Bank of America Corp said on Wednesday that it will pay $8.5 billion to settle claims from investors that lost money on mortgage-backed securities, in a landmark pact that could influence other major banks to settle mortgage claims.
The sum would be big banks' largest single settlement thus far related to the financial crisis that helped spark the Great Recession. The settlement, which Bank of America said would lead to a second-quarter loss, is subject to court approval.
"This is another important step we are taking in the interest of our shareholders to minimize the impact of future economic uncertainty and put legacy issues behind us," said Bank of America Chief Executive Officer Brian Moynihan in a statement. "We will continue to act aggressively, and in the best interest of our shareholders, to clean up the mortgage issues largely stemming from our purchase of Countrywide."
Bank of America said the charges would include an additional $5.5 billion to cover expected payments to other mortgage bond investors.
As a result of the settlement, Bank of America said in a statement that it expects to report a net loss in the range of $8.6 billion to $9.1 billion in the second quarter of 2011, or $0.88 to $0.93 per diluted share.
The $8.5 billion settlement covers claims from 22 institutional investors, including BlackRock Financial Management, Pacific Investment Management Co and Western Asset Management. The bank said the settlement is linked to mortgages made by Countrywide Financial Corp, once the nation's largest mortgage lender, which it bought in 2008.
The settlement could pressure other big banks, including JPMorgan Chase & Co and Wells Fargo & Co, to settle similar lawsuits with mortgage bond investors.
Moynihan said Wednesday that the settlement would minimize "future economic uncertainty" in the banking business and "clean up the mortgage issues largely stemming from our purchase of Countrywide."
For several months, Bank of America battled claims based on estimates "that were much different from ours," Moynihan said. But at this point, it made more sense to settle than to keep fighting, he said.
"We have said consistently if people are reasonable and can get to a reasonable assessment of their claims and it's in the best interest of shareholders, we will settle," Moynihan told Wall Street analysts in a conference call.
Citi analyst Keith Horowitz said the settlement, which amounts to only 2 percent of the original principal balance, removes one of the largest investor risks for Bank of America.
"We think this could prove to be a step forward" for Bank of America, Horowitz said. It would show investors that the bank can manage through crisis without raising additional capital.