Bank of America has reached a $2.43 billion settlement with investors, arising out of the bank’s acquisition of Merrill Lynch. It was alleged that the bank misled investors about the acquisition. This is the largest securities class-action lawsuit settlement arising out of the financial crisis. Shareholders, led by pension funds, including those in Ohio and the Netherlands, accused Bank of America of providing false and misleading statements about the health of Merrill Lynch, which, unknown to the public, was experiencing huge losses in late 2008 amid turmoil in the markets. Even though Bank of America denied the allegations, it’s paying billions to settle the case.
The size of this settlement underscores how two deals in 2008 — the Merrill acquisition and the purchase of the mortgage lender Countrywide Financial earlier that year — have weighed on Bank of America, one of the country’s largest, keeping it from making a full recovery. The Countrywide acquisition, made as the housing market was collapsing, has now cost Bank of America more than $40 billion in losses on real estate, legal costs and settlements, according to sources close to the bank. That deal alone would have been enough to slow Bank of America down, but coupled with the questionable acquisition of Merrill Lynch, it nearly crippled the institution. Since 2009, Bank of America has closed bank branches, sold billions of dollars in assets and cut tens of thousands of jobs.
Bank of America has also paid $150 million to settle a Securities and Exchange Commission lawsuit that contended the bank did not tell its shareholders about big bonus payments Merrill had approved before the merger closed. For a federal securities class action, the size of the Merrill settlement is surpassed only by the Enron, WorldCom, Tyco and Cendant settlements, according to Joseph A. Grundfest, a professor of securities litigation at Stanford University Law School.
It is unclear how much relief the shareholders — those who owned Bank of America shares or call options from September 2008 to January 2009 — will receive from the settlement. Bank of America will use its litigation reserves and litigation expenses to cover the settlement, saying that it and other legal expenses cost it $1.6 billion. Bank of America has agreed to adopt a “say on pay” shareholder vote, an independent compensation committee of the board and policies for committees focused on acquisitions, among other corporate governance changes.
Even with its legal problems, the Merrill Lynch business has helped bolster Bank of America, contributing roughly half the bank’s revenue since 2009. But, as we have reported, the Countrywide acquisition has been a much larger problem for Bank of America. The purchase effectively saddled Bank of America with hundreds of thousands of homeowners struggling to keep up with their mortgage payments. Bank of America has spent billions of dollars to defend lawsuits related to Countrywide’s mortgage business. For example, in the second quarter of 2011, the bank reported an $8.8 billion loss, mainly related to a settlement with mortgage investors.
Earlier this year, Bank of America and four other banks agreed to a $26 billion settlement related to their foreclosure practices. That settlement evolved from an investigation of the mortgage servicing practices by state Attorneys General that was begun in 2010 amid mounting fury over revelations that banks evicted homeowners from their residences with false or incomplete documentation. If any of our readers believe the government over-regulates the banks, perhaps some of the above will change some minds.
Source: New York Times
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