Tuesday, October 19, 2010
Bank of America Facing Crisis
Bank of America is in big Trouble. Yes, Trouble with a capital "T".
You see, Bank of America now owns Countrywide Financial, the scandalous lender that gave out countless home mortgages to people who never could have been reasonably expected to repay those loans.
Bank of America bought the crippled lender at the height of the financial crisis in 2008, when Countrywide was on its knees and ready to go belly up.
Countrywide never worried about the capacity of a borrower to repay a loan since it was just an originator. The lender soon sold those loans, many of which ended up being packaged in residential mortgage-backed securities. They believed they were off the hook when those loans eventually, inevitably, went bad.
Not so much.
The investors in those securities are now demanding that Bank of America repurchase tens of billions worth of mortgages. And these aren't the demands of mom and pop investors in some class-action lawsuit either.
No, the investors demanding repayment include lending giants Fannie Mae and Freddie Mac, as well as the New York Fed, which is seeking to force B of A to buy back a whopping $47 billion in bad mortgages.
Naturally, Bank of America shares tumbled today as reality set in. B of A is in very deep shit.
Investors are demanding the repurchase of loans that were originated “in violation of underwriting guidelines.” Giant bond holders, such as Pimco and BlackRock, are among those also seeking repayment.
B of A never imagined this nightmare when it acquired Countrywide, some say at the insistence of the New York Fed, then headed by Treasury Secretary Tim Geithner.
B of A, the nation's largest bank, is now facing tens of billions in losses. The question is, could it be enough to tank the bank?
As I've noted in my last couple of posts, the level of fraud perpetuated was deep, widespread and included: the loan documentation process, the mortgage-writing process, the mortgage-transfer process, the title-transfer process, and the foreclosure process.
The level of fraud is simply stunning. There is no better way of putting it. And there is no way for the banks to reasonably or credibly play down this fraud, or write it off as a matter of "simple clerical errors."
Just by misstating a borrower's income or debt levels, a bank leaves itself vulnerable to having to repurchase mortgages when the loans go bad. As is widely known, those sorts of manipulations were rampant and widespread.
Simply put, Bank of America is facing a crisis. Even before the specter of having to repurchase at least $47 billion in bad mortgages was made public, the banking giant had already announced a third quarter loss of $7.3 billion, a rather grim figure.
The nation's biggest banks have a strangle-hold on the US economy. It is not inconceivable that B of A will need yet another government intervention because it is "too big to fail". As of last year, Bank of America’s assets were 16.4 percent of GDP.
In total, the three largest US banks (B of A, JPMorgan Chase and Citigroup) comprise 44 percent of the US economy. That is not safe for our economy or for the taxpayers, who may be on the hook should another unpopular bailout proposal be presented to the American people.
This is a remarkable story and it warrants our attention. The fallout could be as devastating as it is fascinating.
One thing's for sure; this is only the beginning.