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.