Some Follow Up Questions (And Recommendations) For Brian Moynihan

In the aftermath of Bank of America's direct answer to Henry Blodget, and indirect response to Zero Hedge, we would like to counter with some additional attempts to bring clarity, and hopefully closure, to the extremely (and regrettably) opaque situation that the bank and its investors (not to mention employees) find themselves in, and which has so far cost Bank of America about $80 billion in market capitalization. Indeed, as Bank Of America has noted, "The mortgage analysis was provided by a hedge fund that has acknowledged it will benefit if our stock price declines" - we fail to see how this is a credible defense: one simple case study reminds us that David Einhorn was publicly short Allied Capital and Lehman Brothers, yet his thesis was absolutely spot on, and the financial institutions in question ended up in bankruptcy. We offer Bank of America the chance to respond to two simple questions, which should eliminate the specter of a litigation induced liquidity crunch. As for the prospect of bank insolvency, we are confident that the reinstatement of Mark to Market any minute now will provide sufficient color on that particular issue.

Dear Mr. Moynihan,


Your financial statements make some assumptions which belie your mortgage putback reserves.  To help us understand why you are adequately reserved, please tell us.


a).  If the repurchase rate assumption in the Bank of New York settlement is changed from 40% to 100%, how much will that increase your mortgage putback liability and, hence, your reserves?  David Grais, in his opposition to the settlement, says that changing that assumption alone could increase private label putbacks to $27bn versus the $8.5bn expected in your financial statements.  IF that scenario played out, are you under-reserved by $18bn+?


b).  If you lose the loss causation ruling which is coming up in MBIA vs. Countrywide, why will home prices matter – in your Fairholme conference call, you told us that BAC’s mortgage putback reserves incorporate a 3% decline in home prices followed by a 1% increase.  MBIA states that their estimates “of breach rates primarily based upon loans with credit breaches or credit and compliance breaches ... these types of breaches are not judgmental and cannot be cured.”  So if you lose the loss causation ruling, by how much will your putback reserves change and why should we have confidence in your methodology?


Please note that your own 10-Q highlights that if BAC is incorrect in these assumptions, your mortgage putback reserves could prove to be insufficient.

And a few practical ideas...

A simple way Moynihan can put a lid on this stuff: PICK UP THE PHONE, CALL YOUR COUNTERPATIES AND SETTLE TO PUT EXPOSURES BEHIND.  Things I would do:


a). Step 1: Write a check to resolve FGIC, AMBAC, SYNCORA and MBIA litigation: cost $9 billion.  After settling Assured, it doesn’t make any sense to try and fight the validity of monoline claims.


b). Step 2: Use the goodwill you have left with the Federal Government and pressure GSEs into modifying your agreement to pay more and conclusively put a cap on the exposure – not report increase in GSE claims and reserves every quarter.


c). Step 3: Resolving steps 1 and 2 gives a little breathing room in resolving the third bucket.  Enter negotiations, bite the bullet and take the pain to reach a comprehensive settlement.


HAND TO HAND COMBAT’ has cost you over $80 billion in market value, perhaps it’s a flawed strategy...


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