The Justice Department, building on a multibillion-dollar mortgage settlement with JPMorgan Chase last year, is now aiming for a deal with Bank of America.
In a move that raised the stakes for the government’s crackdown on banks that sold the troubled mortgage investments during the financial crisis, the Justice Department made Bank of America an opening settlement offer of roughly $20 billion several weeks ago, according to people briefed on the matter.
But that amount is a somewhat inflated starting point for negotiations, and Bank of America has not yet made a counteroffer, according to the people who were not authorized to speak publicly.
The initial offer, the people said, included money earmarked for a settlement with the Federal Housing Finance Authority, a regulatory agency. After the Justice Department made that offer, Bank of America reached a separate $6.3 billion cash deal with the regulator. Because of this, the Justice Department’s remaining request has shrunk significantly.
By one measure, Bank of America will ultimately pay about $16 billion to settle every investigation into its sale of mortgage securities before the 2008 financial crisis. That estimate, widely circulated among bank executives and lawyers, would include the $6.3 billion pact already reached with the housing regulator. The remainder would cover penalties to the Justice Department, as well as to state and federal regulators, and a few billion dollars aimed at providing relief to struggling homeowners.
Still, any settlement with Bank of America is not a foregone conclusion. If talks come apart, the Justice Department could file a lawsuit against the bank.
A spokeswoman for the Justice Department declined to comment, as did a spokesman for Bank of America. Bloomberg News reported certain details of the settlement talks earlier.
The settlement negotiations with Bank of America are playing out as the government is under pressure to extract eye-popping penalties from Wall Street for its role in the financial crisis. For the Justice Department, blamed for its slow response to the financial crisis, the latest civil investigations into JPMorgan and Bank of America suggest that the Obama administration’s crackdown on Wall Street is gaining some momentum.
At the center of the Justice Department’s investigations is Wall Street’s mortgage machine, which churned out billions of dollars in securities from 2005 to 2008. Many of those investments later imploded.
The JPMorgan case, announced in November, offered a template for future mortgage settlements. At the time, Tony West, the No. 3 Justice Department official, said that other cases could follow that model.
The scrutiny extends beyond JPMorgan and Bank of America, though their exposure to troubled mortgages eclipses that of the other banks. Citigroup and other big banks have yet to strike their own settlements.
According to an analysis widely circulated among banks and reviewed by The New York Times, Bank of America could face a higher tally than JPMorgan. The extra liability stems in part from Countrywide Financial, the troubled subprime lender it acquired in 2008.
Bank of America, including Countrywide, issued about $640 billion in mortgage-backed securities before the financial crisis â€" considerably more than JPMorgan’s $460 billion. As a result, government lawyers had more in bonds to target in their Bank of America investigations.
As with the Bank of America investigation, the Justice Department initially sought more than $20 billion from JPMorgan.
Last month, Bank of America said it had held preliminary discussions to resolve the government’s inquiry. According to the people briefed on the matter, the talks occurred at a meeting with Mr. West, who has taken the lead in negotiating the Justice Department’s mortgage settlements with Wall Street.
The bank and the Justice Department are negotiating a broad deal â€" referred to as a global settlement â€" that would resolve a number of outstanding investigations. If it reaches a multibillion-dollar penalty, Bank of America would put to rest an investigation into its sale of mortgage-backed investments and a separate mortgage-related lawsuit that the Justice Department filed in North Carolina in August.
The Justice Department investigations represent only a part of Bank of America’s legal troubles tied to the crisis, which have totaled tens of billions of dollars. In 2012, the federal government sued the bank over a “brazen†mortgage fraud. The bank recently lost that case at trial.
The inquiries have cut into earnings. In the first quarter of the year, the bank said it had $6 billion of litigation expenses.
It is not clear whether a larger-than-expected settlement with the Justice Department would prompt the bank to take more litigation losses in the coming quarters. Bank of America does not disclose the overall amount of money it has set aside as a reserve to pay for litigation expenses.
