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Bank of America stocks rise after record US$17b penalty

Bank of America on Thursday (Aug 21) reached a record deal of US$16.65 billion (S$20.81 billion) with US justice authorities to settle accusations over dodgy mortgage securities it issued ahead of the 2008 financial crisis. 

NEW YORK: Bank of America shares jumped 4 percent on Thursday (Aug 21) despite the bank being hit with a record nearly US$17 billion (S$21.2 billion) fine for selling high-risk mortgage bonds as safe investments.

The settlement with the US Justice department and other authorities over actions that helped spark the 2008 financial crisis was well-flagged in advance, and so did not surprise investors.

Shares opened higher after the announcement and continued to push upward through the day, finishing up 4.1 percent at US$16.16 (S$20.20).

The bank said it would pay US$9.65 billion (S$12.06 billion) in cash to resolve certain civil claims and provide US$7.0 billion (S$8.7 billion) in relief to consumers affected by losses tied to dodgy mortgage securities it issued ahead of the 2008 financial crisis.

The second-largest US bank by assets estimated the settlement would hit third-quarter pretax earnings by US$5.3 billion (S$6.6 billion), or 43 cents per share after tax.

Analyst Joe Morford of RBC Capital Markets said in a client note that the settlement "removes a significant overhang from the stock and paves the way for BofA to return to more normalized earnings run-rates sooner."

The settlement, with the US Department of Justice, the Securities and Exchange Commission, and other authorities including individual states, resolves a number of civil investigations against the bank and subsidiaries Countrywide and Merrill Lynch, which it took over during the crisis.

But it does not resolve potential criminal cases, especially involving Countrywide, once the country's largest home-loan issuer, and Countrywide officials.

"We believe this settlement, which resolves significant remaining mortgage-related exposures, is in the best interests of our shareholders, and allows us to continue to focus on the future," chief executive Brian Moynihan said in a statement.

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