The Bishop and the Butterfly: Murder, Politics, and the End of the Jazz Age

    FHFA will sue Bank of America and other banks

    By Oxy Mora on Fri, 09/02/2011 - 8:37am |

    It is being reported that the Fannie and Freddie conservator known as FHFA will sue B of A and about 10 other banks for losses stemming from improper origination and servicing of loans. Goldman, JPM, Deutshe Bank and others are expected to be included. The FHFA has a deadline of next Tuesday to file the suits. The deadline is a statute of limitations provision in the formation of FHFA itself on Sept 7, 2008. FHFA was given six years to bring actions under Contract law and three years for tort claims.

    Last year the Agency sent out some 60 subpoenas to banks and in July it filed suit against UBS for $900 million in losses on some $4B par value. While $900 M seems a paltry sum, and the reason the market will most likely tank today, is that the UBS suit contains the language  and "such other and further relief as the Court may deem just and proper"--i.e.,legal costs and penalties and further losses on the securities involved.

    There are significant differences between the FHFA suits and those, for example, being brought by investors in such actions as the $8.5B B of A settlement. The FHFA has rights of discovery the others don't have, that is, detailed information on loan files, etc. Up to this point, investor groups have not had access to loan files. As the information from the FHFA suits is made public the views of some are that the other suits will become stronger.

    The scope of the potential liability for the large banks is huge. It is estimated that Freddie and Fannie have had losses in the range of $30B.

    In a related development yesterday the Federal Reserve sanctioned Goldman Sachs for its pattern of negligence in foreclosing mortgages.  As yet, no penalties have been announced. But the Fed ordered Goldman to hire a consultant to estimate the scope of negligent behavior and stated the intention to penalize the bank and force them to provide relief to injured homeowners. While self regulation has seldom worked before, one has to wonder if the Fed isn't planning a significant relief effort for weary homeowners. Frankly, that would be a lot better than QE3.

    B of A in particular faces a mounting and daunting pile of liabilities. There are already some $30B in potential penalties related to the $8.5 B settlement with 22 investors, currently being heard in Fed Court in Manhattan, plus additional suits by MBIA and AIG. Eric Schneiderman and other states' attorneys plan suits against the bank involving both breaches of warranty and fraud. And of course, there is this pending action by the FHFA. Not to mention the separate action by the robo signing, etc. suit being considered by the, what used to be 50, states, attorneys general. This is not to mention also the kind of action the Fed announced against Goldman.

    All of this begs a host of questions. Uh, what about Geithner and Obama. What about downsizing the banks via FSOC. What about the foreclosure mess and the manner in which it is stalling the economy. What about immediate modification help to borrowers in delinquency? What about the lockout of mortgage refinances because it hurts the returns on investors in MBS's. Where is this mess headed and how much is my IRA going to tank today?

    Comments

    Thanks, oxy, for calling the greater attention to this matter your post will likely draw than my news link to yesterday's NYT article by Nelson Schwartz on this:  http://www.nytimes.com/2011/09/02/business/us-is-set-to-sue-dozen-big-banks-over-mortgages.html?_r=1&hp


    by AmericanDreamer on Fri, 09/02/2011 - 8:46am

    Thanks for the link, Dreamer.


    by Oxy Mora on Fri, 09/02/2011 - 9:55am

    If my back of the envelope math is not faulty, I guess they are up against a three year statute of limitations on written contracts in NY state, and the Lehman meltdown is the trigger date, ie, September 15, 2008.

    Let the games begin!


    by jollyroger on Fri, 09/02/2011 - 8:56am

    Thanks, that's a good point.


    by Oxy Mora on Fri, 09/02/2011 - 9:58am

     much is my IRA going to tank today?

    In my official position as King of Market Timers, I am obliged to give you some bad news...plenty, and that's just for starters.

    Our hollowed out, financialized shell of an economy is just the little brother of the big kahuna they call European meltdown, conducted without even the feeble safety net furnished by the *cowering Ben B. 

     

    *(How would you like someone from the state that brought you the Kennedy Assisination to talk shit about going ugly on you....?)


    by jollyroger on Fri, 09/02/2011 - 8:59am

    As we speak the market is down 2%, on light volume, and a terrible jobs report. Banks are down 5%.

    About Ben, not only is the assassination state going ugly overall, but the Dallas Fed President is one of the vociferous dissenters on the FOMC.


    by Oxy Mora on Fri, 09/02/2011 - 10:08am

    Could you say more about FSOCK?  Not familiar with that reference.


    by AmericanDreamer on Fri, 09/02/2011 - 9:04am

    Sorry, Dreamer I had used FSOCK in derision in a former post, should be FSOC, Financial Stability Oversight Committee, created by Dodd Frank.

    One person calling for downsizing banks under FSOC is Chris Whalen of Institutional Risk Analytics. And after reading him, I began looking at the possibility of breaking up B of A if penalties, etc. get out of hand.

    FSOC is chaired by Geithner, and has regulatory and outside members. Voting members include Bernanke, FDIC,SEC,FHFA and others.

    Specifically FSOC is supposed to identify systemic risks caused by large banks and their interconnectedness. They are requiring large banks, and perhaps insurance companies, to submit what is known as "living wills"--a break up plan, road map for dissolution if the institution is deemed to be a "grave threat" to the system.

    Monyihan has in essence threatened to put Countrywide into bankruptcy if penalties and such get out of hand. And Monyihan thinks B of A is insulated from Countrywide's liabilities. My thought is that a protracted fight over who is going to pay the penalties, etc., in the context of all the other litigation, might precipitate action--i.e., downsizing under FSOC, and of course, a refunding. Just a thought.  


    by Oxy Mora on Fri, 09/02/2011 - 10:38am

    You heard it first here, Dreamer.

    It's just being reported by the Wall St. Journal that the Fed has asked B of A for a contingency plan in case the the bank's financial condition deteriorates further.

    Apparently one of B of A's ideas is to issue a tracking stock for Merrill Lynch.

    Dick Bove, major bank analyst, has just denigrated the Wall St. Journal's article, saying that FSOC is the entity in charge of contingency plans, and, my words, they've already done that. Sorry, Bove, all your efforts last week to shore up the bank's are falling apart. And, hey, Bove, a contingency plan by FSOC would require action by....uh....Geithner.

    To expand on my wild speculation about down sizing, Merrill Lynch has now been thrown into the mix.

    So,..uh...Geithner and Obama? Things getting out of hand here?

    I feel weird betting against my own IRA, but then again I'm in for the long term.


    by Oxy Mora on Fri, 09/02/2011 - 11:06am

    You must be mistaken. Fannie and Freddie were obviously flawed because of their relationship with the federal government. B of A (and presumably the other banks you allude to) cannot be flawed because they're for-profit institutions, and the invisible hand never errs. Never. You're mistaken. QED.


    by Verified Atheist on Fri, 09/02/2011 - 9:14am

    I snorted some *ayahuasca the other day, and I SAW the invisible hand, and the middle finger was raised...

     

    *(as if, I wish I could get some DMT)


    by jollyroger on Fri, 09/02/2011 - 10:36am

    You're lucky, I seem to be sensing a digit going up my (fill in the blank).


    by Verified Atheist on Fri, 09/02/2011 - 11:14am

    That usually only happens when you eat Hawaiin 

    wood rose....


    by jollyroger on Fri, 09/02/2011 - 4:47pm

    and Billy Rose


    by Oxy Mora on Fri, 09/02/2011 - 6:24pm

    Any idea why these suits are starting now, three years after the financial crisis?


    by Michael Wolraich on Fri, 09/02/2011 - 10:59am

    jollyroger seems to be suggesting a statute of limitations might be the motivating factor.


    by Verified Atheist on Fri, 09/02/2011 - 11:14am

    This issue bugged the shite out of me but it is important because it goes to DeMarco's motivations--since he has been a key player in slowing down refinances at the Agencies. In otherwords, what is the relationship between what Obama is going to say next week about refinances and this action by DeMArco, who is not a favorite of Geithner, at this exact juncture.

    It turns out that the formation of FHFA three years ago, Sept. 7, 2008 included statutes of limitations for actions taken by FHFA. For Contracts, it is 6 years. For Torts, three years (unless the particular state law provides a more lenient time frame).

    So DeMarco had to act now if he was going to act.
    Did he drag his feet, don't know. He certainly dragged his feet on the issue of refinances. Maybe there is a deal to let the refinances go forward.
     


    by Oxy Mora on Fri, 09/02/2011 - 3:20pm

    Thanks for the specifics. I'm definitely out of my element in understanding all of this.


    by Verified Atheist on Fri, 09/02/2011 - 3:25pm

    Good question. I'll give it a shot.

    With respect to FHFA, there has been a time lapse during which discovery has been taking place. Also the losses keep mounting instead of going the other way. And I suspect there has been indirect pressure by Geithner, et. al.

    As for the other suits, it's been hard for non-Agency investors to get hard numbers on the amount of losses being experienced by servicers. And they don't have rights of discovery.

    In the meantime there has been the 50 state effort, based on discovery of robo signing abuses, but this is an unwieldy group.

    And then I think there has been a big time hands off policy by Obama/Geithner both in deference to banks and in fear of creating more systemic risk. So this created delays, everyone standing around waiting for someone else to act.

    Honestly, I think we are headed right back to the bank crisis we were in three years ago.


    by Oxy Mora on Fri, 09/02/2011 - 11:22am

    Does anyone foresee that if the banks can't afford this process, they will just take more loans from the Fed at 0%?

    What I am not seeing is enough criminal prosecutions, which are the only thing that matters to the guys on The Street.


    by NCD on Fri, 09/02/2011 - 1:40pm

    Loans from the Fed at 0%. I think that will be the end game if B of A, or any of the other banks, gets split up.


    by Oxy Mora on Fri, 09/02/2011 - 1:57pm