Today, once again, U.S. and world financial markets were in turmoil. Regrettably, here at home, since the Fall of 2008, little has been accomplished by our government — bloviations and spin about Dodd-Frank to the contrary -- to effectively resolve matters that would prevent a recurrence of the same events that brought our country to its knees, and from which we, the “unwashed masses” on Main Street, have yet to significantly recover in any practical definition of the word (as multiple articles in Monday’s NY Times and around the blogosphere, see links below, also reminded us). On a global scale, many say we witnessed events, today (literally) in Europe, which directly mirrored the situation that occurred after the implosion of Lehman Brothers, here in the U.S., in mid-September ’08, too.
Truth be told, the reality in the U.S. is now to the point where many economic pundits (including NY Times’ Economics Editor Catherine Rampell, on the front page of today’s edition of that paper’s business section; see: “Second Recession In U.S. Could Be Worse Than First”) are telling us that we may be slipping into another recession which may evolve (or, has already evolved) into something far worse than the one from which we (again, we’re “told”), supposedly, just emerged.
I think at least a couple of the most underreported economic stories of the moment, however are: 1.) the very real possibility that our country’s largest bank, Bank of America, might actually end up in receivership in the not-too-distant future (as you’ll read about that reality, below; their stock lost another 20% in market value, today, alone; and while I haven’t checked the numbers, that would mean somewhere between 50% and 60% of the bank’s market value has vaporized over the past few months), along with; 2.) the truth that the S&P credit downgrade of our country’s debt is really not as big of a deal as most think. However, it is quite notable for the immediate damage it’ll cause in the municipal bond marketplace; and, as a result of that, the virtually direct harm it’ll cause to local governments throughout the land. (Another subject I’ve discussed in detail, countless times in numerous diaries; most recently, right HERE.)
Yet, as Gretchen Morgenson reminds us in the lead article on the front page of today’s NYT, and as Yves Smith has been discussing it over at Naked Capitalism all along, the mostly-still-insolvent, too-big-to-fail banks are undermining Main Street’s economy by diverting scores of billions in taxpayer funds simply to perpetuate their parasitic existence. (All this running concurrently with the multitude of grossly deceptive memes distributed by the powers that be in D.C. hyping the out-and-out lie that “we made a profit on the Wall Street bailouts.”)
As Paul Krugman noted in his column on Friday, until that mentality changes, and until those in power give real Keynesianism a chance, as he’s noted in recent commentary, America’s just treading water.
“The Wrong Worries”
Paul Krugman
New York Times
August 5, 2011
…It’s not just that the threat of a double-dip recession has become very real. It’s now impossible to deny the obvious, which is that we are not now and have never been on the road to recovery…
…
…To turn this disaster around, a lot of people are going to have to admit, to themselves at least, that they’ve been wrong and need to change their priorities, right away…
Like many others, and as I’ve also stated it numerous times, I’m of the mindset that any talk of “recovery” (especially from a Democrat and in the present tense) inherently trivializes the reality that somewhere north of 100,000,000 Americans are living in--or on the verge of—poverty, is little more than an insult to our entire society, and one of the greatest travesties of all.
Also like many others, I would add that any talk of a “recovery” which does not effectively address Wall Street’s criminally-fraudulent behavior during the runup to our nation’s economic downturn, and even as we blog now, is merely little more than lip service, too.
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Where are we?
Here’s NY Times’ Economics Editor Catherine Rampell’s lead in the business section of Monday’s Times: “Second Recession In U.S. Could Be Worse Than First,” explaining how and why our country’s current economic predicament may be far worse than it was three years ago.
Second Recession In U.S. Could Be Worse Than First
Catherine Rampell
Economics Editor
New York Times
August 8, 2011
If the economy falls back into recession, as many economists are now warning, the bloodletting could be a lot more painful than the last time around.
Given the tumult of the Great Recession, this may be hard to believe. But the economy is much weaker than it was at the outset of the last recession in December 2007, with most major measures of economic health — including jobs, incomes, output and industrial production — worse today than they were back then. And growth has been so weak that almost no ground has been recouped, even though a recovery technically started in June 2009.
“It would be disastrous if we entered into a recession at this stage, given that we haven’t yet made up for the last recession,” said Conrad DeQuadros, senior economist at RDQ Economics…
Rampell continues to tell the story—the details of which most reading this are well aware--of how we arrived at this point: the economy’s still very unhealthy, corporations have squirreled away roughly two trillion dollars, but there’s only nominal sideways movement on Main Street, at best. And, in fact, economic disparity between the haves and the have-nots is worse now than it was four years ago, when the recession began. She points out that our nation’s workforce needed to grow at a paltry 3% clip during this faux recovery—at the very least—just to keep pace with our nation’s population growth. (Essentially, just to tread water, so to speak.)
In fact, just the opposite has occurred.
Instead, the number of jobs has shrunk. Today the economy has 5 percent fewer jobs — or 6.8 million — than it had before the last recession began. The unemployment rate was 5 percent then, compared with 9.1 percent today.
We’re reminded:
--Employees work fewer hours now than they did four years ago; so, with less income now, there’s less money to spend in our consumer-driven economy.
--Since late 2007, personal income is down four percent, exclusive of government payments such as unemployment insurance. Incomes are still “moving in the wrong direction,” with private wages/salaries falling in June, the latest month for which numbers are available.
--Consumer spending is barely where it was when the recession commenced, in December 2007.
--New home construction is virtually, and almost continually, at a lowpoint which has established records for that statistical series in recent months.
--Residential real estate valuations, as I’ve noted this in numerous posts over the past few years, have already surpassed the lows reached during the Great Depression. (Diarist’s Note: And, despite understated comments telling us otherwise, the reality is that somewhere in the neighborhood of one out of every three mortgageholders is underwater, owing more to the banks than their homes are worth.)
--And, industrial production, despite spin about a manufacturing comeback by some of our nation’s believers in the Confidence Fairy “…is by far the worst off. The Fed’s index of this activity is nearly 8 percent below its level in December 2007.”
--Last but not least, “and perhaps most worrisome,” are our country’s overall output numbers, a/k/a our Gross Domestic Product (GDP). “According to newly revised data from the Commerce Department, the economy is smaller today than it was when the recession began, despite (or rather, because of) the feeble growth in the last couple of years.”
Rampell points out that virtually all of the traditional remedies used by our government, historically, are no longer available. (I disagree with this sentiment, at least to some extent. I concur with Krugman when he notes that we never really adopted true Keynesian policies to address these problems.)
She notes:
--interest rates are just about as low as they can go
--the Fed’s already “flooded” Wall Street with cash; and many are now saying that (particularly with regard to Ben Bernanke’s QE2) there is no evidence that much of that cash substantially helped the economy
Rampell states: “Congress had some room — financially and politically — to engage in fiscal stimulus during the last recession.” But, as I’ve reported it in other diaries, the President and his advisors reached the misbegotten conclusion—without making any public attempt to the contrary—that any attempts to push through a second, major stimulus program would be a waste of time.
Towards the end of her piece, we’re reminded that federal debt was 64.4% of the economy when the recession started, at the end of 2007. While, today, estimates are that our debt is on or around 100% of our nation’s annual G.D.P.
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According to the front page lead (an ongoing story about mortgage “putback”/fraud claims by investors suing Bank of America that may very well result in either the demise of--or another massive bailout for--it) in today’s NY Times, a piece by Gretchen Morgenson and Louise Story, entitled “AIG to Sue Bank of America Over Mortgage Bonds,” we’re learning that AIG is now adding its name to a lengthy-and-still-growing list of major financial/institutional investors that are seeking almost $200 billion in reparations from Wall Street. (And, as we’re hearing about it from Yves Smith, farther down below, after the smoke clears, litigation may be on the dockets of our nation’s courts that seeks up to $242 billion in damages for these mortgage fraud claims from Bank of America, alone.)
(Yves Smith has been discussing this, most recently in two pieces over her Naked Capitalism blog, over the past three days, which I’ve reproduced in their entirety, below. Collectively, she’s referring to it as a “Bank of America Deathwatch.” As far as our economy’s concerned, if it does materialize, it’ll become one of the most important milestones of an era noted for its failed economic initiatives.)
Exacerbating the politics of the BofA situation, to even put forth the political notion that Main Street would complacently—or otherwise, in any way, shape or form--accept “another” overt bailout of Wall Street, while our government bloviates about “shared sacrifice,” when virtually all of the true sacrifice is occurring on Main Street, already, is nothing short of an absurdity that would even make the “Confidence Fairy” blush with shame.
Then again, from a purely political standpoint, the optics of the 2012 Democratic convention occurring in Charlotte, which is also the home of the corporate headquarters for BofA, would not be pretty if that building was empty a year from now, to say the least. But, the truth is—as much as our Party might like it to be so—the fate of BofA is not a purely political decision.
So, eliminating a politically untenable, new and overt Wall Street bailout to the mix, the two, politically viable options now on the table are to either provide more covert assistance to BofA, or to, finally, take them out of their misery.
That’s right. As you read this, perhaps moreso than at any time since the Fall of 2008, America’s biggest bank stands a real chance of actually going under. (Again, much more about this in a few moments, down below.)
Also, [I’d urge all reading this to forget about the overhyped, direct adverse impact of the S&P national debt downgrade] for a moment. (As I note, below, what is significantly more important about it is the debilitating, follow-on effect it’ll have — and, from what I’ve just read IS now having -- on the municipal bond marketplace, IMHO.)
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Another inconvenient fact, as I’ve noted in numerous posts, is that the so-called Wall Street “bailout” never ended. What else may one say when they learn that there’s an easy couple-hundred-billion-per-year in obfuscated giveaways to Wall Street in effect, right now?
Like the link in the previous paragraph, here’s a link to yet another of the “smaller,” covert Wall Street bailouts that have occurred—and continue to occur--thanks to taxpayer largesse, but without direct taxpayer knowledge of this corporate kleptocracy, also via Gretchen Morgenson, but in yesterday’s (Sunday’s) edition of the NYT: “Wall Street’s Tax on Main Street.” This time, it’s about Central Falls, Rhode Island. In reality, it’s about Main Streets across the land. And, one has to ask: Where was discussion of the multitude of these inconvenient hundreds of billions of dollars in hidden bailout truths in the most recent chapter of our purportedly bipartisan, budget-cutting “negotiations?”
Wall Street’s Tax on Main Street
By GRETCHEN MORGENSON
New York Times
August 7, 2011
Like many states and cities in these hard economic times, Central Falls — population: 19,000 — was caught short by hefty pension obligations and weak tax revenue. It may not be the last municipality to file for bankruptcy. Jefferson County, Ala., is now on the brink of it, thanks to a sewer bond issue gone wildly bad.
But while pensions and the economy are behind many of municipalities’ troubles, Wall Street has played a role, too. Hidden expenses associated with how local governments finance themselves are compounding financial problems down at city hall.
Wall Street banks have peddled to municipalities all sorts of financial products, some of which have turned out to be costly mistakes. Testifying on July 29 at a public hearing on municipal securities sponsored by the Securities and Exchange Commission, Andrew Kalotay, an expert in financial derivatives who runs a debt management advisory firm in New York, asserted that poorly structured financial transactions involving bonds and derivatives known as interest rate swaps represented “Wall Street’s multibillion-dollar hidden tax on Main Street.”
Mr. Kalotay is talking about a type of complex financing that big banks have pushed on state and local authorities in recent years. The arrangements are typically made when borrowers want to exchange variable-rate debt for fixed-rate obligations.
These deals are lucrative for the banks, but many of the issuers don’t seem to understand them. Mr. Kalotay told the S.E.C. that excessive fees charged by banks had cost issuers, and therefore taxpayers, $20 billion over the last five years. Real money, in other words, that could have been used in other ways by states and towns short on cash…
I’ve discussed these facts in a number of posts, with the link to the most recent one being available HERE.
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16 months ago, Kossack gjohnsit provided us with a great post on the single largest, mostly covert Wall Street bailout of all, in THIS diary about Fannie Mae and Freddie Mac: “The most expensive bailout of all, and no one is talking about it.”
(NOTE: Today, in follow-up to the U.S. ratings downgrade announced on Friday, S&P also downgraded Fannie Mae and Freddie Mac.)
The most expensive bailout of all, and no one is talking about it
gjohnsit
Daily Kos
Friday, March 5th, 2010 1:16PM
Let me take you back to Christmas Eve, 2009. It was a time to wrap gifts for loved-ones. That's how the Obama Administration felt about the financial industry when it lifted all caps in emergency bailout money to Fannie Mae and Freddie Mac. That means the taxpayer was on the hook for all losses at these two mortgage giants no matter how large the losses.
The move caused a slight stir, but never got the attention of the American public because the announcement was timed to coincide with the peak season of distraction. And so it was forgotten...but not by Fannie and Freddie.
On eight maids a milking day, also known as New Year's Day, Fannie Mae took advantage of this generosity.
Effective Jan. 1, 2010, Fannie Mae brought an additional $2.4 trillion of its guaranty book of business on to the balance sheet under SFAS 166/167.
Therefore, Fannie Mae expects to reflect approximately 18 million loans on its books compared with approximately two million loans as of Dec. 31, 2009. Management estimates that the cumulative effect of adopting FAS 166/167 will boost its net worth by $2 billion to $4 billion in its first-quarter 2010 results.
Stop! Hold the phone. What this statement indicates is that Fannie Mae, the largest mortgage company in the entire world, was holding eight times the amount of mortgages off-book than it had on-book.
Thus despite the fact that it is losing tens of billions of dollars every quarter, and has borrowed $76.2 billion so far, it was actually hiding the vast majority of its worst performing mortgages off-book. The only reason you move assets off-book is if they are illiquid. And that's not even taking into account Freddie Mac, which has borrowed another $50 Billion from the taxpayers so far.
How bad are those assets? It's hard to say for certain…
Back in early March 2010, when gjohnsit posted his diary, excerpted above, it WAS “hard to say for certain” just how big of a hole Fannie and Freddie were in. As of a little over six weeks ago, we now know that Fannie Mae and Freddie Mac are sitting on, AT LEAST, over $900 billion in illiquid assets.
We’ve learned over the past few weeks that Fannie Mae and Freddie Mac, the largest government sponsored enterprises (GSE’s) which support Wall Street’s control of our nation’s residential mortgage market (more precisely, the GSE’s have supported Wall Street’s profits, moreso than ever over the past few years, while those too-big-to-fail monsters have laid off record-breaking amounts of their mortgage bubble bets-gone-wrong on taxpayers’ backs) are now sitting on…drumroll please… $903 billion in “illiquid assets” as you read this. (Note, immediately below, these are our government’s own, latest numbers.) And, a significant portion of that amount is, most assuredly, courtesy of none other than Bank of America and their Countrywide Financial subsidiary. See: “Toxic loan dump,” from Reuters’ Agnes T. Crane, 6/22/11 (h/t NYTimes.com).
Toxic loan dump
By Agnes T. Crane
Reuters (link via the NY Times’ website)
June 22, 2011
The U.S. Federal Housing Finance Agency estimates that Fannie Mae owned roughly $513 billion of illiquid mortgages in its investment portfolio at the end of last year. This represents about 65 percent of Fannie’s holdings, up from 48 percent the previous year. Freddie Mac held some $390 billion of illiquid assets, or 56 percent of its portfolio - up from 42 percent the previous year.
The regulator of the two government-run housing finance giants (known as government-sponsored enterprises, or GSEs) expects the proportion of illiquid assets to increase further this year as Fannie and Freddie continue to buy back severely delinquent mortgages - those 120 days or more past due - from the mortgage bonds they guarantee, while at the same time shrinking their overall balance sheets as they are required to do.
Fannie and Freddie are purchasing roughly $10 billion of severely delinquent mortgages a month, Barclays Capital estimates…
Bold type is diarist’s emphasis.
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So, how’d that happen? Answering this obviously-rhetorical question, the lion’s share of this new debt was not accrued due to any massive stimulus spending on Main Street. As Paul Krugman recently noted, that never happened. Over the past decade, and most recently since the Fall of 2008, much/most of our government’s cash was spent funding wars, paying for record-breaking increases in the costs of health care goods and services, and supporting the ongoing socialization of Wall Street’s losses as our nation’s moneyed elite continued to privatize their make-believe profits.
Today, right now as you read this, I believe we’ve reached a real tipping point.
I truly believe that the end result of our nation’s fate rests in how our country elects to handle the now-obvious implosion of its largest commercial financial services institution, along with the still-growing deficits that currently exist at the state and municipal level throughout America.
Given the recent announcement that Treasury Secretary Tim Geithner will remain with the administration for the foreseeable future, I’m not optimistic about where we’re headed. And, that’s putting it mildly. But, I’ll let Naked Capitalism Publisher Yves Smith explain, in great detail what’s going on, today, behind closed doors in lower Manhattan, Charlotte and Washington.
Bank of America, our country’s largest retail financial services firm, is easily in the hole for a couple of hundred billion dollars more than they’ve acknowledged, to date. I’ve covered this story rather extensively over the past nine months; see HERE and HERE for examples of this. But now, primarily due to its rapidly-tanking share price reflecting a Wall Street consensus that our nation’s largest retail bank has been grossly-overstating the value of its assets, this story is now going mainstream. Between that and escalating claims from the institutional investor community, it’s to the point that Naked Capitalism Publisher Yves Smith has started a “Bank of America Death Watch” blog. (Read about it, below.)
So, while frequent public jawboning about Standard & Poor’s U.S. credit downgrade is virtually all that we’re reading and hearing about now--I covered my “deep thoughts” [heh] on this in a post, earlier on Sunday--the real story concerns whether or not our country’s going to draw the line on its welfare programs for the status quo, vis-à-vis the real disposition of the BofA story; and, on another front, what’s going to be done concerning what’s now happening within the municipal bond marketplace, as you read this.
You see—for many who may inconveniently overlook the harsh reality that America isn’t some conceptual accounting idea, but is, in fact, comprised of 50 states’, D.C.’s, and assorted territories’ fiscal budgets, along with their respective counties’ and towns’ books, too—many of these entities, already on the verge of bankruptcy, will now, almost certainly, fall off into a financial abyss that is virtually guaranteed to create an end result that one may only describe by using words such as “draconian” or “neofeudal.”
Of course, that’s if we’re to believe what’s in play at another ratings firm, Moody’s, where it’s now being bandied about the blogosphere that hundreds, if not thousands, of muni bond offerings are about to get downgraded by them over the next day or two, as well. And, that’s because these muni bonds’ credit ratings are pegged to the U.S. t-bill interest rates, either tacitly or formally. (And, note, unlike the national S&P credit downgrade, in most instances we’re NOT talking about downgrading this municipal paper from an “AAA” to “AA+” status. Many of these local governments’ bond ratings are at or near junk status, already. What this means is that, starting today, some muni debt will become virtually impossible to move in the marketplace due to the downgrade of our federal paper; in many other cases, other municipal, county and state governments will, collectively, have to pay billions more in fees—think: higher interest to entice buyers to purchase municipal debt; along with additional pass-throughs of increased insurance and derivatives’-related charges by the big banks--to move their bonds now, instead. Again, assuming these imminent downgrades will enable these local governments to issue debt securities, at all.)
So, just as sure as we’re hearing that there will be cuts made to the ongoing budgets of those programs we now know as our nation’s social safety net, America’s entitlement programs for the rich continue to be “funded” at record-breaking levels. Without question, the corporate poster child du jour for our country’s kleptocratic class is our nation’s largest and undeniably-still-insolvent retail financial services institution, Bank of America.
IMHO, it is, perhaps, the very greatest of countless, inconvenient realities that are currently being obscured by boldfaced propaganda and a grossly-misdirected public dialogue about our nation’s finances, today.
While Main Street continues to miss the bus making stops on our country’s supposed route along the “road to recovery,” the too-big-to-fail banks continue to kick the proverbial can down that same road.
Over the past few days, however, we’re beginning to hear, again, that Bank of America may have run out of pavement.
The truth is that the very concept of economic “shared sacrifice” belies little more than what is, in fact: a cruel myth perpetuated by the propaganda of our elite’s minions in the MSM.
As promised, here’s Yves with the skinny on BofA’s implosion...in two parts…and more…
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(NOTE: Diarist has received written authorization from Naked Capitalism Publisher Yves Smith to reprint her blog's posts in their entirety for the benefit of the DKos community.)
Bank of America Deathwatch
Yves Smith
Naked Capitalism
August 5, 2011 4:16AM
This blog is starting a Bank of America death watch.
It is clear that the Charlotte bank has too much in the way of legal liability that it will not be able to shed and yet-to-be-taken writedowns on balance sheet items (for instance, roughly $125 billion of home equity loans and junior liens on residential real estate as of end of last year) for it not to be at risk of a death spiral. Its stock was down 7.44% yesterday, which puts its market cap at $89.5 billion, which is a mere 41.6% of common equity (total equity less book value of preferred) of $215 billion. That means if the bank is under pressure to raise its capital levels, it will be so dilutive as to be problematic, particularly if the stock market weakens further and banks continue to take it on the chin. And the entire mortgage industrial complex is coming under stress. Number three mortgage insured PMI posted yet another loss and fell short of regulatory standards. Although mortgage insurer woes are mainly a Fannie-Freddie issue, problems in tightly-coupled systems can ricochet in unexpected ways.
The death spiral dynamic kicked in during the crisis as a result of funding stress: as interbank markets dried up and short term funding costs rose, CDS spreads also rose and banks faced risk in terms of both cost and availability of funding. Rating agencies downgrades exacerbated the spiral. Some of these conditions would appear not to be operative now, with banks having tons of reserves parked at the Fed. But BofA in particular has been suffering a slow bleed of depositorss (correction of earlier “deposits”, see comments for discussion as to why the reported increase in deposits on BofA’s balance sheet is more complicated than a superficial reading might suggest) as angry consumers vote with their feet, making it more dependent on market funding than before.
The other way for BofA to shore up its capital level would be for it to sell assets. But it already dispose of the Merrill Lynch stake in Blackrock. Merrill would seem to be the most logical sale candidate, but who would buy it when the logical buyers, other TBTF banks, are now under stress thanks to financial market upheaval? It would seem nuts to allow any of the US TBTF banks to double up on market risk. Citi has been under regulatory pressure to skinny down. JPM is less sound that its PR would have you believe (there is a ton of risk sitting in its derivatives clearing business) but Dimon loves to be the government’s subsidized buyer if things got that far. Morgan Stanley? A sale of a stake to a sovereign wealth fund (the notion that this is a “buy low” in an entity not exposed to mortgage liability?)
Bank of American and Citigroup both had near death experiences in early 2009. Citigroup was forced by the FDIC to trim its operations considerably. Bank of America was not required to make any serious overhaul. The mortgage mess has exposed the weakness of the bank’s foundations. Perhaps it will manage to muddle through again ex extraordinary official measures, but I would not bet on it.
Update 12:00 PM: The stock is taking another dive today, down nearly 7% when the S&P (more heavily weighted towards financials) is down a mere 1.7%. The reaction appears to be a combo plate of digesting yesterday’s release of the 10-Q, the Schneiderman law suit, and the news du jour hasn’t helped either. A prominent story on Bloomberg focuses on this revelation in the 10-Q:
Bank of America Corp. (BAC), the lender that announced a $3 billion settlement with Fannie Mae and Freddie Mac this year, told investors that elevated claims from the firms may cost more than previously forecast.
New demands for refunds on soured loans from the two government-sponsored enterprises are coming “in numbers that were not expected based on historical experience,” the Charlotte, North Carolina-based bank said yesterday in its quarterly filing. Fannie Mae and Freddie Mac are being “more rigid” in resolving demands, said the bank, the worst performer today in the Dow Jones Industrial Average.
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More Bank of America Deathwatch: AIG to Seek $10+ Billion for Dud Mortgages
Yves Smith
Naked Capitalism
Monday, August 8, 2011 2:22AM
Wow, this couldn’t be happening to a nicer bank (well take that back, JPM and Goldman are tough competitors).
As you may recall, in the previous quarter, Bank of America announced its $8.5 billion mortgage settlement, which is now looking pretty wobbly, since a variety of unhappy parties, the latest being New York attorney general Eric Schneiderman, have taken aim at it. And Delaware attorney general Beau Biden is reported to be joining the pile on this week. This means either no deal, or a very different deal (almost certainly with bigger numbers attached) after a long slugfest, um, negotiations. The Charlotte bank had said it would increase loss reserves in the second quarter by $20 billion (which included this $8.5 billion) and claimed this would put its mortgage woes behind them. Yours truly was skeptical, and the market reacted badly when it saw the revelation in their 10-Q filing just released, that the bank was going to take more losses on Fannie and Freddie putbacks than previously expected.
The latest revelation, that AIG is expected to file a suit that will seek more than $10 billion in damages against Bank of America on Monday, comes from Louise Story and Gretchen Morgenson of the New York Times:
The American International Group is planning to sue Bank of America over hundreds of mortgage-backed securities, adding to the surge of investors seeking compensation for the troubled mortgages that led to the financial crisis.
The suit seeks to recover more than $10 billion in losses on $28 billion of investments, in possibly the largest mortgage-security-related action filed by a single investor.
It claims that Bank of America and its Merrill Lynch and Countrywide Financial units misrepresented the quality of the mortgages placed in securities and sold to investors.
Note that this is yet another representation and warranty suit, the very same type of liability that BofA was trying to extinguish in its $8.5 billion settlement. Clearly BofA thinks that the amount of the settlement, which looks to be 3.5% of the estimated liability, is a little light(some of the aggrieved parties say the liability across all of the 530 pools included in the settlement is $242 billion). MBS rep and warranty cases have never gone to trial, since they are too costly to perfect (they wind up being fought on a loan by loan basis, even if sampling is done, since the plaintiff must not only establish that the loans were worse than promised, but also that they went bad because they were substandard, not because the borrower lost his job or suffered a medical emergency or had some other “shit happens” normal underwriting loss).
The story also reports that AIG is readying similar suits against other logical suspects, such as Goldman Sachs, JPMorgan Chase and Deutsche Bank, so expect big financial stocks to be under even more pressure when the market opens (I wonder if this story had anything to do with S&P futures going from down more or less twenty points in the early part of the Asian trading day to minus 32 points now).
One gratifying aspect is that Story and Morgenson spend most of the article hectoring the officialdom for doing nothing about bank misdeeds:
The private actions stand in stark contrast to the few credit crisis cases brought by the Justice Department, which is wrapping up many of its inquiries into big banks without filing any charges. The lack of prosecutions — the Justice Department has brought three cases against employees at large financial companies and none against executives at large banks — has left private litigants, mainly investors and consumers, standing more or less alone in trying to hold financial parties accountable.
“When federal authorities don’t fulfill their obligation to enforce the law, they essentially give an imprimatur to the financial entities to do whatever they want and disregard the law,” said Kathleen C. Engel, a professor at Suffolk University Law School in Boston. “To the extent there are places where shareholders and borrowers can pursue claims, they are really serving the function of the government. They are our private attorneys general.”
The Administration and some state attorneys general are still carrying on with the farce of a settlement of their own, having conducted zip in the way of meaningful investigations. They ought to be ashamed, but I assume they are too badly indoctrinated to be capable of such sentiments any more.
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(h/t to Pat Metheny and Lyle Mays for providing the inspiration for the headline of my post, from the title of their 1981 album: “As Falls Wichita So Falls Wichita Falls.”)