Presenting The Key Questions To Be Answered By Bank Of America In Today's Fairholme Capital Conference Call

Ahead of today's Bank of America conference call organized by Fairholme's Bruce Berkowitz which has one purpose only: to rescue his losing investment in Bank of America, which is down almost 30% in the past week, below, courtesy of Manal Mehta, we present 6 prepared questions which we are confident will all get their due attention by Mr. Berkowitz because unless these core questions, which go to the heart of all investors fears about Bank of America, are not answered, and instead nothing but fluff is discussed, the whole exercise will lead to an even greater panic in Bank of America stock. And what would be more ironic than another 20% drop in the BAC stock during this call. Also, in addition to the questions below, we post the following, based on an analysis by Compass Point Research & Trading, which matches an analysis conducted independently by Zero Hedge, and according to which BofA could be forced to repurchase between $28.4 and $62.2 billion, or between $10.6 and $44.4 billion above the bank's current reserves, which would immediately impair the firm's Tier 1 Capital, trimming it by more than 50%, and forcing the company to immediately issue an equity follow on, which will likely lead to a stock price also about 50% lower.

Per Compass: "The bank could be on the hook for as much as $14.8 billion in future losses from U.S. government-back investors Fannie Mae and Freddie Mac, the report said. The losses would come despite a January settlement agreement totaling $2.8 billion that resolved most of the outstanding repurchase claims between Fannie Mae, Freddie Mac and BofA. Compass Point also said the bank could report as much as $44.1 billion in total losses from repurchase requests from private investors. BofA could also lose up to $3.3 billion to monoline insurers looking to recoup losses on mortgage bonds they insured."

As for the questions which we believe are instrumental to getting a fair sense of what is happening with Bank of America, here are the 6 main questions which Moynihan should response before anything else.

We urge readers to dial into this call to hear the honest answers (or lies as the case may be) straight from the horse's mouth - link for the webcast is here.

Questions for Bank of America's CEO:

  1. Earlier this year, you reached an agreement to settle rep + warranty claims tied to a monoline insurer – Assured Guaranty.  Wrapped RMBS deals were typically rotated amongst all the monolines so rep + warranties given to Assured were substantially similar to those provided to MBIA and others.  Yet, in your financial statements – from your latest 10-Q for Q2 2011, you state “We have had limited experience with the monoline insurers, other than Assured Guaranty, in the repurchase process as each of these monoline insurers has instituted litigation against legacy Countrywide and/or Bank of America, which limits our ability to enter into constructive dialogue with these monolines to resolve the open claims. It is not possible at this time to reasonably estimate probable future repurchase obligations with respect to those monolines with whom we have limited repurchase experience and, therefore, no representations and warranties liability has been recorded in connection with these monolines” How is it reasonable – when you have settled with Assured, how is it possible to make a statement that you don’t have enough experience to set aside reserves for claims from monolines like MBIA?  The deals were the same.  To ask a very blunt question – Has Bank of America set aside any reserves for your ongoing litigation with MBIA where you have lost a number of key court rulings?  What would you say to those who say you are hiding behind accounting rules about litigation to not set aside adequate reserves?
  2. The precedents set in litigation versus MBIA has emboldened others to pursue litigation against BAC.  These rulings include allegations of a de facto merger opening BAC to successor liability as well as the use of statistical sampling rather than “hand to hand combat” in fighting mortgage putbacks.  As you highlight in the latest 10-Q, “Additionally, if recent court rulings related to monoline litigation, including one related to us, that have allowed sampling of loan files instead of a loan-by-loan review to determine if a representations and warranties breach has occurred are followed generally by the courts, private-label securitization investors may view litigation as a more attractive alternative as compared to a loan-by-loan review.”  In two weeks, there will be another important decision in the case which relates to an assumption you highlight in your latest 10-Q.  For example, if courts were to disagree with our interpretation that the underlying agreements require a claimant to prove that the representations and warranties breach was the cause of the loss, it could significantly impact this estimated range of possible loss. Isn’t it time to reach a settlement with MBIA before there are further damaging court rulings?
  3. In a December 2010, NY Times article you stated, “But what about Countrywide?   “A decision was made; I wasn’t running the company,” Mr. Moynihan says, although he was obviously a top bank official at the time. “Our company bought it and we’ll stand up; we’ll clean it up.””  In a February 2008 interview, Bank of America spokesperson Scott Silvestri said: Nevertheless, the banking giant says that Countrywide's legal expenses were not overlooked during negotiations. "We bought the company and all of its assets and liabilities," spokesman Scott Silvestri says. "We are aware of the claims and potential claims against the company and have factored these into the purchase."” However, as justification for the BNY deal, the trustee, Bank of New York states “More specifically, before entering into the Settlement, the Trustee has taken into account, among other things, the following: Countrywide’s position that the Trustee could not impose liability on Bank of America under theories of successor liability, veil piercing, or de facto merger is reasonable.” In a number of monoline litigation suits such as MBIA versus Countrywide/Bank of America, the judge has refused to dismiss Bank of America as a defendant claiming that there’s sufficient evidence to support allegations of a de facto merger.  How is it reasonable for BNY to support the settlement under an assumption which runs counter to rulings in a majority of putback lawsuits so far?  
  4. Cost of foreclosure delays.   GSE executives testified that each day a foreclosure is delayed costs approximately $30-$40 per day per loan file.  The GSE’s subsequently required that Bank of America reimburse them for the cost of foreclosure delays.  Initially you estimated the cost of foreclosure delays to be tens of millions of dollars, then it became hundreds of millions and in the latest 10-Q that number had grown to one billion.  In the Q-1 Form 10-Q, you state “Many non-agency residential MBS and whole-loan servicing agreements require the servicer to indemnify the trustee or other investor for or against failures by the servicer to perform its servicing obligations or acts or omissions that involve willful malfeasance, bad faith or gross negligence in the performance of, or reckless disregard of, the servicer's duties.” What reserves has Bank of America set aside to reimburse non agency RMBS securitization trusts for the cost of foreclosure delays?  If BAC engaged in conduct such as robo-signing that led to foreclosure delays, why should investors in RMBS trusts not be reimbursed?  If so, what is the reserve that BAC has set aside for that?
  5. Repurchase Rate Assumption.  In your 10-Q, you state that “The BNY Mellon Settlement led to the determination that we now have sufficient experience to record a liability related to our exposure on certain other private-label securitizations. This determination, combined with changes in our experience with the behavior of certain counterparties, including the GSEs, in the first six months of 2011, was the driver of this additional provision. A significant factor in the estimate of the liability for losses is the repurchase rate, which increased in both the three and six months ended June 30, 2011.” Your 10-Q sheds very little light on how BAC arrives at the repurchase rate assumption and whether or not non-related parties would find those assumptions reasonable?   Also, if the BNY settlement leads you to have sufficient experience to record a liability, why would the Assured settlement not have the same effect for other monolines?
  6. New York Attorney General Eric Shneiderman filed to intervene in the BNY Mellon Settlement claiming “Countrywide's failure to transfer complete mortgage loan documentation to the trusts hampered the ability of the trusts to foreclose on delinquent mortgages” If his allegations turn out to be true, does that mean securitization trusts which were collateralized by mortgages are effectively unsecured obligations?  Does that mean investors in those RMBS trusts would be allowed to put back the securities to Bank of America?


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