IN A DEAL ANNOUNCED MONDAY, Citigroup has agreed to pay $7 billion to settle a Justice Department lawsuit over the bank’s role in the sale of risky mortgage-backed securities prior to the 2007 collapse of the housing market. The settlement includes $4 billion in civil penalties, which Attorney General Eric Holder said was a record civil penalty; $500 million will go to states’ attorneys general, and the remainder will go to help consumers affected by the financial crisis.

This announcement follows a settlement last year with JPMorgan Chase for $13 billion for its role in the financial crisis. Which leaves only Bank of America.

The Justice Department is reportedly seeking $17 billion from BoA. When talks broke down between the parties, the megabank was reportedly offering $12 billion to settle the case — this after already spending more than $60 billion in legal fees, settlement costs and agreements to buy back loans since the crisis, the most of any bank.

The question is, will BoA settle or will it go to trial? Most observers believe the bank will settle, as a messy trial could be a public relations disaster.

When most people hear about these settlements, they cheer and think the banks are getting what they deserve. But this short-sighted thinking apparently does not take into account that these are publicly traded corporations — nor that in the cases of JPMorgan Chase and Bank of America, the real culprits are the companies these banks purchased long after the misdeeds were already done.

It is no surprise that BoA has paid the most of all the large banks. After all, it purchased the nation’s largest mortgage lender, Countrywide, early in 2008. Countrywide became the nation’s largest lender in part by being the biggest promoter of subprime mortgages — and by promoting so-called liar loans, zero downpayment and negative amortization adjustable-rate mortgages.

Bank of America agreed to purchase Countrywide for the bargain price of $2.5 billion in January 2008 — just before the Wall Street meltdown and the freeze of credit markets that just about put our country into a depression.

By that point the crisis was already brewing, and the United States Treasury was scrambling to hobble together a plan to save the nation’s economy. Many believe the Countrywide deal was brokered by then-Treasury Secretary Hank Paulson in an effort to stabilize a faltering mortgage market. Almost everyone agrees it was one of the worst deals in the history of American finance, tarnishing the stellar reputation of former Bank of America CEO Ken Lewis.

The real losers in these mega deals are the shareholders and employees of the banks. Losses incurred are essentially money down the drain — money that could have been used for any number of purposes to make the banks stronger, insuring profitability for the shareholders and job security for their employees. Consumers also lose, as the banks must find a way to recoup these losses, which leads to higher fees.

Guy Benjamin (CAL BRE License #01014834, NMLS 887909) writes a weekly column for The Herald, offering general information on real estate matters. As it is impossible to address all possibilities and variations, he will try to answer individual questions by readers who contact him at 707-246-0949 or gbenjamin@rpm-mtg.com.

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