The Wall Street Journal reports that Bank of America is in discussions with a group of investors headed by Pimco, Blackrock, and the New York Fed that sent a letter roughly 60 days ago that was setting the groundwork for possible litigation. The underlying issue is alleged breaches of representations and warranties in 115 Countrywide securitizations.
Note that this development is not unexpected, although the timing is interesting. These cases nearly always wind up being settled; the cost of pursuing them very far is extremely costly to both sides. Note the problematic issue is not the breaches of the reps and warranties, which most commentators focus on; it’s that it takes a great deal of forensic work to prove those rep and warranty failures were really what caused a particular loan to go bad. As a result, these cases tend to be fought on a loan by loan basis; even a process that constructed adequate samples for each of 115 trusts would involve a whole passel of loans.
The part that appears to be a climbdown is that Bank of America had previously issued a “we will fight them on the beaches, we will fight them in the trenches” sort of statement. So they seem to be entering into talks earlier than one might have expected. But there could be other reasons for this development. First is that the investors had some procedural hurdles to surmount; it seems odd that Bank of America id did not see whether they failed to overcome those obstacles. Second is judges take an extremely dim view of parties showing up in court not having tried to work things out. So Bank of America may be talking simply to make sure it does not prejudice its position (as in it expects the talks as unlikely to lead to settlement yet, but is willing to see, but anticipates the two sides are too far apart and the talks break down, go a few rounds in court, and then wind up back in settlement negotiations, which each side having a better sense of gives and gets). Third is that the CEO and board are under pressure to settle, since even if they believe the settlement amount would be smaller if they go a few rounds and force the investor group to see how costly it will be to prove out its case, that the damage to the stock price in the interim is unacceptable to some influential shareholders.
From the Wall Street Journal:
Bank of America Corp., after vowing to fight requests that it repurchase certain loans, has begun potential settlement discussions with some of its largest mortgage investors, according to people familiar with the situation…
The approach appears to be a major shift in strategy for Chief Executive Officer Brian Moynihan, who in November pledged to engage in “day-to-day, hand-to-hand combat” on investor requests to repurchase flawed mortgages made before the U.S. housing collapse.
The investors, some of whom are acting on behalf of clients, sent a letter in October alleging that a Bank of America unit didn’t properly service 115 bond deals comprised of residential mortgages. It gave the bank 60 days to respond. The disclosure of the letter sent Bank of America’s stock tumbling 4.4% on Oct. 19, as investors grappled with concerns that the bank could be overwhelmed with such investor requests.
With the 60-day investor group deadline set to expire Thursday, the two sides agreed to begin “constructive dialogue” about the group’s concerns and what it wants, one person familiar with the matter said. The talks could still fall apart but the conversations are an attempt by the bank to put the matter behind it, said people familiar with the situation.
This WSJ story was released after the market closed. If the stock pops tomorrow, it would support the thesis that stock price concerns were at least in part behind this move. Put it another way: Bank of America may see itself as vulnerable on a number of fronts, and may be willing to trade off minimizing unfavorable press against what would be the likely value-maximizing litigation strategy.
Update: This report from an industry insider:
This “story” is a crock. I’m no fan of Bank of America in general and particular, but the parties pressing this litigation have managed to get the press to run what amount to their press releases. I suspect they are the source for this “news” which is effectively that the 60 day period has expired and this “story” is cover for giving BofA an extension.
Update 2, 10:00 PM. A report from Bloomberg is consistent with our source’s take above. The Bloomberg story, released two hours after the WSJ account, indicates that this “news” is in fact an extension of the 60 day litigation deadline by the investor group. This is not a terribly sensational development, as the WSJ account would lead you to believe. It is normal for parties pre-litigation to explore settlement possibilities; in fact, it would be highly irregular for them not to. In addition, we said from the outset that cases like this are always settled; they are too costly to go to trial (although as with the MBIA litigation, a claim might be filed and both sides might pursue some discovery before engaging in more serious settlement talks).