Beware What May Lie Off Balance Sheet at Bank of America

A recent ZeroHedge article (Bank
Of America Can Not Deny It Used Repo 105, Response From
PricewaterhouseCoopers Pending; The BofA QSPE's ) probes the
possibility of BofA engaging in Repo 105-like activities in regards to
their QSPEs (off balance sheet vehicles). ZH does seem to uncover a lot
of dirt these days. After reading the article, I think it is worth blog
fans time to delve deeper into the off balance sheet world of BofA. Here
are some older blog posts that ask the hard questions and raises some
additional ones. 

 And
the next AIG is... (Public Edition, and yes, I know there is a typo in
Mr. Tizzio's name) Free registration required to access the naked
swap note.

I have posted this warning of Bank of America's naked swap writing to
my subscribers a few weeks ago. Since BAC is reporting this week, I have
decided to make my suspicions public. I have found evidence that this
bank has $32 billion of naked (as in apparently unhedged) swaps on its
books - just like AIG. The difference is this bank is bigger, probably
has more exposure, and has already been bailed out - several times. Oh,
did I mention the insured collateral is nearly half BBB rated or
lower??? How about extreme management issues at the top, and I mean all
the way to the top (the CEO may actually bring down the ex-treasury
secretary and maybe even the Fed Chairman. A trunk full of junk,
surrounded by drama! It should be an interesting conference call
tomorrow when they report, that is if anybody decides to ask the right
questions...

 If
a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear
It?: Pt 3 - BAC (the bank 

 Bank of America securitizes residential mortgages, commercial
mortgages, credit card receivables, and home equity loans and automobile
loans that it originates or purchases from third parties. As of June
30, 2009, the total principal balance outstanding of securitized
portfolio was nearly 1.7 trillion (including 1.1 trillion of mortgage
backed securities, securitized by Government sponsored entities). The
total senior securities and subordinated securities held by BAC on its
balance sheet amounted to about $27 billion (28% of tangible equity) and
$10 billion (10% of tangible equity), respectively. 

 Click graphic
to enlarge...

Key observations

• In
  the normal course, QSPE (securitization vehicles) are treated as
  separate entities with no right of recourse. However, the Bank has sold
  loans to these QSPE with various representations and warranties related
  to, among other things, the ownership of the loan, validity of the lien
  securing the loan, absence of delinquent taxes or liens against the
  property securing the loan, the process used in selecting the loans for
  inclusion in a transaction, the loan's compliance with any applicable
  loan criteria established by the buyer, and the loan's compliance with
  applicable local, state and federal laws. Under the Bank's representations and warranties, the
  Bank may be required to either repurchase the mortgage loans with the
  identified defects or indemnify the investor or insurer, in case of
  breach. In such
  cases, the Bank bears any subsequent credit loss on the mortgage loans. It is worth noting that during the three and six
  months ended June 30, 2009, the Bank repurchased $222 million and $582
  million of loansfrom securitization trusts as a result of the
  Bank's representations and warranties, and corporate guarantees. In
  addition, the Bank repurchased $208 million and $968 million of loans
  from the securitization trusts as a result of modifications, loan
  delinquencies or optional clean-up calls during the three and six months
  ended June 30, 2009.The Bank also repurchased $77 million of loans from
  trusts securitizing home equity loans during first six months of 2009. However, the amount of loans repurchased during the
  three and six months ended June 30, 2009 are very insignificant when
  expressed as % of tangible equity which was $97 billion as of June, 30,
  2009. This may not last,
  for as buyers, investors and insurer get more aggressive, and/or
  educated, they may push for more action on indemnification. For
  instance, I am confident that Wachovia's poorly written portfolio is
  rife with overstatement of income, over statement of assets,
  understatement of liabilities and debt, misrepresentation of collateral
  use, etc., as was endemic for the industry in the era of liar loans. A
  thorough audit of those loans should enable an activist investor to put
  back a significantly higher portion of that debt to BAC.
• In
  the case of credit card securitization, the Bank is required to
  maintain a seller's retained interest of 4-5% as per the legal documents
  of the securitization trusts and as of June 2009, this seller's
  interest amounted to $9.7 billion or 10% of tangible equity. The
  seller's interest is not represented by security certificates, is
  carried at historical cost (this means it is drastically overstated), and is
  classified within loans on the Bank's Balance Sheet.

Well, it
looks as if I was onto something in Banks
Swallow Another $30 billion or So in More Losses as Their Share Prices
Surge (Again) .

From Bloomberg:

March 5 (Bloomberg) -- Fannie Mae andFreddie Mac may
force lenders includingBank of
America Corp., JPMorgan
Chase & Co., Wells Fargo
& Co. and Citigroup Inc. to
buy back $21 billion of home loans this year as part of a crackdown on
faulty mortgages.

For the sake of nostalgia, an old post reviewing B of A's quarter last
year,
A Glance at the Bank of America recent quarter 

Comments

[sun]

You got a really useful blog I have been here reading for about an hour. I am a newbie and your success is very much an inspiration for me Alaska Fishing Trips

[sun1]

I have to admit that I have never heard about this information I have noticed many new facts for me. Thanks a lot for sharing this useful and attractive information and I will be waiting for other interesting posts from you in the nearest future.keep it up. car insurance

[delacroix]

I suspect, those forced buybacks, of bad mortgages, from fan/fred, will be neutralized. after all the taxpayers are already on the hook, and it would hurt the banks ability to provide services to american families

[Blithering ORSA]

It's something new to justify TARP II - oh goodie!

[williambanzai7]

I remember, a few short years ago, spending untold hours trying to find a way to fairly disclose the reality of business practices in Indonesia to American investors.

I can only imagine what that exercise would be like today, trying to find a way to explain the reality of prevailing US business practices to Indonesian investors.

[bugs_]

The solution to pollution is dilution.

[Cookie]

Reminds me of a WW1 British army marching song...

Wish me luck as you wave me goodbye....

[Reggie Middleton]

I think an economic implosion will cause these issues to come to light before they are exposed voluntarily through accounting rules, particularly since the accounting rules are so susceptible to lobbying and political pressures.

[deadhead]

thanks reggie.

any comments on how the FDIC's capital postponement for 1.5 yrs dims the impact of FASB 166/167?  interestingly, those items must show up on the balance sheet this quarter.....

[jswede]

Reggie, regarding deadhead's comment, didn't WFC comply with FASB 166/67 as of 1/1 and somehow (magically?) they had little effect?  (not that the losses were not there, they jsut somehow got around actually coming clean)