Wednesday, 14 October 2009 05:00

If a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 3 - BAC (the bank

This is part 3 in my quest for the truth in what lies off balance sheet of the big banks in America. Please reference If a Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It? and If a Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear It?: Pt 2 - JP Morgan for the prequels. As was noted before, I also have a 30 part series on this Asset Securitization Crisis for those who are interested in my take on this from the beginning. It is a lot of reading, but it tells it like it is. Now, on to the bank to be owned by America - I'm sorry, that's Bank of America...

Bank of America Securitization Activities

Bank of America securitizes residential mortgages, commercial mortgages, credit card receivables, and home equity loans and automobile loans that it originates or purchases from third parties. As of June 30, 2009, the total principal balance outstanding of securitized portfolio was nearly 1.7 trillion (including 1.1 trillion of mortgage backed securities, securitized by Government sponsored entities). The total senior securities and subordinated securities held by BAC on its balance sheet amounted to about $27 billion (28% of tangible equity) and $10 billion (10% of tangible equity), respectively.

Click graphic to enlarge...


Key observations

  • In the normal course, QSPE (securitization vehicles) are treated as separate entities with no right of recourse. However, the Bank has sold loans to these QSPE with various representations and warranties related to, among other things, the ownership of the loan, validity of the lien securing the loan, absence of delinquent taxes or liens against the property securing the loan, the process used in selecting the loans for inclusion in a transaction, the loan's compliance with any applicable loan criteria established by the buyer, and the loan's compliance with applicable local, state and federal laws. Under the Bank's representations and warranties, the Bank may be required to either repurchase the mortgage loans with the identified defects or indemnify the investor or insurer, in case of breach. In such cases, the Bank bears any subsequent credit loss on the mortgage loans. It is worth noting that during the three and six months ended June 30, 2009, the Bank repurchased $222 million and $582 million of loans from securitization trusts as a result of the Bank's representations and warranties, and corporate guarantees. In addition, the Bank repurchased $208 million and $968 million of loans from the securitization trusts as a result of modifications, loan delinquencies or optional clean-up calls during the three and six months ended June 30, 2009.The Bank also repurchased $77 million of loans from trusts securitizing home equity loans during first six months of 2009. However, the amount of loans repurchased during the three and six months ended June 30, 2009 are very insignificant when expressed as % of tangible equity which was $97 billion as of June, 30, 2009. This may not last, for as buyers, investors and insurer get more aggressive, and/or educated, they may push for more action on indemnification. For instance, I am confident that Wachovia's poorly written portfolio is rife with overstatement of income, over statement of assets, understatement of liabilities and debt, misrepresentation of collateral use, etc., as was endemic for the industry in the era of liar loans. A thorough audit of those loans should enable an activist investor to put back a significantly higher portion of that debt to BAC.
  • In the case of credit card securitization, the Bank is required to maintain a seller's retained interest of 4-5% as per the legal documents of the securitization trusts and as of June 2009, this seller's interest amounted to $9.7 billion or 10% of tangible equity. The seller's interest is not represented by security certificates, is carried at historical cost (this means it is drastically overstated), and is classified within loans on the Bank's Balance Sheet.
  • The bank also holds residual interests of $4.5 billion including subordinated interest in certain principal receivables, subordinated interests in accrued interest and fees, interest-only strips and the bank used a loss rate of 12% to value these residual interest whereas the loan losses rate for the managed credit card portfolio of BAC was 12.91% in 2Q09.
  • Further, under the recently issued SFAS 166 and SFAS 167, the Bank will be required to consolidate certain credit card securitization trusts, commercial paper conduits and revolving home equity securitization trusts which hold aggregate assets of approximately $150 billion as of June 30, 2009. However, out of this, $115 billion is related to credit card securitizations and commercial paper conduits that are currently considered in the Corporation's risk-weighted calculation for regulatory capital purposes.
Last modified on Wednesday, 14 October 2009 05:00