Last April, Goldman Sachs settled with the SEC for $500 million over the synthetic collateralized debt obligation (CDO), Abacus. A CDO is simply a pool of securities (in this case mortgages). And because Abacus is a synthetic CDO, it doesn't contain any actual mortgages. It's a derivative of a CDO with actual mortgage paper.
The SEC alleged Goldman sold investors a CDO without disclosing that hedge fund Paulson & Co. helped design the CDO and was shorting it. Buyers of the Abacus CDO (ACA Financial and German bank IKB) lost nearly $1 billion as mortgages plummeted. A synthetic CDO, by definition, must have someone on the long and short side. It is simply a bet on the direction of a pool of underlying mortgages. The buyers (huge financial institutions) should have known an investor was taking the other side of the bet.
The Goldman lawsuit was just the beginning, we argued. Once the investigations moved on to CDOs containing real mortgages, we'd see real damage...
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Now, it seems clear to me suing Goldman about this issue – a case involving a synthetic CDO that the regulator will probably lose – is simply raising a red herring. Left unexamined is the much larger issue: the extraordinary amount of fraud in mortgage underwriting between 2004 and 2007. – April 21, 2010 S&A Digest |
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When you defraud the sovereign, watch out. We think the fines are going to get a lot bigger... and we'd be surprised if Morgan Stanley survives. Interestingly, we also think the amount of fraud in the mortgage security industry means it's unlikely the insurance on these bonds will remain in force. And that means the $30 billion or so of implied losses mortgage insurer MBIA faces may never be paid out. That's a big number for a stock with a current market value of only $1.35 billion and assets of $25 billion. – July 16, 2010 S&A Digest |
In June, Bank of America announced it would pay $8.5 billion to settle claims from investors who lost money on mortgage-backed securities they bought before the crash. A group of investors (including giants like BlackRock, PIMCO, and MetLife) alleged mortgages they purchased from Countrywide (which Bank of America bought in 2008 for $4 billion) were filled with loans that didn't meet the stated quality standards. The investors also alleged Countrywide didn't keep accurate records of the loans.
Yesterday was the last day to file objections to the Bank of America settlement. And there's a long list of objectors. Goldman Sachs said the settlement lacks enough information to prove all "similarly situated" investors were treated equally. The Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, are also objecting to the settlement... as are dozens of other mortgage investors.
Why the objections? We don't know for certain... But we'd guess the objectors also took huge writedowns on mortgages they purchased from Countrywide. And they want a higher recovery.
This week, U.S. Bancorp, a trustee for a $1.75 billion Countrywide mortgage pool, separately sued Bank of America to make it buy back the mortgages. AIG, the insurer, is also suing Bank of America for $10 billion in a separate case involving mortgage-backed securities.
Bank of America has huge potential liabilities with these outstanding lawsuits. And the bank doesn't make any money... It lost $3.2 billion over the past three years. It's had negative net income for the past two years. That's why it's scrambling to raise capital. The bank took $5 billion from Warren Buffett. It sold half its stake in China Construction Bank for around $8 billion.
Today, news arose that Bank of America will sell its correspondent mortgage business (through which it purchases loans from smaller lenders, sells them, then continues servicing them). Bank of America decided to exit the business about six weeks ago. The business employs more than 1,000 people. And it was responsible for 47% of Bank of America's mortgage originations in the first quarter of 2011. "It is a huge retreat," said Guy Cecala, publisher of the trade journal Inside Mortgage Finance. "Exiting correspondent altogether will reduce their volume significantly."
On a side note, Reuters estimates the writedowns and legal costs associated with Bank of America's purchase of Countrywide brings the actual purchase price to $30 billion. (It paid $4 billion for Countrywide in 2008.)
Though Bank of America CEO Brian Moynihan continually said the bank doesn't need additional funds, his actions speak differently.
Last week Porter and I made a bet about Buffett's investment in BAC. Porter believes Buffett will sell his entire position within 12 months at a loss. Porter believes Bank of America's potential losses are far greater than Buffett expects. I disagree... While I agree Bank of America's will be large, I think the government will backstop any losses. We valued Buffett's position at $5.28 a share. A $500 bottle of wine is on the line. What type of wine should I make him buy?
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"Even though I prefer buying puts vs. shorting, thanks once again for your two great recos. After closing out my Barnes & Noble (BKS) 15 puts on May 12 with a 116% profit, I got stopped out of my 7.50 puts on Pultegroup (PHM) yesterday bagging 162%. Keep up the good work!" – Paid-up subscriber Mark Leibowitz
Regards,
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Baltimore, Maryland
August 31, 2011
Bank of America gets sued, again... Exiting a huge mortgage business... Another bet between Porter and me... Why Californians can no longer afford babysitters…