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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.
[update 07-06-11:]
Maine Treasurer Bruce Poliquin referred my letter of June 18th to MainePERS, from whom I have received the following reply:
Thank you for your email inquiring about the MainePERS investments. Treasurer Poliquin requested that we respond. I apologize for the delay in my response. It was very busy closing up the fiscal year.
Hopefully we can ease your concern about LD 1524. MainePERS is committed to transparency because we are a public fund. Our investments are fully disclosed in a number of venues, our website and investment reports being two. Also, our investment process has multiple layers of checks and balances to ensure ethical investing including regular reviews by both internal and external auditor who have access to all confidential data.
LD 1524 is not intended to limit any information that assures the public about the propriety of our investments. Its’ primary purpose is to limit other investors (e.g. competitors of MainePERS, hedge funds, money managers) from using the public disclosure process to obtain competitive information, sensitive financial information, and trade secrets which may disadvantage MainePERS and the funds with which we are investing.
The exemptions in LD 1524 were drafted to be as limited as possible to provide the public with a clear view of our investments and to allow MainePERS to make the solid investments on behalf of its beneficiaries. These exemptions are similar to exemptions provided to the Finance Authority of Maine (FAME) and Small Enterprise Growth Fund of Maine (SEGF) for their private party transactions. Similar exemptions are also found at numerous other state pension funds and university systems.
Your second concern is one that is most appropriately directed to the Legislature, the sponsor of state pension plans. The Legislature has created a work group to develop a new plan based on Social Security participation for all new hires after 2015.
Managing a $10.5 billion dollar portfolio takes a significant amount of work to develop an asset allocation strategy. We always welcome thoughts and perspectives such as yours when we are going through the allocation process.
I know I can’t directly answer some of your concerns, but I hope this information is helpful.
Sandy Matheson, Executive Director
Maine Public Employees Retirement System
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