Tyler Durden's picture

 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.

From Bloomberg:

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.

h/t Lizzie363

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Deepskyy's picture

It will cripple the Charlotte area, but I still say it couldn't happen to a nicer group of cocksuckers.  (TPTB, not the employees who will pay the price ultimately)

TheMerryPrankster's picture

Seems like they could use all those "excess" employees to certify and validate the foreclosure docs, instead of robosigning and forging mortgage documents.

Isn't it crazy how the banks have stopped being honest and no one seems to care?

to wit: "

It’s clear that the banks aren’t much chastened by the foreclosure scandal that erupted last fall and which threatens to cost them tens of billions of dollars.

An American Banker investigation today shows that several banks are still fraudulently backdating documents to foreclose on homeowners. And it’s not the first to show this. Last month, an outstanding Reuters probe by Scot Paltrow (a former neighbor of mine and Dean Starkman’s at The Wall Street Journal) showed similar behavior (ADDING: The Associated Press had a similar piece earlier that day, as commenter JenniferM points out).

These stories raise serious questions for the Obama administration and states attorneys general led by Iowa’s Tom Miller who have been rushing to settle and release the banks from liability for fraud. How can you release folks who’ve repeatedly shown that they’ll ignore the law and even recent settlements promising they’ll obey it?"


JB's picture

"Isn't it crazy how the banks have stopped being honest"


There hasn't been one since the day some devious goldsmith realized that he could issue more paper claims to the gold in his vault than he actually held.

Fractional reserve banking is dishonest to the core, and always has been.

spiral_eyes's picture

the real problem is global fragility to black swans... the more we TARP, the bigger the swan.


FEDbuster's picture

Crazy Uncle Warren will be taking a bath, only it will be a different type of bath.  Maybe this is just his twisted way of giving back to society before he dies?

rufusbird's picture

I can't help wondering if Uncle Warren would have receved the same media coverage if he had been sitting on the crapper when he got his idea to invest in B of A?

Oh regional Indian's picture

I wonder what would have happened if Unc had been handed a plugged in toaster in the bath. For opening a new account with BAC. Would have sent him BACk, quick. 

BACky Quicky.

All the moves, the sudden legal actions, this smells like the classic liquidity vaccum creating circumstances harking back to 1929. Tells you clear as day that teh same kind of engineered crash is around the corner.



FEDbuster's picture

Let's not overlook the recent moves against the HFT firms.  .gov may take the algos out somehow?  One way would be to put a penny a share tax on all buy/sell transactions, it would at least slow them down a bit.  The tax could be dedicated to funding the SEC (I know trany porn, etc...), but at least it would fund some sort of watchdog over the Banksters.

QQQBall's picture

Why is the solution always another tax or fee? Why must regular traders and investors pay the HFT bullshit? Grow a fucking brain dude.

AldousHuxley's picture

HFT doesn't matter for long term investors like income taxes dont' matter for Buffett. If you buy and hold a stock 50 years, you don't really care what happens in between.


feds are cracking down on banksters' prop trading so they are writing laws. Well workaround that is to invent a new kind of trading that is not specified in those laws and that is HFT. Wait 10 years and goldman sachs will be back with majority of their operations consisting of HFT as they phase out regular trading operations. That's how wall street always worked. Make money on loophole in the system until they get caught and activities are outlawed.

Breaker's picture

As much as I hate taxes, a penny per order would remove much of the order-based gaming reported on this site by the HFT's. But as long as the HFT's keep floating the market up on a regular basis, I can't see any real action against them. As soon as they start floating the market down, watch out HFT's.

RockyRacoon's picture

Interesting item from latest issue of The Privateer:

UK Times newspaper, written almost exactly 100 years ago...illustrate the fundamental problem now confronting the world with stark precision.
“The greatest tyranny has the smallest beginnings. From precedents overlooked, from remonstrances despised, from grievances treated with ridicule, from powerless men oppressed with impunity, and overbearing men tolerated with complacence, springs the tyrannical usage which generations of wise and good men may hereafter perceive and lament and resist in vain. At present, common minds no more see a crushing tyranny in a trivial unfairness or a ludicrous indignity, than the eye uninformed by reason can discern the oak in the acorn. Hence the necessity of denouncing with unwearied and even troublesome perseverence a single act of oppression. Let it alone and it stands on record. The country has allowed it and when it is at last provoked to a late indignation it finds
itself gagged with the record of its own ill compulsion.”
(The Times - August 11, 1846)

WonderDawg's picture

A lot of very wise men have made the same observation over the centuries. In a nutshell: All that is necessary for the triumph of evil is that good men do nothing.

trav7777's picture

but Fannie and Freddie were?  They are abominations

Poetic injustice's picture

No, it dates back to time when ancient people made electrum coins (silver+gold). This forgery could not be revealed using that time methods, only couple of thousand years later. Paper was next, yes.

Problem Is's picture

That is just the NSA surveilling another ZH poster...

Fish Gone Bad's picture

Just the other day, I think it was on CNBC's website, there was some headline stating that Goldman Sachs was going to stop robosigning.  WTF? They are going to stop now, not months and months ago when all the news was making the rounds. 

The people of the United States live in a very scary country.  Perhaps in 3 years when the statute of limitations is about to let Goldman off the hook, Obama will finally go after them.

rufusbird's picture

"It had been a good bank if it had somebody there to shoot it every minute of it's life."

(Paraphrasing the Misfit in Flannery O'connor's "A Good Man is Hard to Find")

max2205's picture

Where's Mr orange. Mr tan man. Is he off the "hook

Problem Is's picture

Tangelo is off the hook + Wall Street CEO bonus sized severance... $65 million I think...

Tangelo will be comfortablly in Orange-Man-Tan for the rest of his natural...

Kali's picture

Statute of Limitations may be 3 years, but people's memories are long.  There will be a different "law" in effect when people get hungry and desperate enough.  That time is not now.  Maybe soon.  When I see all these funemployed not driving around in their cars all day, and instead have to dumpster dive for food, then that time will be soon.

CrashisOptimistic's picture

The operative word in all of this is fraud.

NY State statutes authorize executive clawbacks if there is fraud involved in a transgression.  Not otherwise.

Reducing future bonuses is one thing and that would result from forcing them to spend the money to no longer robosign.  

But recovering bonuses already paid out . . . that's a clawback.  THAT should be the goal of all prosecutions.

Fukushima Sam's picture

After thinking about this move for several hours, at first surprised that the Feds would decide to go after the banks like this, I now think the reason they are doing so is to put the whole thing to bed as cheaply as possible.

The Obama administration knows the people are pissed, he wants to get re-elected.  So they make the pretense of going after the banks for what seems like a large sum of money.  But in reality this is no different from any other slap on the wrist fine these banks have gotten in the past.  Just that due to the very large sums involved in the fraud the slap on the wrist fine looks large.

So, Obama looks tough, the banks put the fraud behind them, and ultimately the people get screwed again.  Because if you look at the size of the fraud perpetuated then you will see that the amounts being pursued by these lawsuits are fractional pennies on the dollar.

Problem Is's picture

+1... Accurate Analysis

This is simply:

CREEP -- Committee to RE-Elect the President playing populace hero to the Amerikan Idiot (in honor of Billy Joe get tossed off a plane) public...

Kabuki Theater: All For Show
Has Eric "Empty Suit" Holder done anything in the last 3 years?? And DOJ is doing something now?

As job performance and approval rating of Obama Bin Lyin' is falling off a cliff...

Load Up the Teleprompter
Fake claims of dealing with fraud on Wall Street and hilarity will ensue...

trav7777's picture

It's Eric "Place" Holder.  That is his nickname, as bestowed by the Washington City Paper during his tenure as US Atty here in DC.  They are barely to the right of the village voice

Captain Planet's picture


Until then, the new peasants will be going hungry, homeless and depressed. Not suffering? 

Take a walk through your nearest ghetto and tell me whose paying the price. The 6 train gets you there nicely. 

Deepskyy's picture

Most of the people in the Charlotte area who will be affected by this, probably have family who live in those ghettos, and only recently got out of them themselves.  I'm not siding with BAC by a long shot, I hate the fuckers.  I just lament for the poorly paid low level workers who will be devastated because of the greed and hubris of the front office.


A.W.E.S.O.M.-O 4000's picture

"... the same government that begged, lied, and basically broke the law to get Ken Lewis to buy Merrill Lynch, is now suing this entity ..."

Gee Tyler, thanks a million for pointing out once more how the evil government is taking advantage of innocent bankers who are just trying to do "God's work."


goes211's picture

A few things.

1) The single worst M&A transaction in history was not Countrywide. It was Wachovia's purchase of Golden West Financial which single handedly destroyed that bank.

2) I was wondering if anyone else thinks that BofA might get less help because they are outside the Wall St clique. If they do go down I find it quite a coincidence that both Charlotte banks take the hit and the main Wall St banks effectively win by eliminating competition.

Arrowflinger's picture


FIrst Union, appropriately FU, was the worst bank in the USA. It bought a huge bank, Core States, and the customers hated FU so much, they left in droves. Then FU bought the Money Store for $billions had it 2 years and closed it down for a total loss. FU had FU'd its reputation so bad, that it bought the wonderful Wachovia for its good name alone. OF COURSE, the Wachovia chieftans were fired and the FUers retained to run da joint.

After getting FUed, Wachovia pled nolo to: laundering $380 Billion of Mexican Drug trade, knowingly participating in a forged check scam against seniors, and selling $8 billion in Auction Rated Securities as being money good.

Wachovia got FU'ed and the FU people destroyed the bank, but finished it off with the Golden West deal.

Anyone within the first 4 levels at the FU'ed Wachovia should be forever ostracized from financial employment.


trav7777's picture

FNM and FRE are jobs programs for blacks.  Each of them is about 50% black employees.  Go figure, huh?  Who could have predicted that these entities would be the worst-run financial institutions ever?  As an aside, I had the "pleasure" to work with a senior project manager out of Freddie, fitting their dominant demographic.  Incompetent does not even begin to describe her

WonderDawg's picture

If incompetent doesn't describe her, allow me to try:

If we could discern that she actually had any aspiration, it would be that she aspires to the bottom rung of incompetence.


trav7777's picture

no...she thought she was the bee's knees, man, seriously.  Blacks in no way lack self-confidence or self-esteem; they think they are god's gift to the earth, the master race.  But, she expected everyone else to carry her water for her, just like the rest of them. 

lolmao500's picture

Citigroup should be at center of this too...

Basically from ``The Guy`` himself... 60%+ of mortgages sold by Citi in 2006 were FRAUDS... and in 2007-2008 (at least) 80%+ of the mortgages sold by Citi were FRAUDS.

This is admitted UNDER OATH by the guy running Citi... and NOBODY GOES TO JAIL...

Under oath :


These mortgages were sold to Fannie Mae, Freddie Mac and other investors. Although we did not underwrite these mortgages, Citi did rep and warrant to the investors that the mortgages were underwritten to Citi credit guidelines.

In mid-2006 I discovered that over 60% of these mortgages purchased and sold were defective. Because Citi had given reps and warrants to the investors that the mortgages were not defective, the investors could force Citi to repurchase many billions of dollars of these defective assets. This situation represented a large potential risk to the shareholders of Citigroup.

I started issuing warnings in June of 2006 and attempted to get management to address these critical risk issues. These warnings continued through 2007 and went to all levels of the Consumer Lending Group.

We continued to purchase and sell to investors even larger volumes of mortgages through 2007. And defective mortgages increased during 2007 to over 80% of production.


Edit : link working now.

Milton Waddams's picture


take a bath (on something)
Sl. to accumulate large losses on a business transaction or an investment. (Alludes to getting soaked, a slang expression meaning "being heavily charged for something.") Sally took a bath on that stock that she bought. Its price went down to nothing. I'm afraid that I will take a bath on any investment I make.
TheMerryPrankster's picture

Interesting take on debt forgiveness:

"Currently we are mired in a “new normal” and calls for “austerity” which are nothing more than the delusional efforts of a status quo to avoid the consequences of its own error and fraud and to profit evermore. So bedazzled by the false wealth created by debt multiplication and its concomitant fantasy of ever-higher returns, this status quo continues to be stupidly amazed that people are not spending and that the economy is not picking up. But how could it be otherwise?

Productive wealth has been trapped in a web of parasitic theft, counterfeiting, liability evasion, non-regulation, and prosecutorial non-accountability. All the fundamental attributes of a functioning exchange economy have been warped to reward creative criminals. I spoke extensively about this in my posts from 2008. ( Imaginary Worth, Empire of Debt: How Modern Finance Created Its Own Downfall (October 15, 2008)

The unsustainable nature of debt

Two observations: 1) Fabricated/parasitic so-called “wealth” destroys value by diluting the value of productive wealth. 2) Debt/credit that cannot be paid back is never an asset and is always a hot-potato liability (needing to be foisted to a greater fool to garner “profit” and transaction fees):“The models [modern debt are] based upon had no contact with reality. They assumed unlimited growth and ability to pay. When matched against the reality of people paying ten times their salary for mortgages that actually added more money owed to their principal (i.e. with negative amortization), required no money down, and set up “balloon payments,” large step-ups in payments after a few years) there is no possible way they could NOT default in a predictable span of time.” ( Part II: How the Credit Default Swap Scam Works (October 13, 2008)Systemically, all debt that charges a percentage (“usury”) originates in delusion. Debt grows exponentially indefinitely, growth (income and otherwise) cannot. This leads to a widening condition where the fruits of productive “growth” devoted to interest payments increase until those fruits are entirely consumed. (The Elephant In The Room: Debt Grows Exponentially, While Economies Only Grow In An S-Curve (Washington’s Blog)

Once this happens, stores of wealth (hard assets) begin to be cannibalized to make up for the difference. You see this in Greece with its sale of public assets to private companies, and in middle-class America where people are liquidating retirement accounts to pay for their cost of living.

This problem is compounded by a private Federal Reserve that lends money into circulation at interest, and then allows the multiplication of this consumer debt-money liability through fractional reserve banking. The money in circulation today could pay only a small fraction of the total private and public debt. That fact alone is evidence of a kind of systemic fraud. “If you just work hard enough, save, and make sensible decisions, you can get out of debt” could only physically work for a bare fraction of the population, given the money-to-debt ratio. The rest would have to simply default to clear the boards.

This is why debt forgiveness makes not only moral but rational, mathematical sense. Finances require balancing to be coherent. There must be some way to redress systemic imbalance. One has to be able to “zero the scales” to get an accurate weight of value and to re-establish healthy value creation."


Caviar Emptor's picture

Productive wealth has been trapped in a web of parasitic theft, counterfeiting, liability evasion, non-regulation, and prosecutorial non-accountability

Yup. They finally did it. They blew it all to hell. The ugly taboo reality is the US economy is just a hollowed husk, cannibalized of most of its sources of wealth (and even its natural resources). There will be a gradual decline punctuated by spooky, sickening legs down until equilibrium is reached in a much smaller, low-growth economy that will never be self-sustaining again. There are plenty of examples of this throughout history. 

centerline's picture

It will be self-sustaining again.  But likely not in our lifetimes.  My children will hopefully see it through.  Between here and there, there will be much pain.  Collapse of Roman Empire style x100.

blunderdog's picture

As obvious as it is, it's so painful to be reminded that so few understand.

The simplest way to think about it, in my view, has always been that if any given institution controls more "money" than the value of every "hard asset" on the planet totaled up, there's simply no way for the system to work.

How long ago was it that we passed that point?

If "the masses" awoke to this kind of realization intuitively, I don't think any aspect of the system would ever work again. 

"Finance" would just die. 

It would take awhile before people got distracted/forgetful enough to permit it to exist again.

WonderDawg's picture

The Fourth Turning does a pretty good job of describing how generational cycles allow us to "forget" our mistakes, and inevitably repeat them in some form or fashion.

ArkansasAngie's picture

Excuse me -- Let's line up in orgination chain order:

The people who took out the loan,

the people who gave them the loan,

the person who sold the securitized package,

the people who vouched for the "quality" of the securized loans.

Now ... take these folks money first and then come ask me for my money.

Debt forgiveness?  Horse manure.

BTW:  Buffett isn't worth $50 Billion.  That's our money thank you very much. 

PMakoi's picture

"This is why debt forgiveness makes not only moral but rational, mathematical sense. Finances require balancing to be coherent. There must be some way to redress systemic imbalance. One has to be able to “zero the scales” to get an accurate weight of value and to re-establish healthy value creation."...

It does, but the moral clarity needs to be refined.  All, or perhaps just most, of us that have worked hard and honestly, and have paid our debts and kept up our mortgage payments, and maybe even pre-paid to reduce the principal will, no doubt, ask/demand for some sort of fair play to themselves.  That's the rub. 

ArkansasAngie's picture

Excuse me again.  I do not owe any money.  I did not take out a loan via misrepresentation.  I did not lie, cheap or steal.

I am at the bottom of the chain in terms of cupability.  In fact most Americans aren't in that chain of culpability.

I have no moral responsibility to maintain Warren Buffet in the lifestyle he is accustomied to.  However ... take his money away and I have no problem with him going on standard government assistance.  And ... if it's good enough for Warren Buffett it's good enough for everybody else in that before mentioned chain of fraud.

RockyRacoon's picture

There is something to be said for simplification of a problem, Angie, but there is danger in oversimplification.   Finding that nuanced, balanced, equitable spot is the tough part.   Don't fall into the trap of thinking you have eliminated all other factors with your pared-down analysis.   There is a fine line these days between the "law" and established moral hazard.   Stay open and flexible on the matter and consider other views, especially those that may clash with your own.   Just sayin'....   

A fellow Arkie.

Maybe-Not's picture

No matter what anyone says, even Tyler.... Ken Lewis bought CW! I can't even type enough words for the stupidity of that!

optimator's picture

Stupidity?  I learned a lot about banksters a few years ago while negotiating a CD rate.  I was doing the numbers in my head while the bank manager was doing it on her calculator.  I corrected a calculation for her to which she replied, "I'm not very good with numbers".