Did Bank of America Exploit Fannie and Freddie?

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Just when it seems all hard feelings between Bank of America Corp. (NYSE: BAC  ) and government-sponsored entities Fannie Mae (NASDAQOTCBB: FNMA  ) and Freddie Mac (NASDAQOTCBB: FMCC  ) have been put to rest, a report from Reuters indicates that, sadly, this may not be the case.

A disclosure on the website of the Financial Industry Regulatory Authority notes that the bank is currently being investigated by the U.S. Attorney's Office for the Western District, North Carolina, as well as by the Commodity Futures Trading Commission. It seems that Bank of America's swaps desk was giving the bank's futures trades priority over those of its clients, and one of B of A's traders may have given inaccurate information to the Chicago Mercantile Exchange during its inquiry into the matter.

Fannie Mae and Freddie Mac trades scrutinized
The article references an FBI bulletin from earlier this month that warned that traders could be "front running" trades by Fannie and Freddie in order to profit from interest rate changes. Contacts at a Canadian bank and a high-level employee of a U.S. bank told agents about this activity, whereby traders that know of another party's trade put their own in first in order to profit from changes brought about by the second trade.

The source at the U.S. bank, which was unnamed, said this activity had netted the bank between $50 million and $100 million in profits. This is because both Fannie and Freddie have huge mortgage portfolios they routinely hedge against interest rate changes, and therefore submit hefty swap orders. Regulators are on alert against interest rate manipulation since the LIBOR scandal, and a slew of banks, including Citigroup and JPMorgan Chase, were fined by European regulators last month for rate-rigging offenses.

An ongoing investigation
Bank of America hasn't been formally accused of wrongdoing, and the trader in question no longer works for the bank. However, the FBI alert noted that the Federal Housing Finance Agency, the conservator of Fannie and Freddie, is conducting an inquiry, as well. The FHFA has been busy collecting settlements from big banks accused of selling toxic mortgage securities to the GSEs back in the day, and its case against Bank of America is still pending.

Bank of America has had a rocky relationship with Fannie and Freddie over the years, and it looked like its recent settlement with the latter had finally put paid to all that antagonism. Unfortunately, this issue may bring out those hostilities all over again -- in addition to a new rash of regulators' lawsuits against Bank of America.

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Read/Post Comments (6) | Recommend This Article (0)

Comments from our Foolish Readers

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  • Report this Comment On January 27, 2014, at 12:13 PM, mastedon2 wrote:

    Today's AMANDA ALIX BASHER ARTICLE, brought to you by none other than Motley Stool.

    Where turds can be found written by short position investors to produce a sentiment and hopefully protect their positions.

    Motley Stool has completely lost its reliability.

  • Report this Comment On January 27, 2014, at 12:19 PM, smauney wrote:

    I don't know about all of that. What I do know is if FNMA is released the minimum base value will be the current market cap + the cash on hand = $21 to $22 per share. The debt is mortgage loan credit so it could yield positive of negative returns in the future, so that's a wash. Earnings coming out, court cases coming up, private money in the form of hedge funds on the table and Dodd-Frank driving away big banks. The writing is on the wall.

  • Report this Comment On January 27, 2014, at 12:27 PM, smauney wrote:

    positive "or" negative return...

  • Report this Comment On January 27, 2014, at 2:28 PM, smauney wrote:

    Ultimately it's not the banks or FNMA & FMCC's fault. None of this was possible without the credit agencies signing off. They are the ones that need to be wound down. If you ever meet a person that has become very wealthy from valuation work, you probably are meeting a crook.

  • Report this Comment On January 27, 2014, at 4:02 PM, smauney wrote:

    We're winding down inequality; We're winding down the best healthcare in the world; We're winding down 30 year mortgages; We're winding down the war in Iraq; We're reinventing the wheel by winding it all down. The only thing we're winding up is your effective tax rate. Raises all around!

  • Report this Comment On January 28, 2014, at 8:57 AM, smauney wrote:

    wind down and polar vortex are the new tipping point and global warming.

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