The profit announcement was a dramatic turnaround from the previous year.  Bank of America investors watched the company’s shares dive by more than 50% last year and the company lost $1.2 billion in the fourth quarter of 2010.

Bank of America’s traditional consumer and corporate lending divisions were healthier than its capital markets divisions.  The Global Banking and Markets division saw revenues drop by 31% with a recorded net loss of $433 million.

The country’s second largest bank has been steadily shrinking, laying off around 7,000 employees and shedding tens of billions of dollars from its balance sheet.  Bank of America lost its number one ranking as the biggest bank in the United States to JPMorgan Chase last year.

The shrinking the company’s balance sheet and selling off assets allowed Bank of America to solidify its capital position.  The bank’s Tier 1 capital ratio rose to 9.86% in the fourth quarter, from 8.6% a year ago.

Bank of America chief executive Brian T. Moynihan said in a statement, “We enter 2012 stronger and more efficient after two years of simplifying and streamlining our company.  We built our capital ratios to record levels during 2011 on the strength of our core businesses and by shedding those that are not core to serving customers and clients.”

The $2 billion in income was mainly the result of one-time items, including a gain of $2.9 billion from the sale of a stake in China Construction Bank and a gain of  $1.2 billion on the exchange of common stock for preferred stock.  The company’s acquisition of Countrywide Financial in 2008 is likely to go down in history as one of the most disastrous corporate deals ever, saddling the bank with losses of more than $30 billion.

The U.S. Justice Department says it’s the largest settlement over residential fair lending practices in history.  Between 2004 and 2007, Countrywide originated millions of residential mortgage loans as the nation’s largest single-family mortgage lender.  Bank of America bought Countrywide Financial in 2008.

The alleged discrimination was aimed at qualified African-American and Hispanic borrowers that applied for home loans.  The complaint alleged that Countrywide charged more than 200,000 African-American and Hispanic borrowers steeply higher fees and interest rates than non-Hispanic white borrowers that had a similar credit profile.  These borrowers were charged higher fees and rates because of their race or national origin, rather than any other objective criteria.

The complaint said that Countrywide was aware that the fees and interest rates that the loan officers were charging were discriminatory against African-American and Hispanic borrowers, but failed to impose meaningful limits or guidelines to stop it.  Sub-prime loans carry more expensive terms, such as prepayment penalties, and higher adjustable interest rates that increase suddenly after two or three years.  This made the payments unaffordable and left the borrowers with an increased risk of foreclosure.  The complaint alleged that by steering borrowers into sub-prime loans from 2004 to 2007, Countrywide harmed those qualified African-American and Hispanic borrowers.

Bank of America spokesman Dan Frahm said in a statement that the company does not practice lending based on race.  He said, “We discontinued Countrywide products and practices that were not in keeping with our commitment and will continue to resolve and put behind us the remaining Countrywide issues.”

Assistant Attorney General for the Civil Rights Division Thomas E. Perez said, “Countrywide’s actions contributed to the housing crisis, hurt entire communities, and denied families access to the American dream.”  Attorney General Eric Holder said, “These institutions should make judgments based on applicants’ creditworthiness, not on the color of their skin.  With today’s settlement, the federal government will ensure that the more than 200,000 African-American and Hispanic borrowers who were discriminated against by Countrywide will be entitled to compensation.”

Bank officials have stated that the plan is viewed as an opportunity to reduce debt and interest expenses while raising capital.  This was a reversal of other announcements claiming that the company did not intend to issue any new shares in the company.  A filing with the Securities and Exchange Commission outlined the plan and the bank is expected to go ahead with the exchange before long, although the decision is not considered final yet.

The value of Bank of America’s shares has decreased dramatically due to numerous issues plaguing the company and worrying investors.  The bank faces tens of billions of dollars in liabilities for its role in the subprime mortgage meltdown.  Bank of America also reversed plans to impose a $5 fee on debit card holders after consumers and politicians in Washington voiced their outrage at the plan.  Shares of Bank of America have fallen nearly 50% in 2011.

The decision to issue new common shares will not reduce earnings if money is saved on the interest payments of the preferred shares and the bank may even see increased earnings in the short term.  The decision to swap shares will also increase the company’s Tier 1 capital base because preferred stock does not count as common equity under international regulatory standards while common stock does count.

Jerry Dubrowski, a spokesman for the bank, said, “We want to exchange one form of capital, which is very expensive, for another, which counts toward our Tier 1 common equity on terms that are economically favorable to us.  Our goal is to have the strongest balance sheet we can have, and this is an important step.”

The implementation of the additional fee for debit card usage comes at a time when purchases made by debit card are on the rise.  Between April 2010 and April 2011, debit card transactions authorized by signature increased by nearly 10%.  At the same time, recent legislation has placed more restrictions on the amounts that banks can charge retailers for debit card transactions at their locations, decreasing the expected profits from these charges.  The added fees are widely seen as an attempt to replace the revenue lost from the implementation of these new regulations.

U.S. Senator Dick Durbin (D-IL), who sponsored portions of the new legislation, released the following statement in response to the decision by Bank of America to charge their customers additional fees:

“It seems that old habits die hard for Bank of America. After years of raking in excess profits off an unfair and anti-competitive interchange system, Bank of America is trying to find new ways to pad their profits by sticking it to its customers. It’s overt, unfair and I hope their customers have the final say.”

“Earlier this year the Federal Reserve determined that the interchange fees Visa and MasterCard fix for big banks grossly exceed the cost of processing a debit card transaction by some 400%. These hidden fees were designed to boost big-bank profits by charging small businesses and merchants every time a debit card was swiped. And profit they did. Bank of America hauls in billions in debit interchange each year.”

“Thankfully, on October 1st that flawed system will be replaced by a more transparent and competitive market. Swipe fee regulation will still allow banks to cover the actual costs of debit transactions but will rein in the banks’ excessive profit-taking. Small business and merchants will benefit from fee relief and consumers will benefit from lower prices. And banks that try to make up their excess profits off the backs of their customers will finally learn how a competitive market works.”

According to recent reports, the number of foreclosure filings submitted by Bank of America increased more than 200% in the month of August when compared to the previous month.  Many of these filings were notices of default, the first step in the process of foreclosing on a home in states where foreclosures are not required to be overseen by a judge, such as Nevada and California.

Experts are worried that an influx of foreclosed homes on an already distressed housing market would depress prices further; increasing the number of homeowners that are underwater on their mortgage and leading to more foreclosures and more people mailing in the keys to homes they no longer wish to pay for.  This would have a negative effect on the United States economy, which is already struggling to extract itself from the worst economic downturn since the great depression.

Many banks postponed foreclosing on homes that were delinquent this past year as they tried to deflect criticism that they were using shoddy mortgage paperwork and automatic paperwork signers, also known as robo-signers, to foreclose on properties in numerous states.  Processing delays also played a role in reducing the number of foreclosure filings reported through the first half of the year.

Bank of America’s stock price as plummeted 50% this year as the company has struggled to defend itself against a barrage of lawsuits related to mortgages, foreclosures, and mortgage-backed securities.  The Federal Housing Finance Agency has filed a lawsuit against Bank of America alleging fraud in the company’s sales of mortgage-backed securities to the agency and insisting on more than $50 billion in restitution.  Bank of America has also been sued by AIG, who claims the bank sold the company mortgage-backed securities that were significantly overvalued and requesting the repayment of $10 billion.

The jobs cuts were announced after Brian Moynihan, Chief Executive Officer of Bank of America, gave an address to investors in which he outlined the cost cutting moves being undertaken to reshape the company.  The company’s stock has taken a dramatic nosedive this year, losing half of its value, and the company must deal with numerous lawsuits from investors and regulators over mortgage-backed securities sales that decreased in value when the housing boom collapsed.

Bank of America has also recently revamped its top management team.  Two top executives chose to leave the company; Sallie Krawcheck, head of wealth management and Joe Price, head of consumer banking.  David Darnell, chief of commercial banking, and Tom Montag, head of investment banking, were elevated to co-chief operating officers, reporting directly to the Chief Executive Officer, Brian Moynihan.

The scheduled job cuts represent a 10% reduction in staff for Bank of America, with a current work force of around 288,000.  These cuts are in addition to the 6,000 jobs already eliminated by the company this year.  The additional reduction in staffing levels is expected to be fulfilled through attrition and the elimination of positions that are unfilled.  Representatives for the bank have indicated that the number of jobs that will be cut is not a fixed number, but the elimination of 30,000 positions will help the company reach its goal of saving $5 billion in costs annually.

The FHFA has made the claim that the loans used for the mortgage-backed securities had riskier characteristics than what was contained in the descriptions used to market the securities.  The damages claimed in the lawsuits include the costs of rescinding the transactions as well as civil penalties and punitive damages for providing misleading materials and misconduct.

The FHFA filed lawsuits against JPMorgan Chase, Bank of America, Citigroup Inc., Merrill Lynch & Co., Goldman Sachs Group Inc., Barclays Plc, HSBC Holdings Plc, Nomura Holdings ltd., Credit Suisse Group AG, Societe Generale SA, Deutsche Bank AG, First Horizon National Corp., Ally Financial, General Electric Co., Countrywide Financial Corp., Morgan Stanley, and Royal Bank of Scotland Group Plc.

In the years since sub-prime mortgage losses pushed Fannie Mae and Freddie Mac towards insolvency, both companies have been operated under US conservatorship.  The billions of dollars in mortgage-backed securities purchased by the companies from some of the world’s largest banks were rated high by the credit ratings firms based on the information provided by these banks about the securities they were offering. This information was found to be incorrect when the mortgages underlying the securities soured, causing billions of dollars in losses for Fannie Mae and Freddie Mac.

Some banks are responding that the FHFA’s claim that the banks misstated the risks of the investments they were selling is unfounded and they are ready to defend their position.  They claim that Freddie Mac and Fannie Mae acknowledged that the losses suffered from their purchases of mortgage-backed securities stemmed from an unprecedented downturn in the housing market and other unforeseen economic factors.  Many company representatives have declined to comment on the lawsuits that have been filed against their company until their legal teams have had a chance to review all of the documents thoroughly.

The impact of the news spread throughout the financial sector as investors worried regulators would ask other big banks to review their foreclosure processes; a topic that is already sour with the public following the robo-signing scandal.

The financial sector, which has led stock higher the previous four sessions, finished Thursday 2.3 percent lower, making it the largest S&P 500 laggard on the session.

According to the Federal Reserve’s orders, Goldman Sachs is required to hire an independent consultant to review foreclosures at the Litton Loan Servicing; a unit that Goldman is currently selling. 

Goldman reached an agreement Thursday with the New York Financial Services Superintendent that will allow the $264 million sale of the business to Ocwen Financial Corp go through.   However, this agreement does not free Goldman of investigations of past actions at Litton Loan Servicing.

The Fed stated that monetary penalties would be handed down if wrongful foreclosures were found by the consultant and occurred between 2009 and 2010.

Additionally, any borrower wrongfully foreclosed on would have to be reimbursed by the bank.

The investigation and potential penalties comes just a year after Goldman Sachs paid $550 million to settle charges from the Securities and Exchange Commission of civil fraud.

Elsewhere, Goldman Sachs cut its forecast for new jobs in August to just 25,000.  The Labor Department is set to release nonfarm payrolls for August along with the unemployment rate on Friday morning.