The strategy largely traces to Mr. West, a former defense lawyer and a personal friend of President Obama's. Mr. West is fond of reminding bank lawyers that to be meaningful, settlements must have a huge penalty. Otherwise, one person who has negotiated with him said, they will simply "be the cost of doing business."
If Bank of America ultimately reaches a deal — resolving all the outstanding mortgage crisis investigations from federal prosecutors and state attorneys general as well as an earlier Justice Department lawsuit filed in North Carolina — the total cost would eclipse all previous bank settlements. And it would come on top of a $6.3 billion deal the bank reached earlier with the Federal Housing Finance Agency, a regulatory agency that sued it over the mortgage investments.
For now, the current record belongs to JPMorgan Chase, which issued fewer mortgage securities than Bank of America in the run-up to the financial crisis. Late last year, JPMorgan struck a $13 billion pact to resolve state and federal investigations into its sale of questionable mortgage-backed securities.
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Gone are the days when payouts of tens of millions of dollars, or even hundreds of millions of dollars, would be sufficient for regulators and prosecutors. The billion-dollar mark, once a ceiling, is now a floor for settling the biggest cases.
Prosecutors grumble that six years after the mortgage bubble burst, banks are still unwilling to accept responsibility for their role in the crisis. For their part, bank lawyers privately complain that the pendulum has swung too far — and that the proposed penalties exceed the actual losses that investors suffered.
In the Bank of America negotiations, the debate over the Merrill Lynch mortgage securities illustrates that tension. In private discussions with prosecutors, the people briefed on the matter said, the bank has claimed that the Justice Department is demanding an arbitrary penalty for the damage attributed to Merrill Lynch. Bank of America has also argued that it would have avoided liability altogether if the government had not pressured it to go through with the acquisition of Merrill Lynch.
Still, those arguments have failed to resonate with prosecutors. It is unclear whether Bank of America could have legally backed out at that point in the acquisition process. And unlike other deals struck in the depths of the financial crisis, the purchase of Merrill was not engineered by regulators. Today, Merrill Lynch's business units are top performers for Bank of America.
The Justice Department rebuffed similar arguments raised by JPMorgan. In those negotiations, Jamie Dimon, the bank's chief executive, argued that many of the mortgage securities at issue in the settlement came from Washington Mutual and Bear Stearns, which JPMorgan purchased at the urging of the government.
Just hours before the Justice Department was set to announce a lawsuit against JPMorgan last fall, Mr. Dimon phoned Mr. West to offer more money and jump-start settlement talks. Weeks later, the bank and the government reached a deal.
Bank of America and its chief executive, Brian T. Moynihan, might similarly avert a lawsuit. But settlement talks have dragged on for weeks.