Bank Of America Reports No Day With Trading Losses In Q3, Announces MBS Complaints Over $375 Billion Worth Of Securities
In its just released 215 page 10-Q, BofA announced it has just overtaken Goldman, and where even Goldman ended up having days with trading losses, Bank of America was perfect. Gotta love all those 3rd grade BofA prop traders (as an FYI to all, BofA is where you go where the safety school equivalent of prop trading dumps you). What is more interesting is that the seemingly flawless trading machine which is BofA has just disclosed it has received a complains by the Chicago FHLB, Cambridge Place, and Charles Schwab (and others) that allege misrepresentations in over $375 billion worth of RMBS. It appears the FRBNY is not the only entity that now is gunning for the scalp of the last remaining flawless frontrunner.
The Corporation and affiliates, legacy Countrywide entities and affiliates, and legacy Merrill Lynch entities and affiliates have been named as defendants in a number of cases relating to various roles they played in MBS offerings. These cases are generally purported class action suits or actions by individual purchasers of securities. Although the allegations vary by lawsuit, these cases generally allege that the offering documents for more than $375 billion of securities issued by hundreds of securitization trusts contained material misrepresentations and omissions, including statements regarding the underwriting standards pursuant to which the underlying mortgage loans were issued, the ratings given to the tranches by rating agencies, and the appraisal standards that were used in violation of Section 11 and 12 of the Securities Act of 1933 and/or state securities laws. The cases generally allege unspecified compensatory damages and in some instances, seek rescission. The Corporation has previously disclosed some of these matters under other headings, in its 2009 Annual Report on Form 10-K and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2010 and June 30, 2010, including Countrywide Mortgage-Backed Securities Litigation; IndyMac Litigation; Merrill Lynch Subprime-related Matters; and Federal Home Loan Bank of Seattle Litigation.
BAS, Asset Backed Funding Corporation, Banc of America Mortgage Securities, Inc., CSC, CWABS, Inc., CWALT, Inc., Merrill Lynch Pierce, Fenner and Smith, Inc. (MLPF&S), and Merrill Lynch Mortgage Investors, Inc. are among the defendants in an individual action, entitled Cambridge Place Investment Management Inc. v. Morgan Stanley & Co., Inc., et al., filed by Cambridge Place Investment Management Inc. in Massachusetts Superior Court, Middlesex County on July 9, 2010. Plaintiff asserts claims under the Massachusetts securities laws and seeks unspecified damages and rescission, among other relief. On August 13, 2010, certain defendants removed the case to federal court. On September 13, 2010, plaintiff moved to remand the matter to state court.
BAS, Bank of America Mortgage Securities, Inc., Bank of America Funding Corporation, CFC and CWALT, Inc., MLPF&S, and Merrill Lynch Mortgage Investors, Inc. are among the defendants named in an individual action filed by The Charles Schwab Corporation in Superior Court California, County of San Francisco. The case was filed on July 15, 2010 and is entitled The Charles Schwab Corporation v. BNP Paribas Securities Corp. and the amended complaint alleges violations of the Securities Act of 1933, the California Corporate Securities Act, the California Civil Code, and common law in connection with various offerings of MBS and seeks unspecified damages and rescission, among other relief.
On October 15, 2010, the Federal Home Loan Bank of Chicago (FHLB Chicago) filed a complaint entitled Federal Home Loan Bank of Chicago v. Banc of America Funding Corporation et al., in the Circuit Court of Cook County, Illinois County Department, Chancery Division against the Corporation, Banc of America Funding Corporation, BAS, CSC and MLPF&S, among other defendants, asserting claims for violations of the Illinois Securities Law, as well as negligent misrepresentation under Illinois common law in connection with various offerings of MBS. FHLB Chicago filed a second complaint on October 15, 2010 entitled Federal Home Loan Bank of Chicago v. Banc of America Securities LLC et al., in the Superior Court of the State of California County of Los Angeles, Northwest District against BAS, CSC, CFC, CWABS, Inc., CWALT, Inc., CWMBS, Inc., among other defendants, asserting claims for violations of the California Civil Code, California Corporation Code, Illinois Securities Law, Sections 11, 12 and 15 of the Securities Act of 1933, as well as negligent misrepresentation and rescission of contract in connection with various offerings of MBS. The complaints filed by FHLB Chicago make allegations similar to those in the Federal Home Loan Bank of Pittsburgh and Federal Home Loan Bank of Seattle actions and seek unspecified damages and rescission, among other relief.
What is odd is that the complaint was filed on October 15, and we are learing about it only 20 days later. Surely $375 billion is material even by Bank of Countrywide Lynch's estimates...
As for the mot hilarious piece of news: here is BofA trading days: the firm had zero trading loss days in Q3. In other words, Bank of America's India trading desk which according to rumors was recently outsourced to Calcutta, is now beating even Goldman Sachs at its game.
The chart below shows how Bank of America made on average $50 milion in trading each day in Q3.
And digging further into VaR, we find the following VaR chart by product group:
|#000000;" colspan="45" align="left">
Trading Activities Market Risk VAR
|Three Months Ended||Three Months Ended||Three Months Ended||#000000;" colspan="6" align="center">Nine Months Ended|
|#000000;" colspan="10" align="center">September 30, 2010||#000000;" colspan="10" align="center">June 30, 2010||#000000;" colspan="10" align="center">September 30, 2009||#000000;" colspan="6" align="center">September 30|
|#000000;" colspan="2" align="center">2010||2009|
(Dollars in millions)
|Average||High (1)||Low (1)||Average||High (1)||Low (1)||Average||High (1)||Low (1)||Average||Average|
|#000000;" colspan="45" align="left">|
|#000000;" colspan="5" align="left">||#000000;" colspan="2" align="right">||#000000;" colspan="2" align="right">||#000000;" colspan="2" align="right">||#000000;" colspan="5" align="right">|
Total market-based trading
|#000000;" colspan="45" align="left">|
The high and low for the total portfolio may not equal the sum of the
individual components as the highs or lows of the individual portfolios may have occurred on
different trading days.
And here is an explanation on why VaR declined in Q3 from Q2. Somehow while the rest of the world was panicing about record correlations, BofA' Calcutta trading desk discoevered a way to "reduce correlations across businesses" - perhaps if they were to license and sell their discovery they would not have to worry about the hundreds of billions in MBS-related losses the world's second most toxic bank (after Citi) is about to incur courtesy of the lawsuit disclosed earlier.
The decrease in average VaR during the three months ended September 30, 2010 resulted from reduced exposures in several businesses. In addition, portfolio diversification increased relative to average VaR, as exposure changes resulted in reduced correlations across businesses.
Counterparty credit risk is an adjustment to the mark-to-market value of our derivative exposures reflecting the impact of the credit quality of counterparties on our derivative assets. Since counterparty credit exposure is not included in the VaR component of the regulatory capital allocation, we do not include it in our trading VaR, and it is therefore not included in the daily trading-related revenue illustrated in our histogram or used for backtesting.
As for the topic most important to everyone at this point, here is BofA's discussion of its MBS portfolio:
At September 30, 2010 and December 31, 2009, residential mortgages were $243.1 billion and $242.1 billion. During the three months ended September 30, 2010 and 2009, we retained $17.1 billion and $8.4 billion in first mortgages originated by Home Loans & Insurance. Outstanding residential mortgage loans increased $1.0 billion at September 30, 2010 compared to December 31, 2009 primarily due to the repurchase of FHA insured mortgages from Government National Mortgage Association (GNMA) securities and origination of FHA insured loans during the nine months ended September 30, 2010. During the three months ended September 30, 2009, we securitized $6.2 billion of residential mortgage loans into MBS which we retained. There were no residential mortgage loans securitized into MBS during the three months ended September 30, 2010. For more information on these securitizations, see Note 8 – Securitizations and Other Variable Interest Entities to the Consolidated Financial Statements. During the three months ended September 30, 2010 and 2009, we had no purchases of residential mortgages related to ALM activities. We sold $129 million of residential mortgages during the three months ended September 30, 2010, all of which were originated residential mortgages. Net gains on these transactions were $13 million. This compares to sales of $17 million of residential mortgages during the three months ended September 30, 2009 of which $14 million were originated residential mortgages and $3 million were previously purchased from third parties. Net gains on these transactions were immaterial. We received paydowns of $9.2 billion and $11.5 billion during the three months ended September 30, 2010 and 2009.
Expect to see much more disclosure on this matter in the coming weeks and months as the topic of fraudclosure just refuses to go away.