NEW YORK (Reuters) — A U.S. judge
wrestled on Thursday with a U.S. Justice Department request that
Bank of America Corp pay $2.1 billion in penalties after being found
liable for fraud over defective mortgages sold by its Countrywide
unit.
In a second hearing on the penalties to be imposed on the bank, U.S.
District Judge Jed Rakoff in New York said he had not yet decided
how to rule in what was one of the few cases to go to trial stemming
from the financial crisis.
But he tested the government's arguments that it should be awarded
penalties based on revenue Countrywide Financial Corp earned selling
loans to government-sponsored mortgage finance companies Fannie Mae
and Freddie Mac.
Rakoff even asked why the government had not sought even more in
penalties, based on the $4.8 billion paid by Fannie and Freddie,
rather than seeking just $2.1 billion based on revenue earned only
on the defective portion of the loans sold by Countrywide.
"I'm interested in the logic," Rakoff said. "It may be there is
logic to the $2.1 billion, but at least to me there is logic under
your theory of the case that would lead you to claim a gross gain of
$5 billion."
Assistant U.S. Attorney Pierre Armand, meanwhile, suggested the
government would increase its request for penalties from Rebecca
Mairone, a former Countrywide executive, from $1.1 million to $1.6
million based on a $487,000 bonus she recently earned from her
employer, JPMorgan Chase & Co.
The hearing followed a verdict by a federal jury in New York in
October finding Bank of America and Mairone each liable for fraud in
a civil lawsuit centered on a mortgage lending process at
Countrywide called the "High Speed Swim Lane," also called "HSSL" or
"Hustle."
Countrywide, which became a poster child for the U.S. mortgage
meltdown, was acquired by Bank of America in July 2008.
The Justice Department contends that the Countrywide program, which
began in 2007 and which the government says Mairone oversaw,
emphasized quantity rather than the quality of loans produced,
paying employees based on volume and speed and eliminating
loan-quality checkpoints.
Bank of America and Mairone deny wrongdoing. The executive is
referred to as Mairone in court papers but now goes by her maiden
name, Rebecca Steele, according to Marc Mukasey, her lawyer.
Rakoff initially heard arguments on penalties in December, when the
government was seeking $863.6 million based on the gross loss
incurred on the loans by Fannie and Freddie.
A request by Rakoff for briefing on an alternative way to calculate
the penalty prompted lawyers working in the office of Manhattan U.S.
Attorney Preet Bharara to seek the even bigger sum of $2.1 billion
based on Countrywide's gross gains.
"The government believes the penalties need to be severe enough to
deter financial institutions and executives from engaging in like
conduct in the future," Armand said.
But Kenneth Smurzynski, a lawyer for Bank of America, said the
government's request for $2.1 billion failed to reflect the costs
involved in generating the loans. When costs were factored in,
Countrywide actually lost money selling the loans, he said.
"The loans didn't just fall out of the sky," he said.
Mukasey, Mairone's lawyer, urged Rakoff to impose no penalties
against his client, calling her a divorced mother of two who has
suffered enough from the "nuclear" effect of the verdict.
"She is currently looking for a new job or at least thinking about
it and having a hard time because of the negative publicity of this
case," he said.
Rakoff, though, called it a "difficult argument to accept," saying
it seemed "far fetched" that any punishment should be eliminated in
the case of someone who commits fraud.
The case is U.S. ex rel. O'Donnell v. Bank of America Corp et al,
U.S. District Court, Southern District of New York, No. 12-01422.
