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Financial stocks just caught fire. Someone must be getting bailed out, right?
Why yes, say critics of the giant banks. They charge that Monday's rally-stoking mortgage-putback deal between Bank of America (BAC) and Fannie Mae and Freddie Mac is nothing more than a backdoor bailout of the nation's largest lender. It comes courtesy, they say, of an administration struggling to find a fix for the housing market while quaking at the prospect of another housing-fueled banking meltdown.
Monday's arrangement, according to this view, will keep the banks standing -- but leave taxpayers on the hook for an even bigger tab should a weak economic recovery falter. Sound familiar?
Happy New Year indeed
"The administration is trying to weave a path between two bad alternatives," said Edward Pinto, a resident scholar at the American Enterprise Institute. "They want to bail out the big banks without doing apparent damage" to the sagging U.S. budget position.
Pinto says truly holding BofA responsible for all the mortgage mayhem tied to its 2008 purchase of subprime lender Countrywide would likely drive it into the arms of the Federal Deposit Insurance Corp., which has enough problems to deal with. Though BofA would surely dispute that analysis, it's easy enough to see where the feds don't want that outcome.
But BofA's many problems aren't the only reason for taking Monday's deal with a grain or two of salt. Critics also question the timing of the settlement, which comes on the heels of a court setback for the banks and a new legal challenge from a big investor. They wonder, given the huge sums being spent to prop up Fannie and Freddie, why the companies didn't get better terms.
And you don't need to be a conspiracy theorist to see that austerity talk in Congress means no more upfront support for financial firms. At a time of double-dipping house prices and nearly 10% unemployment, you can see where some people might find themselves devising new ways to prop up BofA and its housing-exposed rivals JPMorgan Chase (JPM), Wells Fargo (WFC) and Citi (C).
"This looks to me like a gift from Tim Geithner," said Chris Whalen of Institutional Risk Analytics. "There's politics all over this."
Fannie, Freddie and BofA sadly shake their heads at that one. BofA finance chief Chuck Noski spent a Monday conference call describing negotiations over the putbacks as "vigorous." Fannie and Freddie say resolving the mortgage putback issues has been a priority for months, and present BofA's $2.8 billion payment as one that is fair to taxpayers.
Freddie chief Charles Haldeman even says his company, recipient of $64 billion in federal aid over the past two-plus years, "has focused sharply on being a responsible steward of taxpayer funds."
But how sharp is Freddie if all it can do is squeeze a $1.28 billion payment out of a giant customer in exchange for relinquishing fraud claims on $117 billion worth of outstanding loans? The very best its million-dollar executives can do is claw back a penny on each bubbly subprime dollar?
That seems pretty weak even given that this is Congress' favorite subsidy dispenser we're talking about.
"How Freddie can justify this decision to settle 'all outstanding and potential' claims before any of the private-label putback lawsuits have been resolved is beyond comprehension," says Rebel Cole, a real estate and finance professor at DePaul University in Chicago. "This smells to high heaven and they should be called out."
Freddie declined to comment beyond its public statements and filings, and its regulator, the Federal Housing Finance Agency, didn't comment beyond its celebratory statement.
As for the scope of BofA's problems, the bank stressed in its comments Monday that the settlement with Fannie and Freddie should be viewed separately from the two other mortgage-putback categories: suits filed by the monoline insurance companies that backed many of the questionable loans, and disputes with investors in so-called private label securities, those packaged by Wall Street and sold to investors such as insurers and pension funds.
The $6 billion or so BofA has now paid to settle claims with Fannie and Freddie dwarfs its reserves in the other two channels. But that could change, thanks to recent developments in monoline and private label litigation.
In mid-December, a judge ruled that the insurer MBIA (MBI) can use statistical samples drawn from 6,000 case files to show BofA breached contractual representations and warranties on loans, rather than plowing through each of the 386,000 case files involved in the suit.
The finding, wrote an analyst at Gerson Lehrman Group, "dealt a blow to banks trying to defend themselves against mortgage putback liability," by shortening the path to a trial and reducing plaintiffs' court costs.
Then, building on that ruling, insurer Allstate (ALL) last week sued BofA, alleging that offering paperwork filed during the bubble years by Countrywide misrepresented the condition of loans that backed the bonds Allstate bought.
The insurer claimed offering documents indicated, for instance, that none of the underlying mortgages were secured by houses that were worth less than the loan. But Allstate's analysis found in various cases that between 3% and 15% of underlying houses were worth less than their outstanding mortgages.
"That suit is just a slam dunk against BofA," said Cole. "Some of the stuff Countrywide was doing, you gotta be kidding me."
Of course, BofA may yet well win both those cases, or tie them up in court for years, or settle at advantageous terms. Such is the majesty of the taxpayer-backed megabank plying the byways of our legal system.
But even as most of Wall Street calls BofA a buy, some contend the market is vastly underestimating the intensity of the mortgage putback pain ahead. Analysts at Iridian Asset Management, for instance, estimated in October that BofA could face between $50 billion and $100 billion of putback-related losses over coming years.
Even without a huge putback tab, the banks could be in for tough times. Falling house prices could lead to rising defaults as more homeowners find themselves owing more than their house is worth. Rising defaults would hit bank capital at a time when many bank business lines, ranging from trading to credit cards, are looking distinctly less profitable.
And of course, no one is going to sign up for another round of the Troubled Asset Relief Program, no matter how strenuously the government claims it is turning a profit. Thus the appeal of a policy that would eliminate any need to go before Congress.
"They're sending a signal to the banks that now is the time to do a deal and put this stuff behind you," said Pinto.
The $127 billion is the total dollar amount of mortgages that Bank of America sold to Freddie not the unpaid liability. Indeed, the vast majority of those mortgages are being paid on time. Further, this $2.8 billion is on top of $1.2 Billion already given.
Until we see a precise analysis of the total number of non-performing loans and what percentage return Fannie and Freddie are getting through short sales and forclosures, it is impossible to estimate what the real liability is. This is what should have been done prior to any "settlement".
That said, would it truly be better to allow BAC to fail? I certainly don't want to see our country go into a depression and that is the most likely result should Bank of America, or another "too big to fail" bank, fail. If you are frustrated with 9.6% unemployment, imagine 30+% unemployment, soup kitchens and bread lines. Consider starving children and extreme social unrest. Indeed, what would the gangs of LA, NY, or any other major metropolitan area do to feed their families? When young men can't feed their families, they often resort to crime and violence to get what they need. The alternative is bleak indeed.
Alex from Soap Lake--The implication of a "$500 Trillion class action on behalf of all homeowners" is $1.6 million for each U.S. resident, not just homeowners. If the US Census estimate of 74.5 million homeowners is the basis of the lawsuit--that's all homeowners, not just those with bad mortgages--we're talking $6.6 million per homeowner. Recognizing that not all homeowners have mortgages and that among homeowner with mortgages, not all have bad mortgages, the number in the "class action" is substantially less than 74.5 million homeowners. Where do these ridiculous numbers, e.g., $500 Trillion, come from?!
The only way to fight this is to use your 'free will'. Don't do business with Wells Fargo, BofA, Chase, or Citi. I quit Wells Fargo 7 months ago because I was becomming ill reading about the favorable treatment they were receiving from the Federal Government. You must quit too! As long as we sit around and do nothing, this rediculous Federal Goverment will continue to prop up these failing organizations. Go to your local credit union and do business with them. It is the ONLY way!
The continuation of the stealing from the middle class and poor of this country by the whores of congress and criminals who run the banks who are nothing more than pimps of congress!! The people of this country are being ripped off by the very people they keep electing! The democrats and republicans are both traitors to America who put themselves, the rich, and Israel before this country! They start wars and send the middle class (whats left of it) and the poor kids to die so they can stay rich and enjoy the fruits of the poor people's labor!!!
Fannie and Freddie are around on borrowed time, these whales should fail, and sooner or later they will.
Fannie, Freddie and BofA have not been released from claims in a $500 Trillion class action on behalf of all homeowners, whether indebted or not, related to fraud claims filed by the International Bank Activities Reform Commission which is now being sponsored by the Church of Scientology Sea Org and Infinitology! These three phony entities (FRE,FNM and BA) alone are responsible or more than 5 Trillion in Mortgage Fraud in America no matter how you slice the Federal Debt. When the dust finally settles prices will have collapsed and these dinosaurs will be replaced with honest money organizations.
This was planned from the beginning. Henry Paulson forced Bank of America to buy CountryWide and Merrill Lynch. In exchange for the forceful purchase, Bank of America was able to dump all their toxic loans\investments into Fannie\Freddie which seems to be the dumping grounds for all banks...at the expense of the government\taxpayers. So again, this isn't new if you have been following this from the beginning.
I think that the coverage of this is backwards. It illustrates the desire of the Feds to be held harmless and not subject to contract law. They ere responsible to do due diligence, and they pushed the lower standards too. Charging back the troubled assets is a banana republic statist move. By the way, the same is true of the fraud in Medicare. Internal controls before money is paid is the way to stop it, but AG's like to grandstand on the campaign to reclaiom some money.
In short, for $2.8 billion, Bank of America is released from all claims for $127 billion in unpaid Freddie Mac loans and $4.0 billion in Fannie Mae loans. Or in layman's terms, 2.1 pennies on the dollar.
What a deal! Too bad taxpayer-owned Fannie Mae has such incompetent management.
Instead of bail outs for the lenders, this money will be better invested if this money would be use to reduce the outstanding mortgage balances so the homeowner's can afford their payments, thus avoiding further deterioration in the market, save homes, and have the consumers spend their money in fueling the economy.
A related point: The government decreed unlimited backing for Fannie and Freddie. By settling low, and taking the risk off of BAC, the GSEs put the loan losses directly on the taxpayer, regardless of any malfeasance by BAC. If BAC were going to be allowed to go bankrupt, or at least dip into the bondholder's capital, it would be a different matter. A lowball settlement is a bailout using the unlimited backing given to Fannie and Freddie, instead of the need to ask the taxpayer to run the money through BAC, which would go through Congress.
Santa(the tax payers) giving presents to the rich !!
By backstopping all those garbage loans over the years, Fannie/Freddie made the banks TONS of money.
So the question is, "Are Fannie and Freddie *continuing* to bail out the banks?" And the answer, of course, is yes. Since Fannie and Freddie are GSE's (and failing business models), it's the taxpayers who are getting the shaft yet again. We will continue to do so until Fannie and Freddie are shut down, or become profitable.
"Pinto says truly holding BofA responsible for all the mortgage mayhem tied to its 2008 purchase of subprime lender Countrywide would likely drive it into the arms of the Federal Deposit Insurance Corp"
And yet the ones who created the mess we have to live in still feel no pain as they continue to reap their million dollar bonuses while millions of the middle class file for bankruptcy. It's time to call for justice.
The $1.98 Billion to settle 12,000 disputed mortgages represents less the 1/10th of 1% of BofA's 14,000,000 mortgages. If the true number is 1% then liability would be in the trillions, If 10%, I can't even do the math. This is an attempt by government to set the standard before the private investors go for the juggular.
One important point that you are missing is how close Countrywide (the subsidiary of BOA) is to bankruptcy.
By settling the GSEs get as much cash as possible and have moved ahead of other potential creditors if there is a large court settlement down the road.
I'm not sure you know what you're talking about. Fannie was sucking these loans up with a vacuum cleaner from Countrywide, B of A gets the call from the government to buy Countrywide, then Fannie starts going through the loans finding technical issues and tries to push them back to BofA - Having said all that, what difference does it really make, the Fannie is the government and BofA survives because of all the governmental money/interventions, what would be the point of hitting b of A harder, and then having to give bofa more money?
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