Turn On The Lights, Watch The Roaches Scatter Part 72

Bank of America not only admits to mortgage fraud in Foreclosuregate, but will pay $8.5 billion dollars to settle with the big hedge fund lords that took it in the shorts on CDOs.

Bank of America and its Countrywide unit will pay $8.5 billion to settle claims that the lenders sold poor-quality mortgage-backed securities that went sour when the housing market collapsed.

The deal, announced Wednesday, comes after a group of 22 investors demanded that the Charlotte, N.C. bank repurchase $47 billion in mortgages that its Countrywide unit sold to them in the form of bonds.

The group, which includes the Federal Reserve Bank of New York, Pimco Investment Management, and Blackrock Financial Management, argued that Countrywide enriched itself at the expense of investors by continuing to service bad loans while running up servicing fees.

Bank of America, which bought Countrywide in 2008 for $4 billion, has denied those claims.

Bank of America CEO Brian Moynihan said Wednesday that the settlement would minimize "future economic uncertainty" in the banking business and "clean up the mortgage issues largely stemming from our purchase of Countrywide."

Expect more banks to choose to settle with Pimco and the other hedge fund giants.   More importantly, this could be the crack in the dam that leads to all kinds of other legal actions against the mortgage banks.  Granted, BoA is getting away with less than 20 cents on the dollar here, but considering there's trillions of bad loans out there overall, expect to see a lot more settlements like this.

And soon.  Oh, and BoA doesn't have the $8.5 billion in cash laying around, either.  Things ought to get very very interesting.