Blog on the Run: Reloaded

Friday, August 12, 2011 8:23 pm

The Panthers might need a new name for their stadium …


… because financial blogger Yves Smith thinks that there’s a fairly serious question as to how much longer Bank of America (BAC) might be with us:

Bank of America’s situation is a lot like that of the borrower who has a looming obligation he can’t meet. But unlike having a well identified big debt to pay down the road, the financial behemoth faces large but uncertain in size payments in the future thanks to pending and growing lawsuits to recover alleged damages resulting from the misdeeds of its acquisition, Countrywide. The current wave of litigation that has investors rattled results from Countrywide telling investors that the loans they were packing into securities were much better than they really were.

The Charlotte bank tried to put most of that problem behind it by entering into a settlement for $8.5 billion, which if they can pull it off, will be the bargain of the century. But that deal is being challenged on multiple fronts, including by New York state attorney general Eric Schneiderman. It looks like that pact either will not go through or will be renegotiated substantially and cost Bank of America a good deal more.

Another blow landed Monday when it was sued by AIG for $10 billion, for the same sort of liability it was seeking to discharge in the settlement. If one investor thinks it is owed $10 billion on $28 billion of mortgages, or 35%, when the old settlement deal for $8.5 billion was for only about 3.5% of the total amount of bonds, that alone shows how much more Bank of America might have to shell out.

And that’s only one risk Bank of America faces. The meteor-hitting-the-financial-system sort of lawsuit, which no one has dared to launch, would attack originators and packagers like Countrywide for failing to transfer mortgages properly to the mortgages securities in the first place, in violation of their own contract. This astonishing and apparently widespread “securitization fail” is leading to more and more underwater homeowners successfully challenging foreclosures in court. And it is also leading to banks undermining the rule of law. The robosigning scandal of last fall is only the tip of the iceberg. Both Schneiderman and Delaware’s attorney general Beau Biden are investigating conduct by mortgage securitizers on a broad basis.

This brings to mind another thought I saw somewhere today but cannot remember where: Even if you grant that a bank (or other corporation) is Too Big to Fail, the shareholders could still be wiped out and the responsible executives could all be fired. And in BAC’s case, they should be.

 

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