Bank of America and the Justice Department have reached an impasse in negotiations over a multibillion-dollar settlement deal, raising the stakes in an investigation into the bank's role at the center of the mortgage crisis.
The talks stalled on Monday after the bank's latest offer — more than $12 billion to resolve state and federal investigations into its sale of mortgage investments that later imploded — fell far short of prosecutors' demands, according to people briefed on the matter. The Justice Department, which had imposed a Monday evening deadline for the bank to deliver its near-final offer, has sought a settlement worth roughly $17 billion, which would be the largest payout by any bank to date.
On Tuesday, as Bank of America sought to continue negotiations, the Justice Department moved to put the finishing touches on a civil complaint against the bank, said the people briefed on the matter, who spoke on the condition of anonymity. The lawsuit, one of the people said, would accuse the bank of selling mortgage investments that led to billions of dollars in losses.
A suit, however, is not imminent. Bank of America, which is torn between a desire to put the mortgage crisis behind it and a resistance to paying penalties it considers overly punitive, could still raise its offer to avert a suit.
The bank's resistance to a deal stems partly from a dispute over mortgage securities sold by Merrill Lynch, the investment house Bank of America bought during the depths of the financial crisis. Bank of America has said it felt pressured by the Federal Reserve and Treasury Department to go through with the acquisition in late 2008, though the bank was the one to pursue the purchase.
For the Justice Department — Tony West, the department's No. 3 official, is leading the negotiations — the sticking point is both the size of the settlement and the method of doling out the money. Bank of America wants to earmark a large chunk of the money for various forms of assistance to consumers rather than paying it in the form of a cash penalty, the people said. The Justice Department has also pushed for consumer relief, but also wants the bank to pay more in cash.
The Bank of America investigation represents an opportunity for the Justice Department to flex its muscle over the financial crisis, which has become a sore subject for prosecutors. After years of digging, prosecutors filed only a handful of criminal cases tied to the crisis and not a single charge against a senior Wall Street executive, a track record that fueled a public and congressional outcry.
Without many criminal cases to show for the effort, prosecutors shifted focus, pursuing civil cases against Bank of America and other big banks. The cases, which have a lower burden of proof than criminal actions, offer the Justice Department another chance to impose eye-popping penalties on Wall Street.
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.
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.
More recently, the Justice Department set a deadline for the bank to produce its best offer by last Friday. After a personal meeting with Bank of America's lawyers, the people said, the Justice Department granted the bank an extension until the end of the day Monday.
The bank raised its offer, the people briefed on the matter said, but not enough to close the gap with prosecutors. Mr. West is traveling, which most likely delays a final decision.
Fighting prosecutors is a risky approach, as Bank of America knows well. Last October, in a civil case filed by federal prosecutors in Manhattan, a jury found Bank of America liable for the sale of defective mortgages issued by its Countrywide Financial unit as part of a program nicknamed the "Hustle."
In the Justice Department lawsuit filed last year in North Carolina, prosecutors cited reams of emails from bank employees who questioned the quality of mortgages underlying the securities. One employee wrote that some mortgages were "like a fat kid in dodge ball, these need to stay on the sidelines."
In March, a federal magistrate judge recommended tossing out the lawsuit. A federal judge is expected to hold a hearing Wednesday as part of his effort to decide whether to accept the magistrate's recommendation.
—By Jessica Silver-Greenberg, Ben Protess, and Michael Corkery, The New York Times