The Fourteenth Banker Blog

January 4, 2011

Bank of America Settlement

Filed under: Running Commentary — thefourteenthbanker @ 11:02 AM

So what to make of the Bank of America settlement reported yesterday? At first blush, it appears to be another backdoor bailout of this TBTF bank. According to Barry Ritzholtz, the settlement amounts to 1 cent on the dollar of potential put back claims.

A premium of $1.28 billion was paid to Freddie Mac to resolve $1 billion in claims currently outstanding. But the kicker is that the deal also covers potential future claims on $127 billion in loans sold by Countrywide through 2008. That amounts to 1 cent on the dollar to Freddie Mac.

The stock market cheered with B of A shares up 6.4% on the day on the belief that this settlement helps “size” the remaining settlements the bank will have to make.

According to the Wall Street Journal,

…some investors wonder if Fannie and Freddie actually got the best deal possible, or where looking to help reduce the unease around mortgage-repurchase risk that has dogged financial institutions and B of A in particular.

Brian Moynihan, CEO of B of A, may have nailed it best in his cryptic statement, “These actions resolve substantial legacy issues in the best interest of our shareholders,”

Taking that at face value, B of A won the negotiation in favor of its shareholders and against the shareholders of Fannie and Freddie, that is, us.

This particular fraud is just one fraud. One of the better write-ups recently was by Zero Hedge and has to do with the representations made by B of A in the sale of MBS to Allstate, which is representative of sales of MBS to everybody under the sun. Allstate has filed suit against B of A on the basis that the quality of the securities and the mortgages in the securities was appreciably less than represented. In other words, there were already embedded losses in the securities and B of A knew it and sold it to a trusting buyer.

To sum it up, nothing new to report here.




  1. Interesting. Bof A paid Freddie Mac a premium . That means Freddie also keeps ownership of the $128 bn total of mortgages that Countrywide sold Freddie who may or may not of have resold the mortgages to others with their guarantee. I presume here from lack of clarity that Freddie owns them all. OK, what are the default rates? Freddie is in the business then of doing what investors do… hold the notes to maturity and enjoy the cash flow. That is not for sale. What is the current cash flow on the $128 bn? Next, might Freddie do a little creative thinking? How about taking the houses in foreclosure back via Deeds In Lieu of Foreclosure ? Then, either sell the houses back to the former owners on a Land Contract/ Failing that, drop the houses into a new Real Estate Trust and operate them as rentals using local agents. A lot of cash flow there to cover operating costs but what would the net to the REIT be? 3 %?

    At the end of the day what are their real projected cash flows treated as asset recoveries at the end of the say 10 years? That is $128 bn , less ten years net cash flows back and after that the proceeds of liquidation of the houses? Of course, I would expect the houses to be liquidated slowly over the ten years as the loans pay down, pay off by owner sale, recovered by sales during the ten years I cite. Then sold. What would the losses or profits be? Would they be near the premium paid by Bof A to Freddie?

    Turden and the other commentators ask none of these questions.

    Freddie is defacto a state entity. Might this not be good policy of some decent long term thinking? Or! Might it be panic by the state at having a failed Bank of America? Just who owns the stock of Bof A but a lot of pension plans . Might there be some thinking outside the box for a change? Yesterday, I read a piece where Illinois takes in $13 bn and falling in revenues and spends $26 bn. On top of that, due to cash basis accounting, Illinois owes $6 bn in past dues to school boards, universities , medical operations and generally. On top of that they owe defaulted pension plan debts of $4 billion more. That means, that even a 75 % cut in current appropriations from $26 bn to say %7 bn would generate net new funds of $6 bn and they owe $10 bn.

    How much stock of Bof A do the Illinois pension plans own?

    But what are the real long term losses on these mortgages likely to be? I see a dead federal state emerging from all this if the wrong decisions based on the half assed turdenviews of the nation. The suicidals now control congress as compared to the simply stupid cliques that included the suicidals in the last Congress.

    Comment by Jerry J — January 5, 2011 @ 1:10 PM | Reply

    • No one can think outside their own philosophy. You could write down every mortgage in America by 20%, have the government pay half and the debt owners take a haircut of half, which they deserve, and it would straighten out the balance sheet of practically every family, be an incredible stimulus program, and probably cost less than all the bailouts.

      Comment by thefourteenthbanker — January 5, 2011 @ 5:50 PM | Reply

      • Yup, that is why civilizations fall in my view. The American civilization construct seems a perfect candidate for dissolution. A far greater fall than happened in Russia including the 1917-1921 period. Break up and mass collapse seems unavoidable from rigid true and only heavens by the millions among the citizenry.

        Comment by Jerry J — January 5, 2011 @ 6:27 PM

  2. @jerryj

    Off topic … but I may have alarmed you with my interest in Henry George. I was curious because I know very little about George and real estate is very expensive in my neck of the woods. (Anything that might make housing more affordable is always of interest to me.) Michael Hudson says George was a right-winger and the anti-thesis of socialism (3:15 into the video). So this may help put things in perspective. As always, Hudson is provocative and interesting to listen to.

    Comment by tippygolden press — January 5, 2011 @ 11:01 PM | Reply

  3. Henry George was considered to be a nut job when I was a student. Humorously, I have always been a book nut and back then there were many superb used book stores to tempt my wages. Anyway, back then, every good store had carts of fifty cent books out in front on the sidewalk. They were filled with the mass purchased cast offs of prior fads. Invariably, the cheap junk was first editions of Henry George and Herbert Spencer. At that time too, the cast off supplies of TE Lawrence were also inundating used book stores. Consequently, I have first editions of TEL … everything available by US and Brit publishes. So, I now have quite valuable Jonathan Cape firsts of TEL and others like Graves and Liddell-Hart. Other truly funky WWI stuff too. People like Baron Loringhoven and even the Nazi crackpot Alfred Rosenberg. Rosenberg , Herr Doktor or not, is unreadable.

    Comment by Jerry J — January 5, 2011 @ 11:33 PM | Reply

    • @jerryj

      Seriously, why was Henry George considered a “nut job” when you were a student? Why so flawed?

      Comment by tippygolden press — January 6, 2011 @ 11:53 PM | Reply

  4. The single tax grated on notions of the graduated income tax. Back then, there was a very high corporate income tax and a top personal income tax rate of 92 % . Even more grating was the idea that estates should escape being leveled.

    Comment by Jerry J — January 7, 2011 @ 8:02 PM | Reply

    • Thanks JerryJ

      Henry George is controversial and an outlier.

      There is definitely a housing bubble underway where I live. According to Statistics Canada (?) the average price of a detached home in Vancouver is now $1 million. What is not clear is just how far prices will fall when the bubble deflates. There are homeowners in Vancouver (my parents included) who have owned their property (sometimes a few properties) for decades. You could have bought one of these million dollar properties 30 years ago for $50,000 to $100,000. (They were considered modest homes back then.) This tells me there are many tens of thousands of people where I live who own their homes outright and are now “millionaires”. An entirely agreeable windfall and good on them. Henry George would not go over well here if the idea is to tax away the value of private property. So I do understand I think this position.

      Comment by tippygolden press — January 8, 2011 @ 12:45 PM | Reply

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