-popping numbers in the latest agreement, critics are likely to say the bank got off light, considering the government’s bailout of the financial sector and the economic fallout from the crisis.

“The greed, recklessness and illegal behavior of Bank of America and other Wall Street firms caused a horrendous recession which cost millions of Americans their homes, jobs and life savings,” said Sen. Bernie Sanders, I-Vt., in a statement Wednesday.” This is a very modest settlement.”

Also on Wednesday, Bank of America said it was raising its quarterly dividend to 5 cents per share from the penny per share it has paid since the financial crisis.

The bank had originally won Fed approval for the 4-cent increase in March, but had to postpone the hike in April when it discovered a roughly $4 billion accounting error. The disclosure was an embarrassment for the bank, raising questions about whether the institution was too complex to manage.

Under its new capital plan, Bank of America is giving shareholders the same dividend increase, but scrapping a $4 billion buyback of its common stock. The dividend is payable Sept. 26 to shareholders of record as of Sept. 5.

“This is a milestone day,” said Matt McCormick, a portfolio manager with Bahl & Gaynor Investment Counsel, a Cincinnati investment firm that manages $12 billion. “A dividend increase is a clear sign of current and future financial strength.”

The increased payout, however, is a far cry from the 64 cents per quarter the bank was paying as recently as the fall of 2008. Where the bank once doled out more than $10 billion a year in dividends to shareholders, it paid just $428 million last year.