Friday, 21 January 2011 15:04

Re: B of A - With Banks Being Forced To Admit The Inevitable Truth, How Long Will It Be Before Fundamentals Rule The Day Again?

As far back as 2009  (yes, over a year ago) I have been warning readers and subscribers of the (not so) hidden risks of putbacks, warranty and rep reserves, and the overly optimistic under reserving of the big commercial banks. I used JP Morgan as an example (see link list below), but made it clear this warning stood for several big banks(several of the big banks - As Earnings Season is Here, I Reiterate My Warning That Big Banks Will Pay for Optimism Driven Reduction of Reserves, As a matter of fact I said that the banks ' due to legal risk. This risk was significantly exacerbated the day after making that post, Less Than 24 Hours After My Warning Of Extensive Legal Risk In The Banking Industry, The Massachusetts Supreme Court Drops THE BOMB! wherein the Massachusetts Land Court Decision that invalidates foreclosures based on post sale assignments was up held by the Massachusetts Supreme Court. This is permanent, and precedent setting, absolutely justifying and vindicating my post from the day before and clearly demonstrates that The Robo-Signing Mess Is Just the Tip of the Iceberg, Mortgage Putbacks Will Be the Harbinger of the Collapse of Big Banks that Will Dwarf 2008!

I know many find this to be sensationalist, but they also found the bombastic posts of 2007 to be sensationalist as well, that is at least until 2008! We have mortgage situations where the actual BANKS are walking away from home, see Now, tell me how much the mortgages are worth behind abandoned houses - houses that were abandoned by both the homeowner and the bank? Although these are minority occurrences, I see them spreading away from the fringes and closer to the core as the economics of foreclosing on certain properties makes less and less sense in an increasing number of situations. All of this ranting and raving is simply to provide a background for the not so surprising development in the latest Bank of America quarterly earnings announcement. From Bloomberg: BofA Reports Loss on Costs Tied to Bad Loans, Mortgage Unit:

Bank of America Corp., the largest U.S. bank by assets, reported a $1.24 billion fourth-quarter loss as it boosted provisions tied to faulty loans and litigation and wrote down the value of its mortgage unit. The loss, equal to 16 cents a share, widened from $194 million a year earlier, according to a statement today from the Charlotte, North Carolina-based bank. Excluding a goodwill charge, adjusted net income was 4 cents a share, less than the average estimate of 21 cents by 24 analysts surveyed by Bloomberg.

Brian T. Moynihan, 51, who started as chief executive officer a year ago, booked $12.4 billion in 2010 impairments on credit-card and mortgage units purchased by predecessor Kenneth D. Lewis. The 2008 acquisition of Countrywide Financial Corp., then the largest U.S. mortgage originator, has saddled the bank with lawsuits and demands to repurchase bad loans.

“It’s a kitchen-sink quarter for their Countrywide issues,” said Jason Tyler, who helps oversee $5.5 billion at Chicago-based Ariel Investments LLC. “It’s typical for a new CEO to report a lot of big charges to lower the bar for themselves. You have a small window to do this and not get blamed for it.”

I remember the kitchen sink excuses that were made for Countrywide itself back in 2007. That's a pretty big kitchen!

The bank said earlier this month it agreed to pay Fannie Mae and Freddie Mac $2.8 billion to settle or preclude disputes over mortgages, triggering a $3 billion fourth-quarter provision. The provision was expanded to $4.1 billion, Bank of America said today, citing outstanding and future mortgage buyback claims. The quarter also included $1.5 billion in litigation expenses, the statement said.

... The mortgage unit posted a $4.97 billion quarterly loss, widening from a $994 million loss a year earlier, on the provision and goodwill charge. The provision for loan losses in that unit fell to $1.2 billion from $2.25 billion.

Fannie Mae and Freddie Mac, two of the biggest purchasers of home mortgages, have demanded banks buy back loans that were based on incorrect data about the home or borrower. The two government-controlled companies made more than $20 billion in buyback requests to Bank of America through year-end. The deals and additions to loss provisions “largely addressed” liabilities from Fannie and Freddie, Bank of America Chief Financial Officer Charles H. Noski said on Jan. 3.

The settlement with Fannie and Freddie apparently amounted to a back door bailout in and of itself, for it appears that BofA was able to settle for pennies on the dollar. The real threat is the private label stuff, though. Oh yeah, the US Central Bank has bought up much of that as well. Anyone care to hazard a guess who will foot the bill for that back door bailout?

Bank of America’s stock slid 11.4 percent in 2010, the second-worst performance in the 24-company KBW Bank Index; only People’s United Financial Inc. declined more. The lender had told investors to expect a $2 billion goodwill impairment on its mortgage operations in the fourth quarter, saying the unit’s value had declined because of litigation and foreclosure costs. Bank of America acquired Calabasas, California-based Countrywide in a stock swap originally valued at $4 billion.

Hmmm. A $2 billion goodwill charge following a $4 billion purchase from just two years back. Sounds like money well spent to me :-)

The bank still faces suits from insurers including including MBIA Inc. and Ambac Financial Group Inc. alleging that Countrywide fraudulently induced the firms to guarantee bonds composed of faulty mortgages. Bank of America said in a November filing that it was “not possible at this time to reasonably estimate future repurchase obligations” tied to litigation brought by the insurers.

Moynihan also must fend off demands from Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York for putbacks tied to about $47 billion of bonds, people familiar with the matter have said. Bondholders agreed to delay legal action while holding talks with Bank of America, the lender said last month.

I've been warning on this one since 2007 - What is the Fallout of the Ambac Bankruptcy on the Investment Banking Industry? Robo-signing Conspiracy Theory Grows Some Balls. It's really just a big 3 card Monte game, really! See The truth that no seems to be admitting in the mainstream media is that the Shadow Inventory System in the US is Disguising the Equivalent of a Dozen Ambac Bankruptcies!

JPMorgan, the second-biggest U.S. bank by assets, said last week that fourth-quarter profit surged 47 percent to $4.83 billion as $2 billion in reserves flowed back to earnings on improving credit quality. Citigroup, the No. 3 bank, reported a $1.31 billion profit, compared with a $7.58 billion loss a year earlier. San Francisco-based Wells Fargo & Co., the fourth biggest bank by assets, said Jan. 19 that profit rose 21 percent to $3.41 billion.

Well, I have been suspect of these incongruencies from the beginning. Both of these banks swallowed very sick banks that had horrid underwriting procedures and tons of toxic assets. BofA comes clean, yet JPM just wants to look clean, I will soon illustrate for readers and subscribers how banks are booking "phantom earnings" off of the back of shadow inventory that will go a long way in explaining this "anomaly".

Last modified on Friday, 21 January 2011 15:04