Someone Help Me Make Sense Of These Numbers

It’s enough to make your head hurt. The headline screams, Bank of America to pay $8.5 billion settlement over mortgages. But it’s a “news story” which means there are a lot of data points but very little context.

I’m going to try to pull the relevant bits from the article — and this one — and hope someone here can help us make sense of this.

• Bank of America bought Countrywide in July 2008 for $4 billion
• The lawsuit in question “covers 530 trusts with original principal balance of $424 billion”. About $106 billion of the assets sold for $424 billion (one-quarter) are either in default or are “severely delinquent;” BoA has paid off not quite half ($203 billion).
• The lawsuit was filed by 22 investors who wanted Bank of America to repurchase $47 billion in mortgages Countrywide had sold them in the form of bonds. Their rationale: “Countrywide enriched itself at the expense of investors by continuing to service bad loans while running up servicing fees.”
• The lede: “Bank of America and its Countrywide unit will pay $8.5 billion to settle claims that the lenders sold poor-quality mortgage-backed securities that went sour when the housing market collapsed.” Note: this is an agreement; it is subject to court approval. The more accurate verb tense is “have agreed to pay” not “will pay.”

Here’s my summary and first round of questions:

Bank of America bought Countrywide for $4 billion. Countrywide knowingly sold $47 billion in questionable mortgages and collected fees on those bad assets. BoA is now offering to pay $8.5 billion (18% of the value of those bad mortgages) as a settlement. This is twice what BoA paid for Countrywide.

Tell me again why BoA bought Countrywide and what, exactly, they got for that $4 billion — especially since the Wall Street Journal says they are in the hole for $40 billion post-purchase?

And if this 18-cents-on-the-dollar settlement is a good deal for the plaintiffs … why the hell isn’t something similar being done for all mortgaged homeowners (underwater or not)?

Next question: what about the executives who reaped millions in bonuses on those deals? Should they be allowed to keep those bonuses? Should there not be some form of recourse?

From Eleanor Bloxham at CNN Money:

The Dodd-Frank Act requires so-called clawbacks for accounting restatements. Clawbacks force executives to return bonus monies if they were based on false financial statements and that accounting has to be restated later on.

But the financials aren’t going to be restated in this case… So, what about these large “oops” moments? The ones that take several years to materialize? Is there no accountability for these mistakes? Just take the money and run?

That’s why regulation matters: this is an oligopolistic market with tremendous sway over the economy (“too big to fail”). It’s also why who you elect to represent you in Congress matters: is your Representative and Senators concerned with taxpayers, small business and what’s best for society overall or are they beholden to a handful of oligarchs?

Here’s a reminder about the sums involved in bonuses:

In September of 2008, Merrill Lynch admitted that it couldn’t pay its bills anymore. But, just before it ended its final quarter of business, Q4 of 2008, Merrill Lynch gave out nearly $4 billion in executive compensation bonuses…

… there’s a question over whether Bank of America knew about the Merrill Lynch bonuses handed out in the fourth quarter of 2008. Keep in mind that Bank of America received $20 billion in federal bailout money – translation, your hard earned dollars – to help buy Merrill Lynch, and had previously received $25 billion – your money, again – to unfreeze credit markets…

And BoA paid retention bonuses to the same people at Countrywide that oversaw its demise:

Countrywide Financial (NYSE: CFC) has decided to give retention bonuses to some of its top executives to keep them at the company until its acquisition by Bank of America (NYSE: BAC) is consummated.

For instance, executive managing director Ranjit Kripalani will get $2.5 million if he stays through March 15th (two more months).

There’s more:

[T]he man at the center of the national mortgage crisis [Countrywide founder Angelo R. Mozilo] stands to collect an additional $112 million in severance when Bank of America buys the company he helped found.

And a bit more:

BofA and Merrill Lynch awarded its traders and executives $6.9 billion in bonuses for 2008, despite receiving a $45 billion taxpayer bailout.

The sums are insane. Gecko’s “greed is good” mantra has been adopted whole hog by Wall Street (even if the bank is headquartered in the Carolinas) but the fact is that greed is not good for society.

Final question: what, exactly, is BoA doing such that its CEO predicts that in a few years “the bank should be able to make $35 billion to $40 billion of pretax profit a year.” And can it possibly be good for the country as a whole?

How much is $35-45 billion in pre-tax profits? For the 10 years prior to the big recession, BoA averaged $13.5 billion in profit each year.

Regardless of the “rightness” of this growth (refrain: “too big to fail”), BoA appears to be on the way to that prediction:

Excluding the settlement and other charges, the Charlotte, N.C.-based bank expects to post a quarterly profit of $3.2 billion to $3.7 billion.