For a change, JPMorgan’s rollercoaster negotiations with state and federal regulators to resolve the bank’s liability for rotten mortgage-backed securities did not make news Wednesday. Has there ever been more public dealmaking between the Justice Department and a target? It feels as though the public has been made privy to every settlement proposal and rejection, as if we’re all watching a soap operatic reality show. Will there be a reunion episode if the bank and the Justice Department end up finalizing the reported $13 billion global settlement, with Eric Holder and Jamie Dimon shouting imprecations at each other?
Bank of America filled the MBS news vacuum Wednesday. Its quarterly filing with the Securities and Exchange Commission disclosed that the bank – under Justice Department investigation for its securitization practices – has bumped up its estimate of litigation losses in excess of its reserves to $5.1 billion. The filing also said that staff lawyers from the New York attorney general’s office have recommended a civil suit based on Merrill Lynch’s mortgage-backed securities.
BofA also had some good news, though. Late Tuesday, U.S. District Judge Mariana Pfaelzer of Los Angeles granted tentative approval to the bank’s $500 million Countrywide MBS class action settlement, despite objections to the deal from the Federal Deposit Insurance Corporation (on behalf of 19 failed banks that owned Countrywide MBS) and several other institutions. Perhaps even more importantly, on Wednesday, two significant objectors to BofA’s proposed $8.5 billion put-back settlement with private Countrywide MBS investors dropped their challenges to the deal. In separate letters to New York State Supreme Court Justice Barbara Kapnick, who has presided over a sporadic but nearly concluded trial on the settlement, three Federal Home Loan Banks and two Cranberry Park investment vehicles asked to withdraw from the proceeding. The remaining objectors, led by AIG, Triaxx and the FHLB of Pittsburgh, filed a strong post-trial brief summarizing their evidence that the proposed settlement was obtained through a “conflicted, back-room, closed-door process” and “cannot be endorsed without running roughshod over the absent certificateholders’ interests.” But the objectors’ ranks are dwindling, and late withdrawals by MBS certificate holders that actually helped try the opposition case has to increase the pressure on Justice Kapnick to bless the deal.
If you step back from all of these incremental developments, you see two banks traveling opposite roads to the same hoped-for final destination: a resolution of all their liability for deficient mortgage-backed securities. JPMorgan is concentrating first on a deal with regulators, not with private investors. BofA, meanwhile, is inching toward an end to claims by private investors but has balked at paying out more money to regulators. Last week, as you surely remember, Bank of America lost its gamble on a trial of Justice Department allegations that Countrywide’s short-lived, high-speed “Hustle” underwriting system defrauded Fannie Mae and Freddie Mac. A federal jury in Manhattan found the bank liable on one civil fraud charge; U.S. District Judge Jed Rakoff has yet to determine damages. BofA also hasn’t settled the Federal Housing Finance Agency’s securities suits before U.S. District Judge Denise Cote of Manhattan, unlike JPMorgan, which agreed last week to pay $5.1 billion to end the FHFA litigation against it.
To a large extent, these different approaches were forced upon the banks. Because of Countrywide’s egregious mortgage practices, Bank of America was an early magnet for MBS claims. Countrywide was first targeted in an MBS class action all the way back in 2007, before it was even acquired by BofA. MBIA launched its enormous litigation against BofA in 2008, and the Gibbs & Bruns institutional investor group that instigated BofA’s put-back settlement sent a demand notice to Countrywide MBS trustee Bank of New York Mellon in 2010 – two years before Gibbs & Bruns sent similar breach-of-contract notices to trustees for other banks that issued mortgage-backed securities, including JPMorgan. It’s hard even to remember now that Bank of America reached billion-dollar put-back deals with Fannie Mae and Freddie Mac on the last day of 2010. By the time state and federal officials finally got serious about MBS fraud in early 2012, BofA was already battered and bruised by private mortgage-backed securities litigation.