Wednesday, December 29, 2010

Kitchen Temperature Rising

Still want to own this bank?

Yesterday Allstate Corporation filed suit in federal court against Bank of America and its Countrywide mortgage subsidiary over Countrywide's sale to Allstate of $700 million in residential mortgage-backed securities that were designed to fail.

Allstate alleges "material misrepresentations and omissions regarding the riskiness and credit quality of the Certificates in which Allstate invested." Further:

"This systemic abandonment of Countrywide's stated underwriting guidelines infected all of the loans it securitized. Whereas Allstate was made to believe it was buying highly rated, safe securities backed by pools of loans with specifically-represented risk profiles, in fact the Defendants knew the loans offloaded onto Allstate were a toxic mix of loans given to borrowers that could not afford the properties, and thus were highly likely to default."

Even though the Countrywide abuses took place before its merger with Bank of America in 2008, Allstate insists that Bank of America is "successor in liability to Countrywide and is jointly and severally liable for the wrongful conduct alleged herein of the Countrywide Defendants."

It is difficult at first glance to evaluate what the hit to BofA would be if the Court finds in Allstate's favor. Allstate wants a full refund on some of the securities (which would be "put back" to BofA) and a recovery of lost principal and interest payments on the securities it must keep, plus a recovery of lost market value of the latter securities. Add attorneys' fees and prejudgment interest, and we're into the hundreds of millions.

But this is just chump change in the entire universe of claims against BofA. In a 10-Q filing with the Securities and Exchange Commission dated last November 5, the company warned investors thusly about pending litigation (bottom of page 60):

"The Corporation and affiliates, legacy Countrywide entities and affiliates, and legacy Merrill Lynch entities and affiliates have been named as defendants in a number of cases relating to various roles they played in MBS offerings. These cases are generally purported class action suits or actions by individual purchasers of securities. Although the allegations vary by lawsuit, these cases generally allege that the offering documents for more than $375 billion of securities issued by hundreds of securitization trusts contained material misrepresentations and omissions...."

Did you get that? $375 billion.

Interestingly, the State of Maine has been trying to get in on this action (court docket here), even as the State's retirement portfolio holds 2.5 million shares of Bank of America stock. Message from the left hand to the right hand: SELL.

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