Is PIMCO The Fed's "Agent Provocateur" In Scuttling Billions In Legal Putback Claims Against JP Morgan And Bank Of America?

Tyler Durden's picture

Perhaps it is time for JP Morgan to revise its estimate for putback liability claims. As a reminder back in October, it was none other than JP Morgan which said: "We estimate putback risk to be approximately $23-$35bn for agency mortgages, $40-80bn in non-agency and roughly $20-30bn for second liens and HELOCs. However, there are a number of reasons why these estimates are on the high end, including losses already taken and loss reserves established." Well, there appear to be a number of reasons of why these estimates may have been on the very low end as well, the first one being that the bank itself just announced "it faces up to $4.5 billion in legal losses, in excess of its established litigation reserves, should its worst-case legal scenario occur." And if JP Morgan is seeing billion more in putback exposure, then what should Bank of Countrywide Lynch say, which just reported that the amount of debt which is being put against the firm for fraud of various types has just doubled from $46 billion to $84 billion. Luckily, according to a DebtWire report, PIMCO and BlackRock are actively doing the Fed's bidding in attempting to form a splinter group within the putback litigants and to settle with BofA for a nominal charge. Will the Fed be once again successful at subverting justice?

From the WSJ:

The SEC has requested the additional disclosures on what banks could potentially face on legal losses on top of what they have set aside. The banks all face a rash of lawsuits regarding the financial crisis and collapse of the housing market, particularly from investors who purchased mortgage-backed securities that later tumbled in value.

The bank already accounts for what it considers a reasonable estimate of losses in a litigation reserve, a number it doesn't make public. The $4.5 billion figure would be a worst-case scenario on top of that number. It said the additional losses could be zero, though it could also go higher as the bank can't yet make estimates on the more than 10,000 legal proceedings it faces.

Those who have been following the recent attempt by various plaintiffs to claim fraudulent misrepresentation using statistical sampling, which Allstate, and its lawfirm appears to have perfected, this will come as no surprise. Neither will it be a surprise that the litigation floodgates, as we have claimed since September, are about to blow open and drown the bank in hundreds of millions if not billions of legal settlements and fees.

J.P. Morgan was also the latest bank to include a disclosure that it has
received "a number of subpoenas and informal requests for information"
about its mortgage business. The bank said those requests include
questions about its underwriting of mortgage-backed securities. The bank
said some of the investigations also arose after it announced a
foreclosure moratorium last year when it found problems in its
foreclosure practices.

Ironically, it is the biggest mortgage lender in the US, Bank of America which continues to blatantly misrepresent its putback exposure:

Last week, Citigroup Inc. warned the high end of its worst-case scenario was $4 billion, while Bank of America Corp. warned of up to $1.5 billion in additional losses and Wells Fargo & Co. said its extra disclosure was $1.2 billion above its reserves.

We wonder whether BofA's number accounts for the just disclosed doubling in putback claim notional against the bank as Bloomberg summarized:

A bondholder group seeking reimbursements from Bank of America Corp. over soured home-loan securities said the amount of debt it holds grew to $84 billion after more investors joined the dispute.

The number climbed from about $46 billion in October, according to the group’s lawyer. The investors have had “enough progress” in negotiations with Bank of America and Bank of New York Mellon Corp., which acts as trustee of the debt, to warrant continued talks, Kathy Patrick, a partner at Houston-based Gibbs & Bruns LLP, said today in a telephone interview.

Bank of America said Feb. 25 there were 225 mortgage deals in dispute, up from 115 in October. It didn’t provide a dollar value for the securities. Investors challenging the bank include Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York, people familiar with the matter said in October.

The “careful approach” of Patrick’s investor group doesn’t mean it will accept less than it’s entitled to, she said, dismissing the idea that her clients will limit their settlement goals because of their other business dealings with Bank of America.

What Bloomberg did not however discuss is the previously reported tidbit by DebtWire that Pimco (and naturally BlackRock) may be attempting to derail the attempt to actually extract some real damages from BofA. We quote from the piece by Allison Pyburn and Adelene Lee:

A growing faction of mortgage bond investors are rallying to fight a potential “sweetheart” deal between Bank of America and a handful of friendly funds related to Countrywide Financial’s mortgage buyback saga, Debtwire reports. The investors fear talks led by some of the nation’s largest fund managers, including PIMCO and BlackRock, along with Freddie Mac and the New York Federal Reserve, could bind them to pennies-on-the-dollar payouts even though contractually Countrywide’s owner is required to repurchase all flawed mortgages at par.

In Countrywide deals, the number of mortgages that differ substantially from their descriptions is estimated between 40%-45% to as high as 70% of the balance, according to one of the sources involved and a source familiar with the lender’s collateral. An agreement struck between the big boys could bind all non-agency mortgage backed securities issued by Countrywide, BofA and potentially Merrill Lynch, should trustees for the deals participate, said David Grais, a partner in New York law firm Grais & Ellsworth, which represented Greenwich Financial in a buyback case against Countrywide in 2007. Such a deal would likely prevent mortgage bond investors from pursuing a higher payout in the future, Grais said.

Between 2004 and 2007 Merrill Lynch and Countrywide issued at least 491 deals totaling USD 414bn. The agreement would mirror the USD 3bn deal BofA arranged with Freddie and Fannie Mae in January. All of the mortgage bond investors, including PIMCO and BlackRock, initially banded together to pursue full reimbursements for bad mortgages sold into the Countrywide mortgage deals they bought, the second source involved said…The investors found evidence of the so-called servicer self-dealing in 200 RMBS deals holding USD 200bn in mortgages, the sources said…The evidence would have armed bond investors with the arsenal to declare BofA in default of its Countrywide servicing contracts, stripping it of its servicing rights, while revealing information that would have resulted in untold amounts of repurchase requests, the source said. BlackRock and PIMCO, however, switched course…The BlackRock and PIMCO-led faction turned to Kathy Patrick, a partner in Houston, Texas-based law firm Gibbs and Bruns, and employed several tactics to recover their losses – but balked at using the evidence, according to the source…Because it declined to use the allegedly damming evidence, the PIMCO group’s attempts to negotiate with BofA has been labeled as “unleashing a dog with no teeth”- - partly to fulfill their fiduciary duties to their own investors while also ensuring BofA’s financial strength, the two sources, a third with knowledge of the situation and a lawyer following the dispute said...BlackRock holds an estimated USD 3.4bn of BofA equity, and BlackRock, PIMCO and fellow signatory Western Asset Management Co. maintain significant government ties through the Public-Private Investment Program (PPIP) funds they run…The faction led by PIMCO and BlackRock purport to have at least that much standing in USD 47bn of Countrywide mortgage bonds. The opposition, meanwhile, is gaining momentum by soliciting more foreign banks to join the movement, Frey said.”

In other words, the Fed, through PIMCO and Blackrock appears to be aggressively attempting to sabbotage efforts to extract anything more than a token settlement from BofA (and thus the entire mortgage servicer industry). Luckily, as more and more institutions (all of whom were guilty of taking the world's biggest liar and fraud's word at face value) join in the fray, the ability of PIMCO to do the Fed's bidding gets progressively more diluted. We can only hope that for once the Fed will not get its way.

h/t MM