Visualizing How Bank Of America's Reserve Accounting Errors Are One Giant "Subprime CDO "

Tyler Durden's picture

About a month ago we penned an article titled (and asking) "Is Brian Lin The Next Incarnation Of Joe Cassano?" in which we sought to demonstrate just on what flimsy ground Bank of America has based its litigation reserve assumptions: a topic that since then has become the biggest sticking point in the BAC bull thesis. Considering that since then, Bank of America default risk has exploded by over 150% and the stock price has plummeted by half, at least some have grasped the severity of a situation when incremental flawed assumptions are magnified level after level, until we finally get what, as Manal Mehta terms it, is a Bank of America "Subprime CDO." Since this issue is extremely important to the future of the financial system (a bankruptcy of Bank of America would be hundreds of times more severe than Lehman's), below we present in visual, and thus easy to comprehend, format what we previously explaining in a narrative and which once again brings us to our question: will the man behind the BAC litigation reserve fraud be responsible for the next iteration of an AIG-type implosion?

Here is what we said a month ago:

“As an example, even if just the last assumption were changed from Countrywide and Bank of America having to repurchase all, rather than just 40%, of loans that were both in default and breached Countrywide's representations and warranties, then Mr. Lin's estimate of a reasonable settlement would rise from a range of $8.8 to $11 billion to a range of $22 to $27.5 billion. Modifying any of his other three assumptions would cause that range to rise much more."”

And here is Bank of America's fraud upon fraud in chart format:



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FEDbuster's picture

"Friends of Angelo", I think not. 


Fish Gone Bad's picture

Bank of America is a tapeworm infested piece of shit. 

cynicalskeptic's picture

Unfortunately it's still lodged in the nation's colon and no amount of Exlax seems to be able to get it out...

G-R-U-N-T's picture

Bill Black clarifies:

"In The Law, Bastiat explains that if the privileged classes use the government for "legalized plunder" this will encourage the lower classes to revolt or use socialist "legalized plunder" and that the correct response to both the socialists and the corporatists is to cease all "legalized plunder". Bastiat also explains why his position is that the law cannot defend life, liberty and property if it promotes socialist policies. When used to obtain "legalized plunder" for any group, he says, the law is perverted and turned against the thing it is supposed to defend.[8]"

fx's picture

Oh yeah, of course, Mr. Lin's assumptions from a distance are far more accurate and credible than BofA's. Sure. If tomorrow some moron came up with an even higher risk estimate ZH would probably be even more euphoric about publishingh it. Unfortunately, ZH has by now become a total gloom and doom shop only - it is focussing solely on any piece of bad or negative news or uhm, speculation, they can get their hands on. Understandable, since fear and gllom sells far better than optimism or just balanced views. Btw, BofA may still have the legal option to just send Countrywide into bk - now, that would be funny, won't it? What baffles me here is that everybody attacks the banks and their lending and disclosure practice while all the irresponsible idiots who blatantly LIED in their loan applications about their personal finances and who still get even rewarded with taxpayer money are totally out of focus...

Transformer's picture

Do you think that maybe, just maybe, the gloom and doom here has something to do with current conditions?  Gold went  up a couple hundred $ in a couple weeks.  You think there was some good news behind that?   I'd like to hear it.  How about the good news behind european sovereigns and their bonds.  What's the good news there?  Housing is down, unemployment is up, more people on foodstamps than ever, the US is in a debt stiuation that cannot be solved, businesses are failing all over. 

So tell us some of the good news.


Alpha Monkey's picture

What baffles me here is that everybody attacks the banks and their lending and disclosure practice while all the irresponsible idiots who blatantly LIED in their loan applications about their personal finances and who still get even rewarded with taxpayer money are totally out of focus...

Maybe you should go check out then come back and talk about who was lying where and when.  You might be supprised to find out that the people earning sizeable bonuses were the ones primarily insisting on falsifying income statements.

jayman21's picture

The common guy cannot bring the global economy down, but the expert can and did and continues to bring it down.  What more is there to this arguement?

Withdrawn Sanction's picture

"What baffles me here is that everybody attacks the banks and their lending and disclosure practice while all the irresponsible idiots who blatantly LIED in their loan applications about their personal finances and who still get even rewarded with taxpayer money are totally out of focus..."

It's true, there were shady characters and liars applying for loans. Let's be clear though, the banks are the guardians in this process. They are the alleged professionals whom we hire to sort out (or, yes, even deny) loan applicants and to price accurately the risks of the loans they do make. Nobody can credibly claim the banks did their job well in this regard, least of all Contrywide and BofA.

Pay Day Today's picture

William Black has been crystal on this point. 80% or more of the frauds in liars loans and other subprime loans were perpetrated by lenders.

r101958's picture

"...while all the irresponsible idiots who blatantly LIED in their loan applications about their personal finances..."

Conversely, what happened to 'due diligence' with regard to checking the validity of the information on the application? As a buyer, if I want to buy a piece of land, I had better exercise due diligence by checking the land and its paper trail. If I don't, and there is something wrong with title or the land is not what I expected then I am screwed.

Both parties to a deal have responsibility. Both parties, in this real estate disaster, are at fault.

New_Meat's picture

"Conversely, what happened to 'due diligence' with regard to checking the validity of the information on the application?"

Bawney had a piece of defeating 'due diligence' (this from the Globe, of all places,  in 9/08):

and Janet Reno, in her own words:

And don't forget Jamie Gorelik who caught it on both sides: in Justice and in Fannie:

"During Gorelick’s tenure Fannie Mae began to bundle subprime loans into securitized financial instruments."

Above is just a piece of the mess.

- Ned

johnnymustardseed's picture

FX, if  B of A was going to loan a couple of hundred billion to people for homes they could not afford, don't you think they would check  loan application  cause if they can't pay and the shit that is happening might be coming back to bite them.

rekfhardy's picture

I understand Ken Lewis took down the "BK" remote structure his legal beagles had wisely constructed to ring fence Countrywide from BAC. If true, another trick must be found, possibly hiving it off to the taxpayers as part of the coming roll up of FNM, FRE, FHA..

CompassionateFascist's picture

Had an intelligent comment, but that 101 off to the right distracted me. Off to wherever.

PulauHantu29's picture

Great analysis. Here is what Der Spiegel has to say:


Speculators are betting against the euro, banks are taking incalculable risks and the markets are in turmoil. Three years after the Lehman Brothers bankruptcy, the financial industry has become a threat to the global economy again. Governments missed the chance to regulate the industry, and another crash is just a matter of time. By SPIEGEL Staff.,1518,781590,00.html#ref=n...


TimmyM's picture

Pulau, your spiegel article misses the elephant in the room. All this financial innovation and shadow banking was not created in a vacuum. Keynesian monetary fiat central banking and policies of promoting growth by fixing the price and availability of credit has drowned the system with liquidity. Demand for capital is what should determine credit growth. Policies promoting uneconomic credit compress credit profitability. Banking capital is forced to reach for a satisfactory return in ever more risky ways as the core economic function of banking is destroyed by government sponsored excess lending capacity. All the eggheads quoted fault a lack of regulation and a failure of free markets. What they should conclude is a failure of Keynesian credit schemes that interfere with a free market for capital.

narnia's picture

with fractional reserve banking in a central bank controlled single legal tender fiat currency system, there's no escaping the busines cycle and/or inflation from an overly ambitious Treasury no matter how omniscient the regulatory body.

the only winning move, professor falken, is not to play the game: no state sponsored fractional reserve banking, no central bank & no legal tender laws.


Pay Day Today's picture

"What they should conclude is a failure of Keynesian credit schemes that interfere with a free market for capital."

When on earth did flooding the banking system with trillions in liquidity suddenly get described as "Keynesian"???

Keynes was interested in supporting aggregate demand within the overall economy when times were tough.

Not the aggregate demand of Wall St traders and HFT teams.

TimmyM's picture

"Supporting aggregate demand" distorts the price and availabilty of credit. This missallocates capital flows. You have confused intent with result.

oogs66's picture

spot on...banks refused to raise new capital when they could...regulators talked about 2015....we might not make it that long


How much more straw can this camel's back take?

BigDuke6's picture

This may help the picture

“If the US government was a family, they would be making $58,000 a year, spending $75,000 a year, and have $327,000 in credit card debt.

They are currently proposing BIG spending cuts to reduce their spending to $72,000 a year. These are the actual proportions of the federal budget and debt, reduced to a level that we can understand.”

Wesley LeGrand, Grand Private Equities

foofoojin's picture

And then there medical jumped another 2k a year like mine.  so it was all for nothing. at this point. everything is for nothing.

cynicalskeptic's picture

Whoops... the car just blew its transmission and Dad's hours at WalMart got cut.........

But we're still paying for Cousin Bobby's new 12 gauge, F-250 and trained huntin' dawg......  gotta feel like we're well protected. 

BigDuke6's picture

Haha, yep, have a green one.
And running with it , the money isn't owed to rich daddy warbucks , it's owed to the wide boy loan shark who once he can afford the gold plated Uzi 9mm will demand Alaska as payment for the debt

Cast Iron Skillet's picture

nice picture, thanks! ... I would add that the credit card debt is at a low but likely soon to be much higher interest rate.

brokesville's picture

Change name to Bank of  Fukushima send out a new lobbyist with new name of course problem solved, this new economics is grrrreate

Caviar Emptor's picture

Details, details....let the great bank "temporary nationalization" scheme begin : Fed takes them over, scrubs 'em clean, spins off a new lean mean 'good bank', and taxpayers get left holding the bag. 

We all win!

DonutBoy's picture

Yes - but I'm thinking it won't work because it will go system-wide.  The failure might look like this: the treasury announces it's nationalized BofA temporarily and all counter-party liabilities will be met, bond holders take a loss, and stock-holders are screwed.  Every other bank's stock-holders realizes the entire system is at riak.  All bank stocks are sold off.  No one will loan to any bank except the nationalized BofA.  Now TARP-2 is required, or the credit system freezes.  But Congress is not in session and is in no mood for TARP.  Twelve hours later it's in Europe, and it's a total catastrophe, all the banks are closed.  Another 12 hours and the US banks are closed.

johnnynaps's picture

If you could paint that picture, it would be worth Millions in a hundred years. Then again, this bottle of Gin might be worth that considering our fiat!

Caviar Emptor's picture

Fannie/Freddy 'conservatorship' was anounced as a done deal. No discussion. Fed, Treasury, FDIC would collaborate. No haircuts, no huge debt for equity. Fed learned from 2008 not to let TBTF fail. They'll pre-empt the fail. This time around there's not enough private sector to absorb this Walrus. 

Eireann go Brach's picture

O'robyomama will no doubt get on TV soon and read from his teleprompter that B of A is a good buy and that buying it is the patriotic thing to do !

StychoKiller's picture

Stick it in yer garage, right next to that Chebby Volt...

Long-John-Silver's picture

Rollover 1981 (movie) perfectly visualized our current condition.

Rollover 1981... world economic collapse

Seer's picture

And the Saudis (soon to be the Chinese) were the scapegoats.  Never mind that the system was predestined to fail (perpetual growth on a finite planet).

I still love this vid, comedy can deliver the message clearer than anything else:

BTW - How do you say "we're fucked" in Chinese?

Caviar Emptor's picture

"Ask not what your country can do for you. Ask what you and your country can do for the banks". 

Randy Kruger's picture

Smoke and mirrors.  None of this matters.  BAC will implode if allowed to implode (Lehman 2008), and will survive if there is enough interest from the Fed & company to keep it alive (all other TBTF, 2008).   In any case, QE3 will be right behind the upcoming escalation of crisis.

James T. Kirk's picture

When bofa tanks, the multiple street riots/bank runs will be visible from low orbit satellites. Wonder how the FDIC would play that one? Do they have a fleet of semi-truck size printing presses they can deploy in such an event?

sasebo's picture

Just tried to pull 60k in cash out of my bank friday - they didn't have it in the vault. Scurred around like mad. Said they would have to go to the Fed for it. To have it printed? Who knows. Told me I could get it thursday.

I'm probably on some hit list at the FED but I don't give a shit. Everything else is AU & AG in my possession.

Jasper M's picture

I had a similar experience, with a smaller amount,at a small bank, last year. Closing an account of $13,000, they could only give me $10,000 in cash. 

   That prepared me mentally for what is to come. The Fed does Not have enough cash (as in FRNs) to handle a general bank run. Only about $55B on the planet. They will have to "holiday"; only probabyl be more like "holi-week". Which will help things So much! Nothing generates calm like being unable to take action. Probably end up like Argentina, withdrawal limits. 

Withdrawn Sanction's picture

According to the Fed's own data, there is roughly $975 billion in currency (FRNs) circulating worldwide. A quick back-of-the-envelope calculation indicates that's about 3 grand in ready cash for every man, woman, and child in the US.

However, when you consider that by some estimates, about half of that currency circulates outside the US (and some estimates place this figure at 80%), there's even less cash per person available at home. And of the stuff that's actually in the US, none of it is in the banks but instead is in the pockets of individuals and in the tils of businesses. (The currency held by banks is counted toward their reserves, and is only about $57 billion currently.)

Bottom line: for a 60 grand cash w/d, Im surprised you only had to wait a few days. Ink takes a while to dry...

Caviar Emptor's picture

Think of BAC as a mini Greece: 

Giant debt for equity swap will be politically unacceptable. Haircuts are out of the question. So a Fed mop up operation is in order to show that "all debts will be repaid in full". And a new and improved BAC will emerge which will tend to the urgent business of sitting on cash, collecting interest on Treasuries, and calculating the bonus pool. 

JW n FL's picture

But! But!! InfiniTimmy and Ben-O-Cide said!

BigDuke6's picture

JW buddy, i can see u have lost faith in our great leaders

Would it be because debt is back to where it was after World War Two?, and for similar reasons: military spending plus post-economic crisis welfare.

There is one big difference, however: the war hasn't ended. After 1945 the world entered a period of postwar reconstruction that lifted economies everywhere. The US economy boomed in the 1950s as a result of the fact that it won the war. Economic growth wiped out the government debt quickly.

That is not happening this time, it's more like Japan after 1989, when the economy remained in a debt trap. A debt trap is where a government is forced to reduce spending and raise taxes, which weakens the economy and further increases debt.

For 30 years real incomes in the US have not grown, and the consumption and housing booms were fuelled by debt instead of income growth. It was, in a way, a fools' paradise that has now caught up. After the recession of the 1970s and 1980s, the US government moved to actively stimulate household borrowing, to create the illusion of prosperity through rising house prices and debt-funded consumption.

In addition spending on social security and medical benefits was steadily increased without any regard to the ageing of the population, the rise in life expectancy and the growing obesity of the population, leading to deteriorating health. Then in 2001 military spending was dramatically increased...

thats the way i see the main issues and you have taught me the rest

Seer's picture

All good, though I have a slightly different take on this comment:

"The US economy boomed in the 1950s as a result of the fact that it won the war."

The US economy boomed for these reason:

1) Removal of spending controls- manufacturing adjusting back toward civilian goods;

2) Pent up savings were unleased (see #1);

3) Rest of world was shifted from military spending (generally same as #1 and #2);

4) US came out of the war as the leading industrial nation (exports up);

5) Further wealth realization through oil exports (US was leading exporter of oil- now it's the leading importer);

6) Low personal debt levels (see #1 and #2).

The US really was never under attack by any conventional sense of war.  Yeah, Pearl Harbor (which was blow back from US interrupting supply lines in to Japan), but there was nearly zero probability that Japan could have ever occupied the continental US.

What the US "won" was the salvation of its key trading partners: Britain was a major debtor to the US, in which case had Germany "won" the war the US would have lost all chances at collection: and then there was the reconstruction money (  Yes, there was the Marshall Plan, but consider this a small price for the US to maintain its customer base (esp with its heightened industrial position).

BigDuke6's picture

Yes, all true, not being from the states this was not clear to me, thx.
What do u think about the addiction to military spending? I was going to drone on about that but ran out of puff.

pazmaker's picture

great little history lesson!  thanks Seer!