Wednesday, June 29, 2011
Late yesterday came word that Bank of America was close to a settlement whereby a whopping $8.5 billion will be paid out to institutional investors holding toxic mortgage-backed securities peddled by Countrywide Financial, which BofA took over in 2008. This is the biggest settlement to date over claims arising from the subprime mortgage boom that helped precipitate the near-meltdown of financial markets three years ago.
[update 07-05-11: The price tag may go higher. Today a court filing on behalf of an investor group called Walnut Place challenged the proposed settlement for "the secret, non-adversarial and conflicted way in which [it] was negotiated." The Walnut Place investors want to opt out and pursue recourse separately, feeling that the $8.5 billion for a class-action suit is not enough.]
The deal follows the bank's settlements earlier this year with Fannie Mae and Freddie Mac (for $2.8 billion) and Assured Guaranty Ltd. ($1.1 billion). As of March 31, Bank of America was seriously under-reserved for an outcome of this magnitude, with a provision for representations and warranties of just $1 billion (scroll to page 22 here). The latest settlement wipes that away, plus all year-do-date earnings as well. In addition to the $8.5 billion payout, the company will set aside $5.5 billion to rebuild the aforementioned reps-and-warranties reserve (because yes, Mathilda, there are more claims coming). And it doesn't stop there. According to a statement:
The company also expects to record $6.4 billion in other mortgage-related charges in the second quarter of 2011, including a non-cash, non-tax deductible impairment charge of $2.6 billion to write off the balance of goodwill in the Consumer Real Estate Services business, as well as charges related to additional litigation costs, a write-down in the value of mortgage servicing rights, and additional assessment and waiver costs for compensatory fees associated with foreclosure delays.
Add all those items together, and the total damage to the company's balance sheet is over $20 billion. Not even Jamie Dimon makes that much.
Karl Denninger points out that $20 billion is a hefty 12% of BofA's market capitalization (share price multiplied by share count). And the litigation is not over. BofA and other lenders are currently negotiating with the 50 state attorneys general and the feds regarding shoddy lending practices and abusive foreclosures. The bill for those transgressions may add up to as much as $20 billion industry-wide. The MainePERS investment portfolio continues to hold 2.5 million shares of Bank of America common stock and almost a million shares of another highly exposed bank, Dimon's own JP Morgan Chase (see below). The share prices of those two are in serious downward trajectories as the hedgies are fleeing in droves.
While MainePERS portfolio managers sit on their hands.
Maine Treasurer Bruce Poliquin referred my letter of June 18th to MainePERS, from whom I have received the following reply:
Sandy Matheson, Executive Director
Maine Public Employees Retirement System
Sunday, June 26, 2011
Sunday, June 19, 2011
Saturday, June 18, 2011
Open Letter to Maine's State Treasurer:
I am dismayed to read in this morning's Lewiston Sun Journal about the progress of LD 1524, a bill that, if implemented, would pull a veil over some of the state's investments on behalf of MainePERS beneficiaries. If I were a state employee coerced into mandatory pension contributions, I would sure as hell want to know where my money was.
I have already communicated to you that I believe the state should be out of the retirement-planning business altogether. The projected returns of 7+% per annum are totally unrealistic given the current trends of an aging population, growing structural unemployment, and collapsing credit. Liquidate MainePERS. Let beneficiaries get their money back (with a reasonable return and, if necessary, a cash-out bonus) while they can, before the looting runs its course.
And if we're going to continue playing the markets, let's dispense with the "passive" management approach. There will be more losers than winners in the next 5-7 years, so buying the indices practically guarantees poor performance. A good place to start would be culling the zombie banks from the MainePERS portfolio. Every hedge-fund manager on the planet worth his salt is doing exactly that. The financial sector can only shrink from here.
Bill Hine, Peru, ME
Treasurer Poliquin referred my letter to MainePERS, from whom I have received the following reply:
Sandy Matheson, Executive Director
Maine Public Employees Retirement System
Wednesday, June 15, 2011
The Financial Times has an interactive graphic detailing what the CEOs of the big Wall Street banks are getting paid. You might want to review the bidding because before year's end the banks will be back to the taxpayers for another bailout.
Monday, June 13, 2011
Sunday, June 12, 2011
Most thru-hikers will tell you: Maine is their favorite stretch of the Appalachian Trail. But the Great Smoky Mountains run a close second. The Boston Globe's Derrick Jackson, who often trains his photo eye on Maine, headed south to see what all the talk is about. His latest photo gallery appears here.
Saturday, June 11, 2011
Nice place to visit, wouldn't want to lend there.
Greece is like really REALLY far away. So who in America cares if the Greek government fails to pay off its sovereign debt! What happens in Greece stays in Greece, right?
OK, so maybe there will be a little leakage to the rest of the European Union. Or a lot. The European Central Bank, truth be told, has an Airbus A380 full of paper not only from Greece, but from the other PIIGS as well. If they all default, the ECB becomes insolvent, as will a gazillion European banks holding the same crapola. U.S. banks have less direct exposure to European peripheral debt, so we're all good on this side of the Pond.
Or not. To the surprise of absolutely no one, the biggest U.S. banks have concocted yet another way of trying to get money for nothing. They have sold insurance to the European banks in the form of credit default swaps (CDS), which, upon a default "event," obligate the seller (read: "greedy U.S. bank") essentially to buy the bad bonds at face value from the swapholder ("clever Euro bank"). In other words, the risk of default is transferred from the bondholder to the seller of the swap. The U.S. banks are betting that they are the clever ones, that the PIIGS will be bailed out before they are ever allowed to default. The CDS, they hope, will expire worthless.
...the Greek people, never to be confused with their government, are not interested in having services curtailed, benefits trimmed, and paychecks confiscated just so that all the banks, European and American, can get paid 100 cents on the dollar. Nor are their German brethren willing to guarantee loan payments ad infinitum. A nasty "event" is increasingly likely--and may be only days way.
Financial commentator John Mauldin's weekly newsletter, posted today, is entitled "Time to Get Outraged." He reckons that the CDS exposure of U.S. banks totals $120 billion, enough to bankrupt them should dominoes start to fall. In the "event," expect TARP Two, where the banks extort more bailout money from U.S. taxpayers. As for the banks' shareholders (that's you, MainePERS), they get wiped out. It's a win-win for the banks. The Europeans come out whole, and American CEOs continue to get paid. It's a lose-lose for the rest of us.
How exposed is MainePERS stepchild Bank of America? Let me count the ways:
[from BofA's first-quarter 10Q filed with the SEC]
ZeroHedge has a provocative post up today with evidence that the beneficiaries of the Federal Reserve's latest round of quantitative easing (a.k.a. QE2) are not U.S. banks nor their domestic customers, but foreign banks:
"In summary, instead of doing everything in its power to stimulate reserve, and thus cash, accumulation at domestic (US) banks which would in turn encourage lending to US borrowers, the Fed has been conducting yet another stealthy foreign bank rescue operation, which rerouted $600 billion in capital from potential borrowers to insolvent foreign financial institutions in the past 7 months. QE2 was nothing more (or less) than another European bank rescue operation!
[click to enlarge]
...if there is one definitive proof of the Fed abdicating any and all of its mandates, and merely playing the role of globofunder explicitly at the expense of US consumers and borrowers, not to mention lackey for the banking syndicate, this is it."