What’s Behind the U.S. Suing Big Banks Over Mortgage-Backed Securities?, By Robert Blonk, ESQ., LLM., William H. Byrnes, ESQ.


More bank stock declines and less lending could be in store as financial institutions face another massive round of lawsuits. The Federal Housing Finance Agency sued 17 banks on Sept. 2, alleging that the financial institutions committed securities violations in the lead-up to the recent financial crisis.

The lawsuit concerns sales by the institutions to Fannie Mae and Freddie Mac of almost $200 million in residential private-label mortgage-backed securities that later collapsed. The lawsuit also names some of the banks’ officers and unaffiliated lead underwriters. 

In addition to the securities violations, the lawsuits allege that the banks made negligent misrepresentations and failed to do adequate due-diligence and follow standard underwriting procedures when offering the mortgage-backed securities.

The complaints were filed in both federal and state courts (New York and Connecticut) against 17 banks, including major financial institutions like Bank of America, Barclays, Citigroup, Countrywide, Credit Suisse, Deutsche Bank, General Electric, Goldman Sachs, HSBC, JPMorgan Chase, Merrill Lynch, Morgan Stanley and others. The lawsuit is substantially similar to the suit filed against UBS Americas earlier this year.

Fannie Mae and Freddie Mac were placed into conservatorship in 2008, right after the subprime mortgage crisis made public waves. Under the conservatorship, the FHFA has control over the government-sponsored enterprises and has the power to bring lawsuits on their behalf, as it did in this case.

The feds waited to file the lawsuit until the stock market was closing for the Labor Day weekend Sept. 2. But the timing didn’t prevent a run on bank stocks as rumors about the suit led to significant declines in bank stock prior to the release. This latest litigation comes on the heels of the 50-state robosigner foreclosure investigation which by itself could cost banks almost $200 billion.

Some in Washington say not bringing the suit would have been akin to giving the banks another bailout. U.S. Rep. Brad Miller, D-NC, praised the FHFA for bringing the suit, saying that “[n]ot pursuing those claims would be an indirect subsidy for an industry that has gotten too many subsidies already. The American people should expect their government not to give the biggest banks a backdoor bailout.”

But other commentators say the government’s timing of the lawsuit couldn’t be worse. It will hit the banks’ bottom lines when they can least afford it. And with interest rates likely to stay at record lows for the next two years and the Federal Reserve running out of options for stimulating bank lending, the cost may further stagnate the slow economic recovery. It’s hard to imagine how the lawsuit could be anything other than a weight on the already fragile economy.

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Cloud of suspense surrounds Bank of America, WikiLeaks, by Rick Rothacker, Charlotteobserver.com


Picture of Julian Assange during a talk at 26C3

Image via Wikipedia

Internal security stepped up after Assange announces plans for ‘megaleak’ about a large bank.

Heading into the new year, a big question looms for Bank of America: What’s next in the WikiLeaks saga?

Julian Assange, the anti-secrecy organization’s founder, has said he is preparing a “megaleak” about a large bank, leading to speculation the Charlotte bank is the target. On Monday, he told the Times of London that he had enough information to make the bosses of a major bank resign.

Meanwhile, Bank of America has cut off payments intended for WikiLeaks, spurring the group to tell customers to stop doing business with the bank. Other financial institutions that have foiled payments have faced cyberspace attacks from WikiLeaks supporters, but so far the bank doesn’t appear to be suffering ill effects.

Analysts say it’s possible WikiLeaks could stir up new trouble for the nation’s biggest bank, perhaps exposing more problems in the mortgage arena or reviving questions about its Merrill Lynch acquisition. It’s also possible the revelations cause little harm or that WikiLeaks bypasses the bank altogether.

Bert Ely, a Virginia-based banking consultant, said he suspects all major financial institutions are girding for the group’s next move.

“We don’t know it’s Bank of America,” he said. “It could be one of a number of banks.”

In recent months, WikiLeaks has gained notoriety for exposing Pentagon and State Department secrets and for Assange’s fight against sexual assault charges in Sweden. In November, he told Forbes magazine that his group planned a bank leak in early 2011. That drew attention to a 2009 article in which Assange said WikiLeaks had obtained a Bank of America executive’s hard drive.

Bank of America has said it has no evidence that WikiLeaks has company data but it has said little else on the subject. In a speech earlier this month, chief marketing officer Anne Finucane hinted Bank of America was steeled for any possible revelations, partly because it already has endured intense investigations of its 2008 Merrill deal.

“We have been out there pretty much 24/7, whether those of us who run communications like it or not, and we have learned not only to react, but deal with this as a given,” Finucane told a Boston audience.

A Bank of America employee told the Observer that it appeared the bank had stepped up security internally recently, taking steps to block access to websites such as Gmail on company laptops. The bank declined to comment on security procedures.

Analysts say they’re watching for the next development, which could cause new problems for a company still trying to recover from the financial crisis. When speculation surfaced on Nov. 30 that Bank of America could be WikiLeaks’ next target, the bank’s shares plunged more than 3 percent to $10.95. But since that drop-off, the bank’s shares have climbed nearly 15 percent to $12.98 at Tuesday’s close.

Jefferson Harralson, a bank analyst with Keefe, Bruyette & Woods, said WikiLeaks’ revelations are unlikely to highlight a new problem but could add more color around topics already in the news. The bank’s mortgage unit, bulked up by the 2008 Countrywide Financial acquisition, has been the biggest trouble spot lately. The most costly issue is requests by investors to buy back billions in soured mortgage loans originated and sold off by Countrywide during the housing bubble.

“The soft underbelly (for Bank of America) would be the mortgage crisis,” Harralson said.

Still, analysts already are braced for huge losses tied to mortgage loan repurchase requests. Harralson estimates the bank could spend $35 billion over five years buying back mortgages, although he suspects the amount could end up being less.

Ely, the banking consultant, said WikiLeaks could reveal information on a range of issues, from executives’ actions during the Merrill Lynch acquisition to who is using the company jet. One of the more damaging disclosures would be evidence of securities law violations, such as the manipulation of earnings or the failure to disclose material information to investors, he said.

“That can trigger lawsuits from shareholders and bring out the class-action bar,” he said.

The New York Times on Tuesday reported that regulators also are worried that WikiLeaks revelations could show failings by the agencies charged with overseeing the banking industry. Earlier this month, however, Federal Deposit Insurance Corp. chairman Sheila Bair downplayed concerns about a leak. “I have a hard time understanding what would be so provocative,” she said after a speech. “So I would just ignore it, I really would.”

On Friday, Bank of America said it cut off payments to WikiLeaks because it had “reasonable belief that WikiLeaks may be engaged in activities that are, among other things, inconsistent with our internal policies for processing payments.” A bank spokesman declined to answer further questions.

Analysts said the bank could have a number of reasons for making the move, including pressure from the government, a desire to separate itself from possible criminal activities or revenge for obtaining its internal information.

Through its Twitter handle, WikiLeaks has encouraged Bank of America customers to close their accounts. The bank’s website doesn’t appear to be suffering from cyberspace attacks. Rich Mogull, analyst and chief executive at security research firm Securosis, said WikiLeaks supporters would need “massive resources” to dent the bank’s formidable defenses.

“Bank of America is always under attack,” Mogull said. “It’s one of the biggest targets on the Internet.”

In case of any leaks, Harralson said Bank of America is likely preparing its legal response, although that could be difficult against an “ephemeral” organization like WikiLeaks. “You can examine your legal options,” he said, “but it’s a hard organization to pin down.”

Read more: http://www.charlotteobserver.com/2010/12/21/1926976/cloud-of-suspense-surrounds-bank.html#ixzz18tDr1BH4

Sales of U.S. New Homes Increased Again in September, by Bob Willis, Bloomberg.com


Sales of new homes rose in September for a second month to a pace that signals the industry is struggling to overcome the effects of a jobless rate hovering near 10 percent.

Purchases increased 6.6 percent to a 307,000 annual rate that exceeded the median forecast of economists surveyed by Bloomberg News, figures from the Commerce Department showed today in Washington. Demand is hovering near the record-low 282,000 reached in May.

A lack of jobs is preventing Americans from gaining the confidence needed to buy, overshadowing declines in borrowing costs and prices that are making houses more affordable. At the same time, foreclosure moratoria at some banks, including JPMorgan Chase & Co., signal the industry will redouble efforts to tighten lending rules, which may depress housing even more.

“These are still very low levels,” said Jim O’Sullivan, global chief economist at MF Global Ltd. in New York. “Ultimately, a significant recovery in housing will depend on a clear pickup in employment.”

Another Commerce Department report today showed orders for non-military capital equipment excluding airplanes dropped in September, indicating gains in business investment will cool.

Capital Goods Demand

Bookings for such goods, including computers and machinery meant to last at least three years, fell 0.6 percent after a 4.8 percent gain in August that was smaller than previously estimated. Total orders climbed 3.3 percent last month, led by a doubling in aircraft demand.

Stocks fell, snapping a five-day gain for the Standard & Poor’s 500 Index, on the durable goods report and investor speculation that steps taken by the Federal Reserve to shore up the economy will be gradual. The S&P 500 fell 0.5 percent to 1,179.8 at 10:14 a.m. in New York.

Economists forecast new home sales would increase to a 300,000 annual pace from a 288,000 rate in August, according to the median of 73 survey projections. Estimates ranged from 270,000 to 330,000.

The median price increased 3.3 percent from September 2009 to $223,800.

Purchases rose in three of four regions, led by a 61 percent jump in the Midwest. Purchases dropped 9.9 percent in the West.

Less Supply

The supply of homes at the current sales rate fell to 8 months’ worth, down from 8.6 months in August. There were 204,000 new houses on the market at the end of September, the fewest since July 1968.

Reports earlier this month showed the housing market is hovering at recession levels. Housing starts increased in September to an annual rate of 610,000, the highest since April, while building permits fell to the lowest level in more than a year, signaling construction will probably cool.

Sales of existing homes, which now make up more than 90 percent of the market, increased by 10 percent to a 4.53 million rate in September, the National Association of Realtors said yesterday. The pace was still the third-lowest on record going back a decade.

Home resales are tabulated when a contract is closed, while new-home sales are counted at the time an agreement is signed, making them a leading indicator of demand.

Moratoria’s Influence

Economists are debating the likely effect on new-home sales from the foreclosure moratoria and regulators’ probes into faulty paperwork. Most agree the moratoria pose a risk to housing sales as a whole.

Michelle Meyer, a senior economist at Bank of America Merrill Lynch Global Research in New York, is among those who say the moratoria, by limiting the supply of existing homes, may lift demand for newly built houses in coming months.

“There is a possibility there will be a shift in demand for new construction, at least in the short term,” she said.

The U.S. central bank and other regulators are “intensively” examining financial firms’ home-foreclosure practices and expect preliminary findings next month, Fed Chairman Ben S. Bernanke said this week at a housing conference in Arlington, Virginia.

Fed officials have signaled they may start another round of unconventional monetary easing at their next meeting Nov. 2-3 to try to spur the economic recovery.

Homebuilders say labor-market conditions will be the biggest factor in spurring or delaying a recovery.

“The U.S. economy needs to improve, and we’ve got to see some improvement in job creation,” Larry Sorsby , chief financial officer at Hovnanian Enterprises Inc., the largest homebuilder in New Jersey, said during an Oct. 7 conference call.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

Bernanke Asset Purchases Risk Unleashing 1970s Inflation Genie, by Craig Torres, Bloomberg.com


Official portrait of Federal Reserve Chairman ...

Image via Wikipedia

For the second time since he became chairman in 2006, Ben S. Bernanke is leading the Federal Reserve into uncharted monetary territory.

Bernanke next week is likely to preside over a decision to launch another round of large-scale asset purchases after deploying $1.7 trillion to pull the economy out of the financial crisis, comments from policy makers over the past week indicate. This time, with interest rates already near zero, the Fed will be aiming to increase the rate of inflation and reduce the cost of borrowing in real terms. The goal is to unlock consumer spending and jump-start an economy that’s growing too slowly to push unemployment lower.

Estimates for the ultimate size of the asset-purchase program range from $1 trillion at Bank of America-Merrill Lynch Global Research to $2 trillion at Goldman Sachs Group Inc., with economists at both firms agreeing the Fed will likely start by announcing $500 billion after the Nov. 2-3 meeting. The danger is that once the Fed kindles price increases, inflation will be difficult to control.

“By reducing real interest rates and trying to break the psychology of ‘Why spend today when I can buy goods cheaper tomorrow,’ they are hoping to drive growth that would be more commensurate with a pickup in employment,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York. “The risk is a late 1970s type of scenario where the inflation genie gets out of the bottle.”

The U.S. Treasury Department yesterday sold $10 billion of five-year Treasury Inflation Protected Securities at a negative yield for the first time at a U.S. debt auction as investors bet the Fed will be successful in sparking inflation. The securities drew a yield of negative 0.55 percent.

‘Unacceptable’ Inflation

William Dudley, president of the New York Fed and vice chairman of the Federal Open Market Committee, yesterday repeated that current levels of inflation and a 9.6 percent unemployment rate are “unacceptable” and said the Fed needs to take action, even though expanding the balance sheet isn’t a “perfect tool.”

“To the extent that we can do things to improve the economic environment, we certainly owe it to the millions of people who are unemployed to do so,” Dudley said in response to audience questions after a speech in Ithaca, New York. Policy makers haven’t yet decided whether to buy additional assets, he said.

A second jolt of monetary stimulus would expand the Fed’s $2.3 trillion balance sheet to a record and likely work through the exchange rate as well as interest rates, said former Fed governor Lyle Gramley. A weaker dollar would boost U.S. exports and push prices higher as the cost of imported goods rises.

Competitive Exports

“It is a channel that works not only from the standpoint of encouraging more growth and making exports more competitive, but if you’re worried about inflation getting too low, this tends to put a little upward pressure” on it, said Gramley, a senior adviser at Potomac Research Group in Washington.

An index of the dollar versus six major currencies is down 5.2 percent since Sept. 20, the day before Fed officials concluded their last meeting by saying inflation measures were “somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.” The Standard and Poor’s 500 Index is up 3.8 percent since then.

A 10 percent decline in the dollar in the first six months of next year would push the economy above estimates of trend growth, moving indicators on inflation and employment more rapidly toward the Fed’s policy goals, according to a simulation run by Macroeconomic Advisers LLC on their model of the U.S. economy.

Effect on GDP

Gross domestic product would rise 1.1 percentage points more than the St. Louis-based firm’s baseline forecast for next year, to 4.8 percent. In 2012, growth of 5.7 percent would exceed the baseline forecast by 1.3 percentage points.

Unemployment would fall to 7 percent by the end of 2012, 1.4 points lower than the firm’s baseline forecast. The consumer price index, minus food and energy, would rise 0.4 percent and 0.7 percent more each year.

A continuing rally in stocks could also provide an added lift to growth, the firm’s simulation showed.

The firm, co-founded by former Fed governor Laurence Meyer, predicts the Wilshire 5000 stock index will jump 14 percent next year and 16 percent in 2012. The index tracks the impact of rising asset prices on household net worth. An additional 10 percent gain in the stock index in the first half of 2011 boosts growth by 0.1 percentage point and 0.3 percentage point more than the firm’s baseline forecast.

‘Transmission Mechanism’

“The transmission mechanisms are risk assets and a lower dollar,” said Steven Einhorn, who helps manage $5 billion at hedge fund Omega Advisors Inc. in New York. “Exports will respond over the next six to 12 months, and a further lift in risk assets will have benefits in more consumer spending as it lifts households’ net worth.”

A weaker dollar won’t be welcomed by U.S. trading partners concerned about the danger of competitive devaluations as nations seek to boost exports and growth.

Bernanke received “criticism” at a meeting of Group of 20 central bankers and finance ministers in South Korea last weekend, said German Economy Minister Rainer Bruederle.

“It’s the wrong way to try to prevent or solve problems by adding more liquidity,” Bruederle told reporters. “Excessive, permanent money creation in my opinion is an indirect manipulation of an exchange rate.”

$500 Billion

Economists Jan Hatzius at Goldman Sachs and Ethan Harris at Bank of America predict the Fed will spread an initial $500 billion in asset purchases over six months. That is the figure mentioned in the Oct. 1 speech by Dudley, who said $500 billion in purchases could have the same effect as cutting the benchmark federal funds rate by as much as a 0.75 percentage point.

The FOMC’s meeting next week could be contentious, with regional bank presidents such as Charles Plosser of Philadelphia and Richard Fisher of Dallas expressing concern in public remarks about a second round of asset purchases. Neither is a voting member of the FOMC this year.

Plosser told reporters Oct. 20 that high unemployment may not be “amenable to monetary-policy solutions” and added that he was “less inclined to want to follow a policy that is highly concentrated on raising inflation and raising inflation expectations.”

Fisher said central bank officials must be mindful of the effect their actions are having on the dollar.

Dollar Impact

“We need to be aware of the impact whatever we do has on other variables, and one of the variables is the dollar, the value of the dollar against other currencies,” Fisher said in an Oct. 22 interview in New York.

The prospect of an easier policy for a long period could prompt foreign investors to use Fed purchases as an opportunity to unload longer-term Treasuries, said Vincent Reinhart, former director of the Fed Board’s Division of Monetary Affairs.

“This might put more pressure on the exchange value of the dollar than the Fed is willing to tolerate,” said Reinhart, a resident scholar at the American Enterprise Institute in Washington.

Some commodity prices have already started to move up in anticipation of further Fed stimulus. Gold futures traded on the Comex in New York have risen 22 percent this year to $1,338.90 an ounce, while silver is up 40 percent.

“The Fed would like to talk up as many asset classes as it can,” said Scott Minerd, the Santa Monica-based chief investment officer at Guggenheim Partners LLC, who helps oversee $76 billion.

Asset Bubbles

“The history of the Fed, over the last 20 years, is one of bubble to bubble: one bubble deflates to create another bubble,” Minerd said. “We are certainly heading into the mother of all bubbles with commodities and gold.”

Another danger for the Fed is that its policy fails to have the intended effect, damaging the central bank’s credibility, Reinhart said.

“What happens if they bulk up the portfolio by another $500 billion in the next six months and there is no material change in markets or the outlook,” he said. “Presumably, the Fed will double-down and buy some more, but at some point, people will ask, ‘Is that all there is?’”

U.S. central bankers cut the benchmark lending rate to zero in December 2008. Seeking more stimulus, they launched a $1.7 trillion program to buy mortgage-backed securities, housing agency debt and U.S. Treasuries. The purchases ended in March.

Jackson Hole

Bernanke told central bankers in Jackson Hole, Wyoming, in August that those purchases “pushed investors into holding other assets with similar characteristics,” lowering interest rates on a broad range of debt.

While a second round of Treasury purchases would also lower nominal rates, the FOMC has been explicit about the need to lower real interest rates through higher inflation, minutes of its Sept. 21 meeting show.

The personal consumption expenditures price index, minus food and energy, rose at a 1.4 percent annual rate in August. That’s below the Fed’s long-run preference range of 1.7 percent to 2 percent. The year-over-year increase in consumer prices jumped as high as 14.8 percent in 1980 during the administration of Jimmy Carter.

Even moderate rates of inflation can shift wealth through the economy. Companies can make more money because their prices rise faster than wages. Households can also benefit as incomes eventually rise while costs on fixed-rate debt stay the same.

Chipotle Mexican Grill Inc. chief financial officer John Hartung told Bloomberg Television Oct. 22 that he expects inflation to be in the low-single to mid-single digits next year. “We would welcome modest inflation along with the continued pickup in consumer demand,” Hartung said.

To contact the reporters on this story: Craig Torres in Washingtont ; or Scott Lanman in Washington at slanman@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net