TARPed, RETARPed, And Then DETARPed
Tonight we learned that the FHFA, on behalf of Freddie Mac and Fannie Mae, are suing Bank of America, Merrill Lynch and Countrywide plus 27 individuals who were signatories to the individual RMBS prospectuses at issue.
The entities and individuals are being sued for making false and materially misleading statements, material misrepresentation, and common law negligent misrepresentation and in the case of Countrywide and Merrill Lynch common law fraud (one wonders if this opens the door for AG’s to charge any of the entities with criminal fraud) in connection with $57.4 billion of RMBS sold to Fannie Mae and Freddie Mac. It is worth noting that the allegation of common law fraud allows the Plaintiff to seek punitive damages. Further, there are allegations of material omissions made by the Defendants such that the Plaintiffs were not able to conduct proper due diligence on the securities.
The suit alleges that the entities and individuals lied (materially misrepresented) just about everything to do with these securities, from defective loan origination, to defective securitization.
We are truly shocked that 3 years after Fannie and Freddie were made wards of the state that the government is only NOW discovering the lies involved in this whole process. One wonders where they were in 2004, 2005, 2006.......? From the FHFA filing against Merrill Lynch pg.95
Former Merrill Lynch CEO John Thain accurately described the problem to the FCIC in September 2010:
"when you have a system where you pay someone for originating mortgages simply on volume and nothing happens to them if the credit quality is bad, and nothing happens to them if the borrower is fraudulent on his loan application, and nothing happens to him if the appraisal’s fraudulent, then that’s probably not a very smart system."
We ran a rough estimate using what the FHFA is seeking from UBS (the only lawsuit to date that quantifies the amount the FHFA is seeking). In UBS, the suit was based on $4.4B billion in RMBS in which the Plaintiff is alleging approximately 20% losses on the securities at issue and asking to for $900m.
If we apply those metrics to the BAC/ML/CFC entity, the total value of securities involved is $57.4B which equates to approximately $11.48B in loss damages alone. In addition the Plaintiff is seeking punitive damages from ML and CFC. Bank of America is a mere $1.2B of that total damage amount, Merrill Lynch $4.97B and Countrywide is $5.32B.
Alternatively, using generic cumulative loss thresholds of around 45% based on Fitch estimates for 2005-2007 vintages, and applying a conservative 60% loss severity to defective loans, implies $25.8 billion loans are defective, with total Bank of America umbrella losses of $15.5 billion.
This is virtually the entire worth of the company's stake in the China Construction bank. And this is to settle just with the FHFA alone!
Not to poke holes in the “buy” thesis of Dick Bove who does not seem to understand that BAC's deposits are actually a liability, and who at 60+ years old still does not know the difference between a stock (which incorporates something called "liability assumption") and asset purchase, we can’t help but wonder when BAC will again claim with a straight face that they don’t need any “new capital”. We do speculate that that the man who just last week purchased 7% of the company for $7 a share won’t be taking any baths in the immediate future.
Some of the firms sued today had asked the Treasury and the Fed to slow the process so they could settle the claims out of court, according to a person briefed on the private conversation who spoke on condition of anonymity. The impending lawsuits were one subject of an Aug. 10 meeting at Treasury between Bank of America Chief Executive Officer Brian Moynihan and Treasury Secretary Timothy F. Geithner, the person said.
We have no doubt that the “investment” by Mr Buffet and the sale of their CCB shares in the last ten days were all pure coincidence, as clearly BAC was not aware of any events on the horizon necessitating the need for “fresh capital”.
While the most damaging deal to the BAC franchise was the purchase of Countrywide, the brilliant idea of Ken Lewis (and no doubt about 3 dozen investment bankers), Merrill Lynch was not the sole idea of Ken Lewis, not by a long shot.
The first time we asked whether it was appropriate to hold Ken Lewis responsible for the mess that is the purchase of Merrill Lynch was back in February of 2010. We suggested that is might also be worth looking at Ben Bernanke and Hank Paulson as culpable parties given that they basically told Ken Lewis he had to do this merger for the good of the country. A couple of days after the initial piece we posted this which outlined the strong armed tactics that Hank Paulson employed so Ken Lewis would not use the MAC clause to get out of the "Merrill Transaction".
We use the walk down memory lane to demonstrate, that the same government that begged, lied, and basically broke the law to get Ken Lewis to buy Merrill Lynch, is now suing this entity possibly all the way to bankruptcy court (if one believes that TBTF can actually, you know, fail).
Incidentally, if any of the shareholders of BAC wish to trace the ultimate guilty party for the downfall of Bank of America, they should focus their ire not so much on Moynihan, who was merely the planted fall guy, nor so much his predecessor, Ken Lewis, although his purchase of Countrywide is now the single worst M&A transaction in history, but the man who broke every fiduciary law imaginable and then some, and who forced Bank of America to bite off ten times more than it could chew, all while operating under the pretense of prosecutorial immunity on grounds of "saving the world."
It is time someone finally put an end to this farce on and handed a summons to Hank and his "crony communism" buddies, who ended up bailing out mother Merrill's multi-millionaire stakeholders and managers, at the expense of hundreds of billions in wiped out Bank of America equity value, and soon to be, deposit impairments, as America's biggest bank is first taken to edge, and then, beyond.
At a minimum there is a real human cost to this mess in that a total of 30,000 individuals are to be layed off in the coming BAC "rationalization" process as the bank attempts to starve off oblivion, from the Charlotte observer:
The Charlotte-based bank could potentially shed 25,000 to 30,000 jobs over several years, the sources said. The bank hasn’t said how many jobs will be eliminated in the efficiency campaign, although some reports have said the number could reach 10,000. Executives are still working on final plans........A 30,000 reduction would equate to a little more than 10 percent of the employee base.
So to sum up: first the taxpayers were asked to save Freddie and Fannie, then they were asked to save the banks, now when it is politically expedient to do so, the first entity which is still being saved ($200B of taxpayer funded capital injections later) is suing the second saved entity. In the interim, on a day when job growth in this country was essentially ZERO, we are going to lose another 30,000 private sector jobs.
Finally, it is worth mentioning that these lawsuits are suggesting that Fannie Mae and Freddie Mac were semi-clueless when it came to the mortgage securitization process. Something that may be a tad difficult to prove given that they were major players in the mortgage markets.
If readers are confused, they are not alone.