= Subscriber content; or subscribe now to access all American Banker content.

B of A Learns No Good Deed Goes Unpunished

At year end 2010 Bank of America had $2.3 trillion in assets, $230 billion of capital, 57 million customers, ranked among the top firms in nearly every major growth market in the U.S., employed 288,000 people, made $150 billion of community development loans a year, donated $200 million to charity annually, and was one of the largest home lenders in the nation.

You might know that B of A acquired two giant firms — Countrywide and Merrill Lynch — during the 2008 crisis. What you might not know is that these acquisitions were done without government aid.

If you are a shareholder of B of A, particularly one with a short-term horizon, you are likely unhappy with the acquisitions. But as a citizen and taxpayer you should be very thankful that B of A stepped up to the plate in the dark days of the financial crisis.

As bad as the crisis was, imagine how much more serious it would have been had Countrywide and Merrill Lynch failed. Countrywide was one of the largest home lenders in the country and Merrill Lynch was the largest investment banking firm. Alternatively, imagine how expensive it would have been for government to provide assistance to resolve those firms.

After completing due diligence on Merrill Lynch in late 2008, B of A concluded that Merrill was in worse shape than anticipated and considered abandoning the deal. Then Secretary of the Treasury Henry Paulson threatened that B of A would regret walking from the deal.

B of A's reward for doing the deals was to be summoned to Congress to explain why senior folks at Merrill Lynch were allowed to receive contractually agreed bonuses at the end of 2008. The Securities and Exchange Commission piled on with an enforcement action claiming the bonuses were not properly disclosed in proxy materials.

Merrill Lynch has proved profitable to B of A, but Countrywide has been very painful. The issue at Countrywide is not so much losses on mortgage loans, but litigation. Other banks find themselves in similar positions, including Wells Fargo which acquired Wachovia (which itself had acquired troubled mortgage lender Golden West Financial) and JPMorgan Chase which acquired Bear Stearns and WaMu.

B of A has been defending tens of billions dollars of legal claims arising primarily from real estate loans at Countrywide and Merrill. Even the Federal Reserve Bank of New York joined the fray, claiming to be duped in its purchase of mortgages.

Having to defend litigation by private parties is unavoidable. B of A's management might be forgiven for assuming that the government would be grateful enough for B of A's acquisition of these two giant problems to go easy on asserting claims against Countrywide and Merrill.

But no good deed goes unpunished. A recent suit against 17 large banks by the Federal Housing Finance Agency involves some $200 billion of loans purchased from the banks by Fannie Mae and Freddie Mac. B of A’s share is $57 billion, mostly related to Countrywide and Merrill. The suit is particularly egregious in that Fannie and Freddie virtually abandoned underwriting standards and embarked on a two-decade long lending binge that was a major contributor to the real estate bubble and collapse.

In addition, B of A and other major banks are facing suits by 50 state attorneys general seeking to reform their foreclosure policies. This has slowed foreclosures to crawl and delayed cleaning up the housing mess.

Bank regulatory agencies have taken enforcement actions against the banks requiring them to conduct massive reviews of their mortgage loan files and foreclosure processes. The banks are spending billions and chewing up scarce personnel resources.

The government says creating jobs and turning around the housing industry and the economy are its highest priorities, but its actions indicate very high priority is being given to punishing the banking industry.

We cannot have a strong economy without a strong banking system. Punishing the banks for political purposes brings to mind a remark credited to Churchill: "Holding a grudge is like drinking poison and expecting the other person to die." It's noteworthy that B of A recently announced it will reduce its workforce by 35,000 people.

We have wasted the past couple years pursuing a mindless vendetta against the banking industry, even though very few banks had anything to do with creating the crisis and most are victims of it. It's past time for government to put the crisis behind and make job number one helping the private sector get back to work.

William M. Isaac, former chairman of the Federal Deposit Insurance Corporation, is senior managing director and global head of financial institutions at FTI Consulting, chairman of Fifth Third Bancorporation, and author of "Senseless Panic: How Washington Failed America." The views expressed are his own.


(26) Comments



Comments (26)
Interesting mix of comments here. I appreciate them all, as it is an indication that people care about the country and are getting involved. However, a number of the comments miss the point of the article.

It doesn't matter why B of A purchased Countrywide and Merrill Lynch. I assume B of A's primary motive was to make money with perhaps a side benefit of helping the country during a period of financial crisis. Severe turmoil in the economy and financial system is not good for financial institutions.

Nor does it matter whether the deals were good or bad. It seems clear in hindsight that Countrywide was a bad deal for B of A. Merrill Lynch seems to be working out well, although many believe that B of A could have purchased Merrill for much less had it waited a week or two.

One point of the article is that B of A -- whatever its motives -- did us citizens and taxpayers a big favor by purchasing these two very large problems without government assistance at the height of the financial crisis. That is indisputable.

A second point is that B of A did not create the mortgage mess at Countrywide and Merrill Lynch. It inherited the mess when it acquired these two firms and it is up to its eyeballs trying to get control of the problems. B of A's task is made so much more difficult by the government piling on with sweeping regulatory enforcement actions and litigation -- for problems B of A did not create! This too is indisputable.

A third point is that Fannie Mae and Freddie Mac virtually abandoned decent underwriting standards and went on a two-decade long growth binge that was a direct cause of the housing boom and collapse. It is unseemly for Fannie and Freddie to sue B of A for loans sold to Fannie and Freddie by Countrywide and Merrill Lynch before B of A acquired those firms.

Fannie and Freddie knew full well what they were doing and fought tooth and nail against any and all attempts by the government to get them under control. The public record could not be more clear on that score.

Finally, a number of readers do not appear to grasp the distinction between suing a legal fiction (i.e., a bank) and suing the individuals who made the decisions that put the bank in harm's way. During the banking and S&L crises of the 1980s and early 1990s, officers and directors, auditors, appraisers, investment bankers, and other individuals numbering in the thousands were subjected to civil and criminal actions and a good number of people went to prison. These types of actions by government get people's attention and change behaviors.

The economy is very sick and millions of people are suffering. Isn't it time to focus all of our energy on getting the housing markets and the economy turned around? I think so.

Bill Isaac
Posted by isaac1 | Friday, September 30 2011 at 1:09PM ET
It's about time the truth was expressed on these pages. Fannie & Freddie are the main culprits here, not the banks.
Posted by org06751451 | Wednesday, September 28 2011 at 11:14AM ET
I think it relevant that you mention why the collective state Attorney's General are taking B of A to task. They have used fraudulent practices (in our own family) in many ways. I know you know this Bill and am wondering why you don't comment on both sides of the story. I'm glad they did what they did, but for the every day person trying to refinance or trying to deal with foreclosure their requests, paperwork and many other forms of information, go to fake fax machines and other obfuscating practices. The people who are desperately trying to hang on to their homes are being rebuffed, humiliated and treated with little to no dignity. I know that B of A is not the only bank participating in these practices, but they are--why are they allowed to do this? I also wonder in the housing mess, why would these banks rather let a whole neighborhood become blighted by foreclosures rather than help people refinance and stay in their homes? It's such a mystery to me (and I know countless others). I would love it if you answered some of the counters to your argument--that would make for a lively exchange (if you can get lively on the internet). Respectfully (really) submitted by your cousin, JoAnn
Posted by JoAnn L | Tuesday, September 27 2011 at 5:17PM ET
The government says creating jobs and turning around the housing industry and the economy are its highest priorities, but its actions indicate very high priority is being given to punishing the banking industry.

Oh, c'mon, Bill. The banks are being punished - at this moment in time - for a failure in LEADERSHIP - for failing to 'fess up to the fraud and fix it. I mean, they committed fraud and now they're caught. But are they trying to make it right? Nooo.... It's their choice to fight tooth and nail in the face of obvious fraud. Why, right here in Sarasota, right here in the 12th Judicial Circuit, anyone with a pulse can waltz right in to the Clerk's office and see a mountain of fraud. Fraudulent affidavits. Fraudulent assignments of mortgage. Robosigning all over the place. Bill, if you want to see some fraudulent documents, why, I'd be more than happy to meet you down there and give you a little tour.
I have been in litigation with WaMu and now Chase since 2006. They are perfectly prepared to throw their children under the bus to defend the indefensible: fraud. Instead of saying, hey, we wrongly foreclosed on you, they fight. Instead of saying: we filed fraudulent affidavits - in fact, all the affidavits we filed were fraudulent - and we need to fix it. Oh, no, they fight.
My life has been on hold, my marriage tanked, and all because I am a part of what turns out to be the most massive fraud ever perpetrated on a citizenry in the history of the world.
If I walked into Bank of America this afternoon and held them up for $10, I could expect to serve prison time. So why are you giving Bank of America, Wells, Chase, Deutsche, etc. a free pass? Countrywide was filing fraudulent paperwork, BUT SO WAS Bank of America. WaMu was filing fraudulent paperwork, BUT SO WAS Chase. Why is there no mention of jail time for crooked bankers and lawyers in this article?
This is a failure of LEADERSHIP.
The only fix for this is for the banks to hire a whole bunch of people and look at every single mortgage and re-fi since oh, about 2000. As unpalatable as it is to say, that's the only way this situation can be fixed and for people to be able to move forward.
This ain't some banana republic: this is AMERICA. Fraud on the court cannot be allowed to stand.
I can guaran-damn-tee that if you were enmeshed in this unbelievably awful situation you wouldn't be so sanguine about "moving on" and "forgiving the banks" and spouting Churchill.
Buddy, not all of us live in a million dollar mansion with no mortgage.
I don't know about anybody else, but these bank apologists give me a pain in the rear.
Posted by Liz C | Monday, September 26 2011 at 9:42AM ET
I can't believe this guy. So he expects us to think BofA was just doing their patriotic duty and sacrificed for the good of everybody, me included, HA and HA again. Just what kind of idiots does he think we are? He either owes them or is about ready to receive a huge favor. Man, the country got screwed by all these immoral bankers, the economy got a cataclysmic hit from their greed. After that, they went on to foreclose on millions of homes, WITH FRAUDULENT DOCUMENTS, forged signatures and making false statements in court. And you think the government should go easy on them? These people are worst than the mob. They are being kept off the hook by their friends in high places but they belong in jail.
Posted by mauriciott | Friday, September 23 2011 at 10:10PM ET
I am particularly disturbed about Mr. Isaac's comments. B of A cast as a victim? How preposterous. They were the ones that victimized their customers, shareholders, and investors who bought the junk including fraudulent loans that found its way into mortgage backed securities. They were incompetent in buying Countrywide which every in the industry knew, I guess except for B of A, they were a cess pool.Thank god for the FHFA for trying to rightfully recover money for the U.S. taxpayers. Go light on B of A? Reward their incompetence? I expected more from the author given his role as former FDIC chairman. He, like many, are looking after the interests of big business instead of standing up for the real victims. I guess his perspective has changed now since he is the chairman of a big bank.
Posted by Paul K | Friday, September 23 2011 at 11:59AM ET
Well written article. It's high time that the banks go on the offensive against all of the "victims" of the housing crisis. A mortgage If fraud has been committed, what role is played by the borrower who provided incorrect information on loan documents? Let the foreclosure process work - and get the ambulance chasing lawyers out of the game.
Posted by Mergerwave | Friday, September 23 2011 at 11:57AM ET
Unfortunately, it rolls uphill. Senior management is ultimately responsible for the actions of those below them. For Merrill senior management to receive "contractually agreed upon" compensation was one thing, but to be compensated for ruining the company is another. There's a reason they were acquired! B of A should be held accountable for it current state, but by the shareholders, not the government. Government is just as complicit with the lack of regulation that it not only enforced, but forced! I'm curious, Mr. Issac, if you have actually tried to deal with B of A for a mortgage modification or to prevent forclosure of your property? I'm pretty sure that if you had, you might be writing a totally different article.
Posted by lputnam | Friday, September 23 2011 at 8:25AM ET
Robert R says, "They were not defrauded into a loan. They all knew what they were getting into. Trying to catch on to that gravy train of non stop home appreciation with Washington DC and organizations like Fannie Mae & Freddie Mac and the Rainbow Coalition etc., telling people that they had a right to participate in the Amerucan Dream just like anyone else did."

Yet the FBI puts out a warning of mortgage fraud in 2004

So how did all the borrowers in 2005 and 2006 deserve to get foreclosed on when by that time every mortgage broker or lending institution across the country should have been well advised of the problem.
Posted by Steve H | Thursday, September 22 2011 at 9:10PM ET
This article is right on the money. I know Brian Moynihan and he is an HONORABLE MAN!!!!!!!!!!!!!! Most people that are being Foreclosed on, even though I hate the fact that so many people are being hurt, deserve to be foreclosed on. They were not defrauded into a loan. They all knew what they were getting into. Trying to catch on to that gravy train of non stop home appreciation with Washington DC and organizations like Fannie Mae & Freddie Mac and the Rainbow Coalition etc., telling people that they had a right to participate in the Amerucan Dream just like anyone else did. B of A didn't have to buy Countrywide or Merrill. Imagine what the Feds would have had to spend if B of A and wells etc, did not step up to the plate. This is not just political, it is stupid, intentional, damaging our banking system and therefore our nation! To me Obama is enjoying it while it happens as a radical with a mission accomplished! If not then he is just an idiot!
Posted by robrose | Thursday, September 22 2011 at 6:01PM ET
Is this article supposed to be comedy? What a joke! Former FDIC Chairman? That would explain a few things. So B of A bought these two companies out of the goodness in their hearts? That is just not true by any stretch of the imagination. They thought they were getting a good deal and were wrong. So America should thank the management of a poorly run bank for making bad business decisions? Sounds like something out current President would say!
Posted by Steeve B | Thursday, September 22 2011 at 5:41PM ET
While I agree with most of Mr. Isaac's thoughts, I also believe that Ken Lewis and his M&A team screwed up the transactions. They were doing the government and country a favor in both cases. They should have insisted on indemnification in both cases or should have acquired only the assets (and liabilities) of the firms and not the corporate entity. Or they should have insisted on equal treatment to that which the government gave GM where the bond holders were screwed and the Auto Union was rewarded - with no recourse against GM for outstanding claims.

Lewis crewed-up - he trusted the government. Where were his great M&A lawyers?
Posted by Bond I | Thursday, September 22 2011 at 5:18PM ET
It was Ken Lewis's ego, not public interest, that motivated BofA to acquire Countrywide and Merrill. (If not it means he sold out his shareholders.) Just because these acquisitions happened to prevent the likely failure of both companies doesn't mean BofA should get a pass on the consequences of bad deals.
Posted by MrPotter | Thursday, September 22 2011 at 4:32PM ET
E m must dwell in the White House where the break from reality is as wide as the sky is blue. The naivate that the regulators can continue on a vendetta against the banking industry and hope for economic recovery is indemic of the Administration. People bought houses they wanted but couldn't afford and yes, there were some in the banking industry that promoted the housing inflation by making loans that were aggressive, but that was actually a small number of players. It is just so convenient to paint all banks with the same brush and to continue to blame someone else. It keeps one from turning their eyes upon themselves. Until the ridiculous efforts to give everyone a home for free cease (sound socialistic?), the broader economy will not revive.
Posted by Patrick S | Thursday, September 22 2011 at 4:19PM ET
I totally agree with FDIC Chairman William Isaac. The collapse of the mortgage and banking industry is water under the bridge! Let's get on with improving consumer confidence and let banks make loans!
Posted by Ellen H | Thursday, September 22 2011 at 4:15PM ET
This "crash" has been one caused by a lack of regulation and unmitigated greed. No question - consumer/borrowers saw a never ending upward spiral of values and took advantage of it. Unfortunately most consumers were and remain woefully naive of the way in which the financial industry functions. Even most in the "true" banking sector were uneducated in the ways of investment & mortgage banking.

Following that same train of thought: What were the SEC folks and the Treasury thinking allowing the Securitization to move as it did. The economic growth figures are part of regular reporting to agencies as is the level of securitizations. However, the "2000s" were "hands-off business". We now know the price.

If BAC,Chase,Citi,were just "real banks" it would agree that they should get a pass on this mess. But, they are financial players with subsidiaries in every corner of every financial nook and cranny. The consolidation of financial services eliminated any innocence the banks may have been entitled to claim.

I have joked about having to call "1-800-THE-BANK" due to mergers and acquisitions (which I did until the late '80s). Incest brings out the worst character traits. Add to that unpleasant image unadulterated greed and EGO, and, well we are living with the result

Richard Isacoff
Posted by riisacoff | Thursday, September 22 2011 at 3:59PM ET
B of A wanted to do the Countrywide deal, the government didn't force them. And the world would not have ended if Countrywide went belly-up. On the other hand, they didn't want to do the Merrill deal, but Merrill is profitable, so where's the beef? The FHFA sued over the Merrill loans, but whose fault is that?
Posted by kvillani | Thursday, September 22 2011 at 3:44PM ET
If they'd quit breaking the law on a daily basis I'd be a little more sympathic.
Posted by dthomas327 | Thursday, September 22 2011 at 3:44PM ET
The treatment of BofA is a testimony to how politicized the regulatory environment has become. This is a dangerous and slippery slope for it ensures that the next time regulators start "dialing for dollars", no one will pick up the phone. Jay S
Posted by Mark M | Thursday, September 22 2011 at 3:24PM ET
"Holding a grudge is like drinking poison and expecting the other person to die."

So quit holding a grudge. Banks and lenders have been caught defrauding the borrowers and investors, so rescind the contracts and mortgages. The only wasted mindless vendetta is furthering to destroy this country by covering it up.
Posted by Steve H | Thursday, September 22 2011 at 2:50PM ET
"We cannot have a strong economy without a strong banking system." No doubt this is true, Mr. Issac. But can we have a strong banking system without true free market capitalism and abiding by common law? Putting the banking system above the principles of our country to protect our country, might make many of us in the financial community wave the stars and stripes in glee. For others of us, we fear the reckoning will come nonetheless.
Posted by PJ O | Thursday, September 22 2011 at 2:47PM ET
Do you seriously believe that "very few banks had anything to do with creating the crisis and most are victims of it." I'm sorry but that goes against all the facts. Yes, Countrywide, New Century, Ameriquest and other non-bank subprime lenders were to blame for no doc loans. But
Posted by berryk | Thursday, September 22 2011 at 2:42PM ET
"Having to defend litigation by private parties is unavoidable. B of A's management might be forgiven for assuming that the government would be grateful enough for B of A's acquisition of these two giant problems to go easy on asserting claims against Countrywide and Merrill."

You have to love the logic here: If private parties want to sue a bank for fraud, well that's unavoidable. But banks should be able to assume that the government will refrain from pursuing them for that same fraud.

I want the government to pursue fraud in these cases. Otherwise we will be back here again in a few years (anyone remember Enron, Tyco, WorldCom?), and bankers will be saying "Who could have seen it coming?"
Posted by Tony S | Thursday, September 22 2011 at 2:32PM ET
So....let me get this straight...with all of their superior education and years of big business finance and handling the money of wealthy business executives and corporations, these bankers were out smarted and out-maneuvered by little housewives, teachers and truck drivers. they were out-maneuvered by laborers and factory-workers who duped these innocent bankers into lending them money on a "liar" loan? Did these same innocent bankers then tell these borrower that they didn't want to raise their loan rate and the borrower forced them into it? Did these innocent bankers want to let these evil borrowers out of their loan, but the borrowers had finagled a prepayment penalty so that the banks had to hold them to it? Is that how it worked?

And now these bankers still have a job and the borrowers are losing theirs? Hmmm....perhaps the borrowers should be the ones getting the bonus' and raises! these guys are crafty!

By the is my understanding it has already cost the tax payers at least 16 trillion dollars. What would have been different if they had failed?
Posted by ElaineG | Thursday, September 22 2011 at 1:39PM ET
Great article. I agree that teh banks are not innocent, but many forget what it would have cost taxpayers if Merrill, Countrywide, Wachovia and Bear Sterns had failed.
Posted by Brian S | Thursday, September 22 2011 at 10:05AM ET
"Punishing the banks for political purposes"?


Well, maybe fraud isn't a crime for banks any more. Maybe filing false affidavits in courts isn't a crime. Maybe defrauding people into buying houses they can't afford isn't a crime. Maybe defrauding bank shareholders by making loans that had no chance of paying off isn't a crime.

Maybe filling the world with fraudulent RMBSs and CDO Squared isn't a crime.

Or is it just that enforcing criminal laws against banks and their employees is political? Insisting on the rule of law is so political.
Posted by Ed Walker | Thursday, September 22 2011 at 5:26AM ET
Add Your Comments:
Not Registered?
You must be registered to post a comment. Click here to register.
Already registered? Log in here
Please note you must now log in with your email address and password.