In 2008, when Bank of America acquired Countrywide—then the leading company in sub-prime mortgages—they thought it was a fantastic investment. Little did they realize, just a few months later the entire mortgage market would collapse and they were left holding all of the liabilities. According to Bloomberg, “U.S. District Judge Jed Rakoff in Manhattan is considering how much to penalize the bank following months of arguments over the size of the civil fine that Charlotte, North Carolina-based Bank of America should pay in the first mortgage-fraud case to go to trial.”
Bank of America believes that it should have to pay “at most” a little over one million dollars, but U.S. attorneys in Manhattan have said that they should pay $2.1 billion, the maximum penalty. In a court filing, U.S. Attorney Preet Bharra said the fine should be high both to “punish defendants for their culpability and bad faith, and to deter financial institutions and their executives” from repeating Countrywide’s mistakes.
The maximum penalty is set because of the Financial Institutions Reform, Recovery, and Enforcement Act, a statue that federal prosecutors in New York routinely use to reclaim profits from mortgage fraud. Under this law, the penalty is capped by the amount of money either gained or lost from the fraud.
Since most of the violations were committed before Bank of America acquired Countrywide, the company believes that the maximum fine is far too pejorative. In a separate trial in October, Countrywide and former executive Rebecca Mairone were found to have liability for selling thousands of bad mortgage-backed securities to government institution Fannie Mae and Freddie Mac. Mairone’s own penalty should be, according to the court filing, “commensurate with her ability to pay.”
In yet another court proceeding, the New York State Supreme Court approved an $8.5 billion settlement offer from Bank of America to pay for the claims of “nearly two dozen mortgage securities investors,” according to The New York Times. While it may not seem like it, this was a “win” for the embattled bank, because the plaintiffs—led by lawyers for American International Group, who received the largest-ever government bailout of a private company in September of 2008—said the agreement “shortchanged” investors who bought the bad loans.