Article 77
Imminent, Massive Wave Of Lawsuits To Be Filed By The US Against America’s Biggest Banks
Friday, September 2nd, 2011
In a move that could either send BAC stock limit down overnight or send it soaring (we are still trying to figure out just what is going on here), the NYT has broken major news that the US is preparing to go nuclear on more than a dozen big banks among which Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, in an attempt for Fannie and Freddie to recoup $30 billion if not much more. The lawsuit is expected to hit the docket in the next few days: “The suits stem from subpoenas the finance agency issued to banks a year ago.
If the case is not filed Friday, they said, it will come Tuesday, shortly before a deadline expires for the housing agency to file claims.” Now, taken at face value, this would mean that Bank of America can kiss its ass goodbye as unlike the Walnut Place litigation, this will take place in Federal Court where Article 77 is not applicable. Yet there is something that gives us pause: namely logic, captured by the following words: “While I believe that F.H.F.A. is acting responsibly in its role as conservator, I am afraid that we risk pushing these guys off of a cliff and we’re going to have to bail out the banks again,” said Tim Rood, who worked at Fannie Mae until 2006 and is now a partner at the Collingwood Group, which advises banks and servicers on housing-related issues.” In other words: if the banks are sued, and if justice prevails, the end of the world is nigh and cue TARP 2 – XXX. Now where have we heard that argument over, and over, and over before.
From the NYT:
The suits will argue the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.
Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers.
In July, the agency filed suit against UBS, another major mortgage securitizer, seeking to recover at least $900 million, and the individuals with knowledge of the case said the new litigation would be similar in scope.
Private holders of mortgage securities are already trying to force the big banks to buy back tens of billions in soured mortgage-backed bonds, but this federal effort is a new chapter in a huge legal fight that has alarmed investors in bank shares. In this case, rather than demanding that the banks buy back the original loans, the finance agency is seeking reimbursement for losses on the securities held by Fannie and Freddie.
The prestory is by now known by everyone:
Besides the angry investors, 50 state attorneys general are in the final stages of negotiating a settlement to address abuses by the largest mortgage servicers, including Bank of America, JPMorgan and Citigroup. The attorneys general, as well as federal officials, are pressing the banks to pay at least $20 billion in that case, with much of the money earmarked to reduce mortgages of homeowners facing foreclosure.
And last month, the insurance giant American International Group filed a $10 billion suit against Bank of America, accusing the bank and its Countrywide Financial and Merrill Lynch units of misrepresenting the quality of mortgages that backed the securities A.I.G. bought.
Bank of America, Goldman Sachs and JPMorgan all declined to comment. Frank Kelly, a spokesman for Deutsche Bank, said, “We can’t comment on a suit that we haven’t seen and hasn’t been filed yet.”
The response? Why Paulson-esque Mutual Assured Destruction:
But privately, financial service industry executives argue that the losses on the mortgage-backed securities were caused by a broader downturn in the economy and the housing market, not by how the mortgages were originated or packaged into securities. In addition, they contend that investors like A.I.G. as well as Fannie and Freddie were sophisticated and knew the securities were not without risk.
Investors fear that if banks are forced to pay out billions of dollars for mortgages that later defaulted, it could sap earnings for years and contribute to further losses across the financial services industry, which has only recently regained its footing.
The total litigation amount will not be in the trillions… but will certainly be in the tens if not hundreds of billions.
While the banks put together tens of billions of dollars in mortgage securities backed by risky loans, the Federal Housing Finance Agency is not seeking the total amount in compensation because some of the mortgages are still good and the investments still carry some value. In the UBS suit, the agency said it owned $4.5 billion worth of mortgages, with losses totaling $900 million. Negotiations between the agency and UBS have yielded little progress.
Bottom line: the gloves are coming off, and while we want to believe that this is the final nail in BAC’s coffin (Quinn Emanuel is counsel for the FHFA), we do have a nagging feeling that the US will not purposefully do everything in its power to destroy its banking sector.
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Tags: Article 77, Ass Goodbye, Bank Of America, Biggest Banks, Bonds, Collingwood, Conservator, Due Diligence, Face Value, Fannie Mae, Finance Agency, Gold, Goldman Sachs, Housing Agency, Jpmorgan Chase, Major News, Massive Wave, Nyt, Rood, Securities Law, Subpoenas, Walnut Place
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Warren Buffett’s Philosophy On Investing In Banks
Tuesday, August 30th, 2011
In light of last week’s surprise announcement of Buffett’s bailout redux of Bank of America (the first one being Goldman back in 2008), and following today’s even more surprising objection by the FDIC which threatens to scuttle the Bank of America settlement and force Bank of Countrywide Lynch to raise far more capital, pushing Warren to double down on his investment throwin more good money after bad, especially if the legal case moves from an Article 77-friendly NY state court to Federal, here are the philosophical thoughts from the Berkshire’s oracles contained, in his “Collected Writings”, on his desire to put money into banks.
And we quote:
The banking business is no favorite of ours. When assets are twenty times equity-a common ratio in this industry-mistakes that involve only a small portion of assets can destroy a major portion of equity. And mistakes have been the rule rather than the exception at many major banks. Most have resulted from a managerial failing that we described last year when discussing the “institutional imperative:” the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so. In their lending, many bankers played follow-the-Ieader with lemming-like zeal; now they are experiencing a lemming-like fate.
Because leverage of 20:1 magnifies the effects of managerial strengths and weaknesses, we have no interest in purchasing shares of a poorly-managed bank at a “cheap” price. Instead, our only interest is in buying into well-managed banks at fair prices.
Perhaps a better title for this post would “Buffett on lemmings”…
Full humorous musings:
Tags: Article 77, Bailout, Bank Of America, Berkshire, Case Moves, Fdic, Gold, Goldman, Humorous Musings, Legal Case, Lemmings, Objection, Oracles, Philosophical Thoughts, Redux, Small Portion, Strengths And Weaknesses, Surprise Announcement, Twenty Times, Warren Buffett, Zeal
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