Bank of America (NYSE:BAC) may be about to part with more money than it has earned since 2008 in what will soon be the biggest financial settlement in the industry to date According to the WSJ, the Charlotte, NC-based bank is preparing to pay $8.5 billion to settle mortgage (NYSE:MIS)representation claims (aka the Mortgage putback issue) brought on by such high profile figures as BlackRock (NYSE:BLK), Pimco, MetLife (NYSE:MET) and, of course, the Federal Reserve, previously discussed on Zero Hedge. “A deal would end a nine-month fight with a group of 22 investors that hold more than $56 billion in mortgage-backed securities at the center of the dispute, including giant money manager BlackRock Inc. (NYSE:BLK), insurer MetLife Inc. (NYSE:MET) and the Federal Reserve Bank of New York.” Keep in mind that this is actually not good news for the bank, contrary to what the company’s stock is doing after hours, as this still keeps the company exposed to a multitude of other rep and warranty litigation (which will now be largely underreserved), not to mention fraudclosure issues, which are totally unrelated, and which will plague the bank for years and years. Lastly, BAC (NYSE:BAC) is largley underreserved (see below) for a settlement of this size which means its Tier 1 capital ratio will likely be impacted due to a major outflow of cash.
From the WSJ:
The deal could embolden mutual-fund managers, insurance companies and investment partnerships to go after similar settlements with other major U.S. banks, arguing that billions in loans scooped up before the U.S. housing collapse didn’t meet sellers’ promises or were improperly managed. Most vulnerable would be Wells Fargo & Co (NYSE:WFC) and J.P. Morgan Chase & Co. (NYSE:JPM), which along with Bank of America collect loan payments on about half of all outstanding U.S. mortgages.
The dispute between Bank of America (NYSE:BAC) and the mortgage investors began last fall when they alleged that securities they bought before the financial crisis from Countrywide Financial Corp. were composed of loans that didn’t meet sellers’ promises about the quality of the borrowers or the collateral.
While it is still very much unclear what the terms of the settlement are, one thing is certain: BofA acquisition of Countrywide for $4 billion is rapidly becoming the worst purchase in the history of M&A. Luckily, Angelo “Agent Orange” Mozillo, has a permanent get out of jail card. One wonders just what dirty secrets old Angelo know about the housing market (or regulators’ sexual lifestyles) that not one regulatory agency or DA office is willing to go after him?
And, as often happens, we were quite correct when we speculated back in January that Bank of America is woefully underreserved for this development:
Can You Spell U-N-D-E-R-R-E-S-E-R-V-E-D? If Not, Here Is A Visualization Aid
Following today’s news of an imminent lawsuit to be filed against Bank of America by such entities as the New York Fed (which, by the way, it had to do, and not voluntarily, but merely as a function of its fiduciary duty to taxpayers through its Maiden Lane holdings, managed, conveniently enough, by Bank of America minority holding BlackRock) everyone promptly has taken a quick look back at the bank’s earnings presentation, and especially one little piece of data: the putback reserve. Taking a quick look a page 23 on the pdf we read: “3Q10 reps and warranties provision of $872M is $376M lower than 2Q10, as the current quarter included an increase in expected repurchases from GSEs while 2Q10 included additional provision for monolines.” So how does this stack up relative to the $47 billion in putback demands by such legal “dilettantes” as Bill Gross, Bill Dudley and Larry Fink? We have created the chart below to assist in that particular question. We are also confident that with each passing day we will have to add to the red-shaded area as more and more putback lawsuits come out of the woodwork. And as to where the deficiency amount will have to be funded from? Think cold, hard cash. The same cash that until recently would have been on the “sidelines.”
Tyler Durden is the founder of Zero Hedge.
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