This article is part of our Rising Star Portfolios series. You can read about the Dada Portfolio here.
Of the major banks implicated in various mortgage scandals -- JPMorgan, (NYSE: JPM), Wells Fargo (NYSE: WFC), and Citigroup (NYSE: C) -- perhaps none is seen to be as vulnerable as Bank of America (NYSE: BAC).
Last Monday, B of A took the first step in its effort to "put these issues behind us," with the announcement it had reached a $3 billion agreement with Fannie Mae and Freddie Mac to clear up charges that it had misrepresented the quality of loans it sold the two government-sponsored enterprises. The remedy would be to "put back" -- or force Bank of America to buy back -- shoddy loans.
The put-back threat had been significant not just for its scale, but also its surprise; many had assumed regulators would continue to turn the other cheek for Wall Street. My colleague Anand Chokkavelu wasn't alone in reminding us that "during the financial crisis, the government has shown a great will to ensure the prosperity of too-big-to-fail banks."
One senior banker freaked out to CNBC's John Carney at the time Fannie and Freddie threatened to recoup taxpayer money via put-backs, "This is a serious threat to financial stability. There's no way Tim [Geithner] and Ben [Bernanke] let this play out." The banker's quote would seem to confirm that Wall Street's business model is to blow its bailout on earth-shattering pay -- about $280 billion for 2009 and 2010 -- instead of reserving enough for claims on its own shenanigans. Wall Street then becomes dangerous enough that a collapse would wreck the financial system, and the companies head back to the trough. Bailout, repeat.
So did Wall Street just pull another coup? Rep. Maxine Waters (D-Calif.) questioned whether the settlement amounted to a "backdoor bailout that props up the bank at the expense of taxpayers." Investors last Monday seemed to confirm her suspicion by rewarding Bank of America with a 6% gain that valued the bank at an additional $8.6 billion.
But Fannie and Freddie have been doing a surprisingly decent job pressing claims against the banks. Firedoglake's David Dayen maintains that the repurchase agreement was about in line with what could be expected. Maybe cheerful investors think the deal foreshadows a speedy resolution to other outstanding problems, or maybe they're just missing the bigger picture.
The bigger picture
The settlement with the GSEs probably isn't the end of Bank of America's legal woes.
First, private investors such as PIMCO, BlackRock (NYSE: BLK), and Legg Mason (NYSE: LM) may press put-back claims as well, even though they have a tougher hurdle to clear than the GSE's.
Second, even this agreement may be overstated in the media. An upbeat Bank of America press release announced, "Bank of America believes that it has addressed its remaining exposure to repurchase obligations for residential mortgage loans sold directly to the GSEs." However, some analysts questioned that reaction. In fact, Bank of America's CFO said he expects future claims from Fannie.
Finally, the GSE press release noted that "none of the agreements address representations and warranties with regard to mortgage servicing or foreclosure processing." In other words, $3 billion may get Bank of America off the hook for alleged misrepresentations about the quality of some of the mortgages it sold to Fannie and Freddie, but it doesn't address all the GSE claims, nor does it address many other outstanding issues. These include consumer abuse and foreclosure fraud accusations related to possibly unnecessary foreclosures that garner fees, accusations that servicers failed to live up to mortgage modification obligations, and charges that originators bungled the bundling of mortgage-backed securities in the first place.
The potential remaining civil and criminal liabilities are large -- otherwise bankers and the Congressional Oversight Panel wouldn't be worried that mortgage "irregularities" may present systemic threats a mere two years after the last time taxpayers bailed out Wall Street.
Unfortunately, Iowa Attorney General Tom Miller, who's heading up the 50-state investigation, may be backing off from "we will put people in jail" in favor of the more genteel "our focus is to reform the servicing process and that's inherently civil, not criminal."
It remains to be seen whether Wall Street is not only "too big to fail" but also "too big to prosecute."
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