Monday, October 28, 2013

Bank of America verdict could 'embolden' Department of Justice

The jury's verdict against Bank of America last week could "embolden" the U.S. Department of Justice to extract more and larger penalties from big banks, analysts with credit ratings agency Moody's write Monday.

The Charlotte bank was found liable for fraud last week in Countrywide Financial's program of speedily processing and selling mortgage loans to Fannie Mae and Freddie Mac in the months before the financial crisis. Known as the Hustle, for "high-speed swim lane," the program ended up in hundreds of millions in losses for the mortgage giants as the loans went bad. Federal prosecutors said Countrywide didn't check to make sure the loans were quality and misrepresented what was being sold. (Bank of America bought Countrywide in 2008.)

But the government used its own, new interpretation of the Financial Institutions Reform, Recovery and Enforcement Act to make its case, Moody's analysts wrote. The law had generally dealt with cases in which banks are the victims of fraud by an outside entity. The judge in the case, however, agreed that that a bank could both be the perpetrator and victim of a fraud.

The main implication: The U.S. can now use that law's 10-year statute of limitations and broad subpoena power to conduct longer and more wide-ranging investigations into large American banks.

"Last Wednesday’s verdict may embolden the DOJ to take more cases to trial," Moody's wrote in a Monday report. "In any event, the DOJ now has more leverage to extract heftier fines as part of any settlement."

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