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August 21, 2014

Why Bank of America probably won’t end up actually paying US$17B in mortgage securities settlement

“WASHINGTON — How much will Bank of America’s expected US$17 billion mortgage settlement cost the company? The answer is, almost certainly not that much.

“In mega-settlements negotiated with the government, a dollar is rarely worth an actual dollar.

“Inflated figures make sensational headlines for the Justice Department, and US$17 billion would be the largest settlement by far arising from the economic meltdown in which millions of people in the United States lost their homes to foreclosure. But the true cost to companies is often obscured by potential tax deductions and opaque accounting techniques.

“Officials familiar with the deal say the bank will pay US$10 billion in cash and provide consumer relief valued at US$7 billion.

“The agreement requires the bank to acknowledge making misrepresentations about the quality of its residential mortgage-backed securities itself and in those by Countrywide Financial and Merrill Lynch, according to the officials, who spoke with The Associated Press on condition of anonymity because the deal isn’t scheduled to be announced until Thursday at the earliest.

“Those two institutions were acquired by the bank in 2008 and were responsible for the bulk of the questionable loans.

“The bank declined comment Wednesday.

“Whether cash payments are structured as penalties or legal settlements can determine whether targeted companies can declare them as tax-deductible business expenses. Also, consumer relief is an amorphous cost category: If Bank of America’s deal resembles the department’s previous settlements with JPMorgan and Citigroup, that part could be less costly to the company than the huge figures suggest.”

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Read the full Financial Post article here

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