US banks repay $US37b of fines for selling shoddy mortgages
New York The US Department of Justice says it has recovered nearly $US37 billion from big banks for their role in selling shoddy mortgages before the financial crisis.
New York The US Department of Justice says it has recovered nearly $US37 billion ($40 bilion) from big banks for their role in selling shoddy mortgages before the financial crisis.
Such a big number – intended to deter misdeeds in the future – suggests Wall Street is being made to pay for its role in stoking the subprime debacle.
Yet the financial pain inflicted may not be as great in the end. Take the latest, and largest, mortgage settlement. Bank of America agreed Thursday to a $US16.65 billion deal with federal and state authorities. The actual financial burden for Bank of America, however, may not exceed $US12 billion – certainly a large amount, but one significantly less than the number the government trumpets. At issue is how much of the cost of the $US7 billion in “soft dollars", or help for borrowers, Bank of America will bear under the settlement with the Department of Justice. Some of the relief the bank will provide involves cutting the principal of a loan to make it easier for the borrower to pay.
US Attorney-General Eric Holder held a media conference where he declared a ‘historic resolution’ but some analysts are saying that the tax writeoffs will shift the burden back to the taxpayer. Photo: AP
The dollar amount of that reduction gets credited toward what it needs to fulfil the settlement. But Bank of America wrote down many of its troubled mortgages years ago. And investment firms may now own some of the loans that get written down, potentially shielding the bank from a financial hit.
“The real financial cost to the bank could be considerably lower," housing specialist at the Urban Institute in Washington, Laurie Goodman said. “This is helping consumers, but it may not be costing the bank."
The pain to the bank could also be significantly reduced by tax deductions.
Tax analysts estimate that Bank of America could derive $US1.6 billion of tax savings on the $US4.63 billion of payments to the states and some federal agencies under the settlement.
Shares of Bank of America jumped 4 per cent on Thursday, suggesting investors believed that the bank could take the settlement in stride.
Historic resolution
“The American public is expecting the Justice Department to hold the banks accountable for its misdeeds in the mortgage meltdown," analyst with the US Public Interest Research Group, Phineas Baxandall said.
“But these tax writeoffs shift the burden back onto taxpayers and send the wrong message by treating parts of the settlement as an ordinary business expense. Still, government authorities put emphasis on the aid that will come to borrowers. This historic resolution – the largest such settlement on record – goes far beyond the cost of doing business," Attorney-General Eric Holder said at a news conference.
The Justice Department had already forged huge mortgage deals with JP Morgan Chase and Citigroup, but in certain ways, the Bank of America accord is shaping up into the showpiece for the Obama administration.
Some consumer advocates said that while the deal was flawed in many ways, it provided more relief than the other settlements.
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