Thursday, October 20, 2011

BofA Needs Fed Sanctuary More Than Ever

To whom does the Fed pledge allegiance?
[courtesy Bloomberg]

Bank of America knows that the Federal Reserve has its back. But getting such favorable treatment from the courts will not be so easy. BofA has spent the past several months trying to fast-track a settlement over home-mortgage abuses in what is called an Article 77 proceeding. The bank is hoping that a New York court will agree to cap all related liabilities, henceforth and forevermore, at $8.5 billion. Aggrieved parties would not be allowed to opt out of such a settlement.

Yesterday federal judge William Pauley III offered relief to one of said aggrieved parties by ordering the case removed to federal court. In his ruling the judge found that the settlement agreement "implicates core federal interests" and touches on "the integrity of nationally chartered banks." [Reuters scrutinizes the nitty-gritty here.] Those of you playing at home will quickly recognize that "integrity" and "Bank of America" are not a match. So any protracted exploration of BofA's integrity is likely to be inimical to the firm's best interests.

If Pauley's ruling is upheld upon appeal, the price tag for a settlement will likely go up. Way up. Multiply by ten and work your way up from there. This is an iceberg-sized number that could sink the ship. But creditors and investors need not worry. The Fed has their backs, too. By engineering the mergers three years ago of Bank of America with both Countrywide Financial and Merrill Lynch and now migrating the toxic assets of those legacy firms to a federally insured subsidiary of BofA, the Fed has made sure that the only ones ultimately paying will be taxpayers.

The looting continues.

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