Bank of America is hemorrhaging liability. Although it will take years for this drama to play its way out in court, the Charlotte bank, thanks in large measure to the self-inflicted wound of its Countrywide acquisition, faces litigation-related losses that will make a joke of its second quarter “we put it all behind us” $20 billion writedown. Anyone who followed the crisis reasonably closely will recall that banks similarly tried drawing a line in the sand when they wrote down subprime loans and CDOs, only to take additional life-threatening losses in the following quarters.
The credibility of BofA’s loss reserves took a nosedive last Friday, and I am sure they were delighted to have the debt ceiling nail-biter crowd out their bad news. Alison Frankel of Reuters describes the continuing death-of-a-thousand-unkind-cuts reversals (hat tip Lisa Epstein):
First came news of a new securities fraud suit against BofA. Fifteen institutional investors have elected to opt out of the bank’s $624 million class action settlement of Countrywide-related claims, deciding they can do better in a joint suit outside of the class action. What’s particularly interesting about the case, aside from Bernstein, Litowitz, Berger & Grossmann’s 439-page (!) Los Angeles federal court complaint, is the lineup of plaintiffs. Three of them–BlackRock, TIAA-CREF, and Thrivent Financial–are also part of the group of 22 institutional investors that negotiated an $8.5 billion settlement of mortgage-backed securities contract claims with Bank of America in July.
Note that securities fraud was not included in the proposed $8.5 billion settlement. I had thought that was a free concession, since the statute of limitations for securities fraud on mortgage backed securities issues during the crisis has passed. But these claims relate to the Merrill acquisition. Back to the article:
Finally, late Friday a San Francisco state court judge ruled from the bench that the Federal Home Loan Bank of San Francisco’s $19 billion state-law securities claims against BofA and several other defendants are not barred by the statute of limitations. David Grais of Grais & Ellsworth, who represents the bank, said the ruling is “very significant,” given that the defendants devoted half of their motion to dismiss (known as a demurrer in California state court) to assertions that the FHLB waited too long to file its suit.
Now to the current “we need to bail out liability faster” effort. Shahien Nasiripour gives us the latest sighting in the so-called 50 state AG negotiations (now a misnomer because at least four, and probably six have dropped out). They are starting to feel like the Jarndyce versus Jarndyce of negotiations, even though they haven’t been going on all that long, but since we’ve been told since at least March that it would be wrapped up within weeks (meaning two or three, not a hundred and two or three), the continued overpromising and underdelivering is getting a bit old.
The latest twist is that a small group of state AGs (reported to be four or five) are discussing a “side deal with BofA only. It appears that there are now two tracks going: that the Federal regulators and some state AGs are negotiating with banks individually, and the big group negotiation is in theory still alive. But it seems more likely that the big deal is bogged down, likely the result of the latest sighting of trouble: that the banks have started squabbling among themselves as to who owes what.
The curious bit about the HuffPo story is how few state AGs are participating in this negotiation. Normally, I’d take this as a sign that this effort to craft a separate peace came from BofA. If this idea had come from the AG/Federal regulator side of the table, you’d expect a unified front. But the thin participation may also reflect the fact that the AG support for the entire process had flagged as they have been kept in the dark by the lead negotiator for the states, Tom Miller of Iowa, and many are reluctant to give the sort of broad waiver the banks want when no meaningful investigations have taken place.
The hope by BofA is presumably that this deal with the small group will later be joined by more states (or alternatively, they may just want to get a deal with the Federal regulators, who have from the get go seemed to be pushing hard to get something done to give the banks air cover, and will take as many states as will come along for the ride).
Key extracts from the Huffington Post article:
But the options under discussion with Bank of America, the largest U.S. bank by assets, go beyond what’s on the table in the larger group talks. Justice, along with a small band of state legal officers, is pursuing an agreement that would have the bank forgive what participants described as a significant amount of mortgage principal owed by distressed borrowers in exchange for receiving an effective grant of immunity from government prosecution related to alleged mortgage and foreclosure wrongdoing.
Only a small, select group of states are involved in pursuing the side deal with Bank of America, sources said. The other banks targeted by the government — JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial — are engaged in similar individual negotiations with prosecutors. None of those talks are at such an advanced stage, though.
The agreement, if reached, could be used as a template for the other four banks. The state and federal prosecutors are operating on the assumption that if they could strike a deal with Bank of America — the nation’s largest mortgage servicer — that would compel the other large banks to go along or risk prosecution.
Yves here. This “threat of prosecution” is a joke. There have been no investigations, remember? The Feds and AGs are blustering and the banks know it. That’s why they want a broad release. The only reason they have to agree to come to the table is to get a “get out of jail” card on the cheap. The only thing the states and Feds can prosecute without digging in and doing the work they have avoided is robosigning. Even thought that is a fraud on the court, by itself it is unlikely to add up to much in the way of damages.
Even with the BofA talks supposedly further along, so much is still on the table that it isn’t clear a deal is to be had:
Remaining issues include the scope of the release and the breadth of borrower relief, sources said.
For example, it could involve a release from liability for alleged lending abuses; alleged failure to properly securitize home loans in accordance with state laws; alleged abuses of distressed borrowers who fell behind on their payments; alleged illegal behavior when foreclosing on those homeowners; immunity from suits involving a combination of those claims, or from all of them — an effective grant of immunity from prosecution.
Prosecutors are contemplating giving Bank of America this kind of a broad release — something not yet on the table for the other institutions, sources said — but in exchange for more money to be used to finance mortgage modifications for a targeted set of borrowers.
The bigger the release, the more money banks like BofA would be willing to shell out to lower payments, reduce outstanding amounts owed, and provide for borrowers to transition out of their homes and into rentals.
We’ve said for quite a while that any deal is cash versus release; the rest is decorating to hide that fact. And we doubt that any payment for mortgage mods will be big enough to make much of a difference to homeowners. As we’ve stressed before, this effort is misdirected. With loss severities at 75% for subprime (and rising as more homeowners fight foreclosures, which greatly increases losses), the investors representing the bulk of the value of the MBS would sign up for deep principal mods if there were a process in place to screen out borrowers that were too far underwater to make it even with this sort of relief. By contrast, there is simply no way a bank-funded mod program will provide anything beyond shallow principal reductions, unless it is targeted at very few homeowners. It would be much better, as experts like Adam Levitin have suggested, for banks to pay for third parties to process mods (they’ve demonstrated their incompetence and lack of interest repeatedly) and to write down second mortgages (another impediment to principal mods).
This part of the settlement discussion is sneaky and troubling: “alleged failure to properly securitize home loans in accordance with state laws.” The big violation with “proper securitization” is chain of title, and more and more homeowners are waking up to the mess banks have made here and are not happy with it. Yet even as offensive as this waiver is, the AGs can only waive their rights to prosecute. They can’t waive private parties’ rights to action, which means borrowers can and will continue to use chain of title issues to fight foreclosures, and investors, if they finally take enough losses to rouse themselves, would also be able to sue on this basis. The importance of having state AGs act is that they conduct investigations that private parties can leverage, and also legitimate certain types of litigation (investors in particular tend to be conservative, and would rather ride in the slipstream of other efforts).
And the part at the end of the discussion of who might be eligible for mortgage mods is nausea-making:
Participants believe such a pool would lessen the risk posed by moral hazard, a scenario in which people escape consequences for destructive activity, thus encouraging more destructive activity in the future,
How charming. The authorities are worried about the moral hazard of bailing out borrowers who are in trouble in an economy that has been mired in near recession conditions and high unemployment for two years thanks to the actions of banks, but are not at all concerned about letting BofA off on the cheap. Clearly, in the World According to Banks, the only parties who engage in bad conduct are little people.
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At some point, and I’m really not sure when — perhaps once many of the people who have done okay for the past 30 years start doing really badly — this whole house of cards is going to collapse. Or perhaps, as things look to be set up for a really huge economic collapse sooner rather than later. In any event, this nausea-inducing behavior whereby large corporations and banksters flaunt the law, commit larceny, bribery, theft, fraud, murder and any other crime that pays with encouragement from the government, and the “little” people get held to the strictest letter of the law, will end. At some point these corrupt and lawless scum and their apologists will face the music. The harder they come, the harder they fall, one and all.
I keep hoping so but it seems that we need to do more than hope. I am not sure what but am open to the opportunity to effect serious change.
‘Twould be nice if “Tom Miller” could find a language niche in history like “Uncle Tom” or “Jarndyce versus Jarndyce”.
BTW, I like and would recommend the PBS DVD set of “Bleak House” (if it is still available).
I suspect that BofA is on the ropes and looking to be knocked out.
The funny thing (if you can call it that) is that they are punching themselves in the head as homeowners, lawyers, investors are dealing them body blows.
We are starting to see desperation.
Think how just 18 months ago the banks were NEVER going to do principle reductions. Now we are talking the degree of them.
I suspect that the banks are seeing the light a little to late and they have already convinced the regulators to fight principle mods just as they realise it is the one thing that may keep them from realising the full potential losses they face.
It make take the failure of BofA for the regulators and the other banks to come out and openly admit that they NEED principle reductions to save their back sides.
The banks need to get this problem behind them and that means making the foreclosure waive, litigation wave stop.
The situation for the banks is not unlike the need to amputate a limb with gangrene. Better the disfigurement than a painful and ugly death.
Or, more likely, the executives and lawyers are just trying to keep the whole process going as long as they can pay themselves large incomes. To them, the bank is just one more entity to be asset stripped.
In my business we call accountants the ones who strip the bodies. Lawyers are the ones who bayonet the wounded.
Bingo on the “asset-stripped.” Matt Taibbi’s book “Griftopia” describes the Mafia process by which businesses are looted from the inside out. Nobody cares to actually run them *as businesses* in the meantime unless they “give a f**.” And nobody “gives a f**.” He wasn’t describing the actual Mafia, by the way.
“He wasn’t describing the actual Mafia, by the way”
Thank you for that clarification. I wonder how many people are aware that the Bank of America was founded in 1904 by A.P. Giannini and was originally named the Bank of Italy. In 1929 it was merged with the Los Angeles based Bank of America. Giannini founded to bank originally to lend money to immigrants who had difficulty obtaining loans from existing banks. No need to go into too much detail, but he was the antithesis of the modern day banker and was almost universally loved and respected in his time. I recall that into the 1980’s a B of A branch that I frequented at Columbus and Broadway in San Francisco’s North Beach continued to have pen holders engraved with Bank of Italy. Sad to say, we all know that the Bank of America, which was acquired by Charlotte, NC based NationsBank in 1998 has grown into a monster that old timers assert has Mr. Giannini rolling in his grave. If anyone believes, as I do, that the people who now run the bank are part of organized crime, there is absolutely no basis for any assertion that it is of the Italian variety.
“…..he was the antithesis of the modern day banker…..”
Not quite true. Given the wickedness of our bankers today, that could only be Jesus Christ Himself.
More importantly than principal reductions, monthly debt ratios need to go down to pre-bubble 28/36 levels for the mods to perform. Currently the median HAMP DTI is 31/62. Somehow, Treasury claims the re-default rate for HAMP is only 12%, whereas Barclay’s estimates 75%.
For borrowers to keep their homes and maintain a serviceable revolving and installment debt level relative to gross income (which in most mtg defaults has been significantly reduced), we’d have to rollback W’s Bankruptcy Reform Act of 2005 and allow the bankruptcy court the power to re-underwrite the mortgage, which likely would entail a significant reduction of the principal balance to make the numbers work, just like the court does with installment and revolving debt.
2005: “The financial services industry argued that bankruptcy frequently is the last refuge of gamblers, impulsive shoppers, divorced or separated fathers avoiding child support, and multimillionaires who buy mansions in states with liberal homestead exemptions to shelter assets from creditors.”
Forgive Bank of ‘Murica for a broad range of past mortgage abuses? Just like that? Let all the conspiratorial wretched behaviour just go excused? So that they can “HELP” borrowers?
If there were any justice in this world folks like Ken Lewis, Fat Angelo R. Mozilo would get their foreclosure notices in the mail.
For crimes committed against one group (homeowners who have already been dispossessed), BAC and the unnamed AGs wish to forgive principal for a completely separate group of troubled homeowners?
Yes, this will solve all our problems.
I’m getting my pitchfork ready.
Yeah, I was wondering about that. Did I read it right?
There’s a lawfirm in DC that a reporter could call and ask what is up with this cop out. For some reason, the parties that are most familiar with what the press calls “negotiations” between “party A and B” are obscured to no end.
We know who is really calling the shots and it is infuriating. Indeed, infuriating how much the press is equally responsible for allowing millions of people to be evicted from their homes. Not all the press, but damn near most of the Press Inc. I wonder if the holocaust in Germany started this way – a distracted besieged public, nobody notices, the Government hopes nobody notices, the press is told to report so that no one notices, the war effort continues, people continue to sleep.
That is indeed how the Holocaust started, to a great extent. I mean, Hitler was ranting on all the time, but everyone else seemed to be playing a “nothing to see here” game.
“The authorities are worried about the moral hazard of bailing out borrowers…” And, I’m sure, keeping up that pressure in a million ways in order to convince everyone under their thumb that when things go bad, it MUST be the fault of the borrowers/little people/middle class.
I’m currently re-reading “Hard Times” by Studs Terkel. I was struck by one interviewee who said that it was so infuriating (and horrifying) to see “little people” losing everything and getting kicked to the curb with families in tow and yet also blaming THEMSELVES for unemployment/home loss/institutional failure….”If only we hadn’t bought that used radio….”
Plus ca change.
“Jarndyce versus Jarndyce” made me laugh. Thanks, Yves. There isn’t much else to laugh at, these days.
“Principle reductions” is a very apt Freudian misspelling.
Russell Mokhiber, “Wall Street’s Code of Silence”:
“Peter Orszag was co-author of a study paid for by Fannie Mae back in 2000 or 2001. It argued that Fannie and Freddie are incredibly safe and sound, that the stress test that was going to be employed by the regulator insured their safety and soundness. And that there was something like a one in 500,000 chance that they would end up imperiled. And even if that happened, the cost to the taxpayers would be a few million dollars. That’s pretty much what the paper said.”
“Orszag ends up as the head of OMB [Office of Management and Budget Director]. And when the government takes Fannie and Freddie into conservatorship, he says – there is about a five percent chance that the government could be on the hook for more than $100 billion. Wrong again. No one calls him out.”
“Orszag is now the vice chairman at Citibank. “
Rich people say they deserve extraordinary returns on their capital because they risk extraordinary losses on it. But they don’t take the losses.
yves,
Question:
So living in MASS and watching Ibanez fallout I see how chain of title problems keep people in the homes. And I understand that if the RMBS trust was supposed to own the note/mortgage but didnt and had no standing to foreclose…the servicer (US BANK usually around here) is forced by the court not to foreclose: Does that mean that the trust eats the loss of not “owning” the note or the mortgage payment going forward?
And if so how come lawyers havent found members of the trust in order to class action sue the big banks who sold them bunk houses with title problems?
The trust never existed.
The investors who bought “bonds” issued by the trust which never existed…
…well, the first batch of investors have mostly sold out by now, with the exception of a few institutions. The vulture investors who snapped the “bonds” up ought to be co-ordinating, but the banks are throwing up every legal and procedural obstacle they can to this.
Furthermore there’s an odd feature: a lot of these bonds are owned by *other banks*. They don’t want to expose each others’ criminality, so they’re sitting on these things or trying to unload them on suckers.
Oh. And also. This may be the big one. In order to cover up for the mess, a lot of the servicers are still paying out the “bond” payments for the nonexistent trusts, even if there’s no money coming in… this was (a) how their sloppy, sloppy accounting was set up, and (b) prevents the investors from wanting to file lawsuits.
The “bonds” which have stopped paying out were often promoted by bankrupt servicers, which make for a hard target to sue.
So to recap: individual lawsuits have to come from
(1) a group of investors in the same purported trust,
(2) which was promoted by a bank which isn’t bankrupt,
(3) and which is not currently paying out
Nothing else has the correct incentive structure. There ARE groups like this, but the banks have been trying to prevent them from finding each other.
thats why individual homeowners (former and current), as 3rd party beneficiaries to these MBS trusts, need to step up as a class. pwned. game over…
just need to connect individual mortgage holders with the trusts that are supposed to hold their mortgage. the problem is the stonewall that the banks, and as an extension the occ, treasury, dept of justice, sec etc. have set up to prevent connecting the parties who have been harmed together against the guilty party, namely refusal to give up the PSA that contains a itemized list of the specific street addresses of the homes mortgages contained in the security. what do you call control fraud by your government? is it fascism? the whole investor focus for suits is bullshit. and it wont hunt. i think that 3rd party beneficiary is the way to go..but our country’s money will be long dead by the time they get to that. dumb asses.
by the way, i was given warren’s mailing address at the treasury by my state attorney general last march as a place to go for help – this after contacting everyone on the Financial Stability Oversight Council, as well as my state ag and the iowa guy. talk about game over.
if warren is for real, she needs to get with the new york AG guy and help him get his shit together with a case before the prostitutes and stuff start to appear. that is where its at. running for office is for losers.
“…how come lawyers havent found members of the trust in order to class action sue the big banks who sold them bunk houses with title problems?”
Patience. All this will happen and more. As yet, we are not really even started on what’s potentially a North American-continent-sized Jarndyce vs. Jarndyce legal abyss, which will take decades to play out.
Furthermore, if a basic level of functionality does return to the U.S. housing market — in, say, 2016-2022 — the education debt bubble will have too many Americans in servitude, paying off their debts there, for many to be able to take on mortgage payments. Alongside other demographic trends, that could help make U.S. housing quite affordable in the long term.
Eligibility would also be limited to homeowners in distress, which can be defined by the number of days late a borrower is on his mortgage payments or whether their income is too low to support their payment obligations.
Perhaps eligibility for indemnity from fraud prosecution should likewise be limited to bankers in distress — defined as legal liabilities exceeding 25% of their personal net worth, or guideline-driven jail sentences exceeding 25% of their remaining projected lifespan. That way we could continue to reward the moral hazard of corporations who employ the worst-of-the-worst white collar criminals and most well-manicured sleaze artists.
On the topic of BAC ultimately getting devoured by these lawsuits and litigation, it is my understanding that the majority of their problems came from the Countrywide acquisition. BAC was completely fine, financially, until it decided to buy Countrywide and it’s been downhill since.
But wasn’t Geithner somewhat responsible for the Countrywide deal? Didn’t he push that on Ken Lewis? Or am I confusing things? Because if the govt was partly responsible for the shotgun wedding of Countrywide and BAC, and Countrywide is a terminal cancer — it seems likely the government would have to bail out BAC again. And even if that’s not the case, BAC is the largest bank in the world so the government would likely have to bail them out no matter what. Though maybe this time they’d be less worried about protecting shareholders.
Brett,
The media is still portraying this as a subprime crisis, when it is in fact a jobs crisis. If 30% of mortgages are at or under the water line, BAC has a third of mortgages in trouble. Countrywide is the straw, but the camel was overloaded already.
Actually, BAC bought into several different collapsing businesses. Merrill Lynch seems to have brought them another pile of stinking fraud, and BAC was already hip-deep in fraud. Countrywide was the epicenter, though.
S & H–that’s funny, because the REAL numbers 1-2-3 reasons people file for bankruptcy are medical expenses, job loss and divorce (in which case it’s usually the MOTHER who files, as I did after my divorce, when my ex skipped the country rather than pay his support).
The richie riches act like bankruptcy is a day at the beach and people who file are getting away with something. Yeah right.
At first this article said millions of homeowners would be included, but went on to say that FANNIE and FREDDIE loans are not included. Doesn’t this significantly decrease the number of homeowners “helped?”
And another questions, will someone please tell me how Bank of America/BAC can modify or reduce principal any more legally than it can foreclose on loans it doesn’t own?
Just one stupid question-Why did B of A buy Countrywide? I am just wondering if it was some crazy purchase accounting thing. They bought the company with plans to take down its huge reserves at a later date and throw them into income and, instead realize that the reserves weren’t big enough. It’s just mind boggling that B of A or anyone else would have touched Countrywide with a 10 foot poll. And why didn’t they keep Countrywide’s operations separate in the event of additional problems? There is something seriously wrong with B of A.
Ken Lewis had wanted Countrywide for years. He even overpaid big time. No one pushed him. I said it was a terrible deal at the time for the reason that has become obvious: it was a criminal enterprise, even if much of what it did was technically legal.
Thanks for setting the record straight. I’ve read several stories where it stated he was “forced” to buy CW – poor widdle ole’ Kenny. Doh! Duped by the propaganda again…