JEREMY HOBSON: Well now to another big story breaking this morning. Bank of America has agreed to pay a group of investors $8.5 billion to settle a lawsuit over mortgage backed securities that went bad in the housing bust.
For more on the significance of this, let’s bring in Richard DeKaser. He’s an economist with the Parthenon Group and he’s with us live from Boston as he is every Wednesday. Good morning.
RICHARD DEKASER: Good morning.
HOBSON: Well Richard, how big of a deal is this settlement?
DEKASER: Well, I think this is a pretty big deal. You know, for the past two years the Federal Reserve has been pumping cash into the banking system and they’ve been making money, and their capital levels — which is the pool of funds set aside to cover for loan losses basically — is at the highest level in over half a century. But lending has still been tight. One of the reasons among other is simply that the uncertainty related to those litigation has put a big inhibition on firm lending. So beginning to resolve this, putting hard numbers where previously there was mush, I think is going to help them move past this event and ultimately lend more money.
HOBSON: But this settlement doesn’t end all the uncertainty for banks right? This is just the beginning.
DEKASER: Well, it is. You know earlier this year Bank of America announced that it had an upside potential liability of about $30 billion. So in that regard this is only beginning. And other institutions are surely lining up behind them.
HOBSON: And Richard why are the banks here responsible for these mortgage investments that went bad? If I buy a stock and it plummets, that’s my tough luck, right? I mean what’s different here?
DEKASER: Well, the difference here is that the representation of those investments, in other words, the mortgage securities were not accurately represented. Maybe the documentations on the mortgages themselves were not as good as they were said to have been. At least that’s the allegation. So the implication here is that they’re basically conceding the point, trying to move on, and this is a big change because earlier this year, the position of Bank of America and other was fight to the very end, now it seems like they’re more eager to move on.
HOBSON: Richard DeKaser, economist with the Parthenon Group, thanks so much as always.
DEKASER: My pleasure, take care.