Bank of America

As Bank of America was plunging throughout October, it appears its short interest was, counterintuitively, following suit. As the NYSE reports, short interest in John Paulson's favorite bank (or not - the Paulson & Co. 13F coming out in a few days may have some nasty surprises for longs) was 153MM shares at the end of September. This number dropped by a whopping 54 million shares, or 35.3% in just one month (see table below). This means that the ongoing drop in the name had little to do with a resurgence in shorting, and all to do with increased selling. Furthermore, the far more proportionately bigger drop in SI, means that should there be another notable weakness in the name, then the drop this time will be that more accentuated, as there is less of a short covering impetus to the downside (and greater room for new shorts). In addition to BofA, other notable observations are that shorts in Ford rose to 282 million, making it the second most shorted stock on the NYSE, just after perennially most hated company Citi, which had 423.8 million shares short. The other usual suspects were mostly ETFs which as readers know all too well by know, are merely short hedging vehicles to long single name positions by hedge funds.

Today's fraudclosure (remember that?) court ruling of the day comes once again from Florida, where in the case of Merrill Lynch Credit Corp vs Karin Lenz (Southern Florida case 09-60633) courtesy of yet another massive fumbled mortgage note discovery process, Judge Marcia Cooke has found that Merrill was not allowed to foreclose on a property that had an IRS tax lien on it, that a tax lien is found to have priority over a mortgage, and that in a nutshell the (presumed) mortgage servicer does not have standing to foreclose when the IRS is involved and demands its pound of flesh. This will be the latest cog rammed right up the wheels of the foreclosure process, as another hundred thousand or so mortgage will now likely be derailed as the IRS seeks to recoup tax revenues in a way that implicitly impairs banks, and further delay  foreclosures, now that there is affirmative case law precedent.

William Black ratchets his campaign for putting an allegely insolvent Bank of America into conservatorship by several notches, following up on Jonathan Weil's argument presented a few days ago that there is massive "book cooking" by Moynahan's henchmen, and that it is about time that BofA truly opens it books for all to evaluate just how undercapitalized the mega bank truly is.

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.

Goldman's Richard Ramsden has released another report whose only purpose is to prove that the market is wrong and that banks are angles, that putbacks already priced in by the market for the TBTFs are far greater than even the worst downside case, that business models are "robust", that Basel concerns are overrated, and more such things which, of course, are a self referential plea not to sell Goldman.... Oh yes, and despite all this he cuts the price target for WFC, PNC and, oops, Bank of America, from $19 to $16/share. If Goldman cuts Price Targets when all it sees are pots of gold and unicorns, one dreads to think what may happen if the bank was actually concerned about the fraudclosure situation that according to some rumors has brutalized the banks' October (and now November) mortgage-related cashflow.

Various rumblings started at Zero Hedge and a few other fringe sites, and now essentially mainstream (not to mention emanating from such firms as, oops,  Goldman Sachs) as pertains to a rather curious correlation between POMO days and market outperformance, appear to have finally gotten to such institutional stalwarts as Bank of America and its traditionally imperturbable Jeff Rosenberg (whose opinion we tend to respect). In a piece released tonight titled appropriately enough, "The POMO Conspiracy Theory", Rosenberg (not to be confused with former M-Lyncher David) sets off to debunk that POMO days have an impact on risk assets. Alas, he fails. The conclusion: "Our analysis points to the correlation, but not causality of POMO with rising stock prices." Sure enough, if one could confirm definitive "causality" of Fed intervention in the stocks markets, that would pretty much be the ballgame right there. And it appears that even his correlation results force Rosenberg to step back: "We likely are about to get a lot more days of POMO if the market’s expectations of $500bn further expansion of  the Fed’s balance sheet is confirmed at the conclusion of Wednesday’s FOMC meeting. If the correlation of POMO purchases and stock prices were to continue to hold going forward as it has since August, than we should expect more frequent days where stocks go up as the Fed pumps in liquidity into the financial markets." Thank you for proving our point Jeffrey. Amusingly, at the end of his "debunking", Rosenberg, in typical banker fashion inverts the argument by 180 degrees, and says essentially that even if POMO is goosing markets, it basically creates a self-fulfilling prophecy that "can contribute to a better economic outcome" as it boosts inflation expectations. Jeffrey: a better outcome yes, but for you. And nobody else.

Paulson and David "Balls to the Wall" Tepper just can't catch a break these days...

William Black continues with his campaign to not only bring sanity and transparency to an administration wrapped in secrecy, legacy cover ups and fraud, but to finally do what had to be down two years ago: bring down the big banks, force a balance sheet restructuring at the TBTFs, and force a systemic reset which is the only thing that could bring the much promised "change for good" to this country. " Don't talk about doing the right thing -- do it -- and do it to a major contributor. Don't do it because it's a contributor, but because a bank that commits tens of thousands of frauds should immediately be placed in receivership." We once again hope that more people like Bill Black (if not he himself) will decide to run for president, and make the difficult choices necessary to begin the impossible task of truly fixing the mess this country finds itself in.

Bank of America, which is gearing to resume foreclosures as soon as today, has just confirmed that it has "discovered errors in 10 to 25 out of the first several hundred foreclosure cases it examined starting last Monday." Assuming a nice round number of 500 or so tested cases, this means a faulty incidence rate of up to 4%. Considering that the bank has about 102,000 cases it is preparing to resume foreclosing on, this could mean that as much as 4,500 cases are about to put back. And who knows what else Bank of America is lying about?

Here we go - the rating agencies are now officially in the game. Next up - collateral calls and other nasty stuff: "Today, Fitch Ratings issued a number of separate press releases placing on Rating Watch Negative most U.S. bank and bank holding companies' Support Ratings, Support Floors and other ratings that are sovereign-support dependent. The two companies mostly impacted by this announcement are Bank of America Corporation and Citigroup, Inc." BBB+ coming up.

Hilarious: "We are downgrading BAC to Hold from Buy. Sadly, this action goes against our better fundamental analysis/judgment especially after the company reported 3Q10 results that we believe were better than many feared. Does the fact the company is trading at 90% of reported tangible book value of $12.91 matter? It should, in our view. But, unfortunately it doesn’t – at least not right now." In other words, "unfortunately" the sellside ponzinomics model is breaking down when the rule of law has to be followed. How "sad" indeed.

In an ironic twist of events, last night Bank of America's Chris Flanagan, head of MBS strategy penned an article titled: "Foreclosure Issues Pose Risks, Should Be Resolved With Time" in which the Bank of American proudly reports the following piece of supreme denial: "While that resolution should involve time, effort, and cost, we do not believe it will result in a major long–term disruption to the housing or mortgage markets...Additionally, the allocation of additional costs due to advancing and legal fees will have to worked out. We do believe that the tenets of securitization, MERS, extensive legal foundation that has been established over the last 30 years, and REMIC eligibility will stand." Well isn't it ironic, as Alanis would say... To think all this occurred when Bank of America was still just above it 15 month lows. After today's festivities, not so much. As for the tenets of, well, all those things that are supposed to stand, we are sure that is the case: after all would Moynihan wouldn't risk perjury if he was concerned that a multi-decade culture of perjury, fraud and lies could ever be overturned. The alternative of course would be jail time. And recall what happened to his securities-fraud committing predecessor. Regardless, here is the full MBS defense as presented by the bank with the most to lose when things finally get out of hand. Oddly enough, even this most KoolAided  of defenses admits that "the end result will likely be a further extension of foreclosure timelines." Which makes one wonder: just what gives the bank the confidence that it will be able to lift the moratorium within a week? And just what will happen to the firm if it is unable to sweep all these tens of billions in future losses under the rug.

It is well known that Bank of America owns 34% of BlackRock via a legacy position inherited from Merrill Lynch, arguably the most valuable part of the business. As of today, the stake is worth around $11.5 billion. Yet what may be a little less known is that BlackRock has also returned the favor, and is now the largest holder of Bank of America, owning 5.35% of the outstanding BAC shares, for a total value of $6.6 billion. Does that mean that there is a wash in there somewhere? Who cares. But one thing that certainly is involved, is a massive conflict of interest, especially in the context of litigation. And a big question mark - to claim that BlackRock is willing to impair a nearly $7 billion investment is naive. Instead, due to the incestuous nature of Wall Street, and the cross pollination of MBS holders, is today's action merely a ploy to get some of the more "impacted" parties to promptly settle and eliminate any possible future litigation? PIMCO, for one, and the FRBNY fir another, have the most to lose if the MBS crisis escalates, and if all MBS are unwound. Which means that somehow this is simply another diversion, with the real action taking place somewhere. We hope to figure it out before everyone has settled amicably and the whole fraudclosure is swept under the rug.

As the putback parade gets going, the question is not whether the banks can afford to buy back the mortgages. The question is “Can the Banks Afford the Instantaneous and Guaranteed HIT to CAPITAL?” What investors will lend money to see it instantly evaporate, and how much will they charge for those evaporation services? TARP 3.0 coming to a door step near you!!!

Putbacks, bitches! This headline that has just flashed, can not be right. Otherwise it would mean the New York Fed (and Bill Gross) is preparing to sink Bank of America with hundreds of billions of par MBS putbacks. It would however explain why PIMCO has been gobbling up MBS on margin in the past month as we highlighted. We will bring you more as we see it, because this could be a groundbreaking development.

Update: Blackrock joins too! The "soured mortgages" in question amount to $47 billion (to start). We are now just waiting for BofA to next demand TARP 2 and the circle jerk will be complete.

Update 2: Full Bloomberg story attached.

Reminder: Here is JPM's presentation on what the total putback risk is for the Big Banks. As the lawsuit seeks to putback $47 billion one wonders just how accurate JPM's estimate of a $55 billion max pain truly is...

Reminder 2: As our whistleblower pointed out earlier today, the issue of misrepresentation of all mortgage related items (not just titles) is precisely what would destroy the mortgage originators and servicers. Today, Countrywide, its former orange CEO, and Bank of America are the first to realize just how correct he or she was.