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Wall Street Whispers: Bank Stocks' Real Risk

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But, as it happens, the worst-case scenario never materialized. Goldman lost few clients as a result of the case and the negative attention. It ultimately settled with the SEC for $500 million without admitting to the charges. The Wall Street giant saw its stock bottom out around $130 on July 1 and move on a fairly steady trajectory upward since then. Goldman's shares closed above $170 last week for the first time in more than half a year.

The fallout from mortgage litigation is different in its details and its scope, but not that much different in nature.

"In 2008, you were staring at what could have been the end of the system, so anytime you get a whiff of mortgage issues again, you get the 'sell first ask questions later' attitude," says Driscoll. "With Bank of America, you had the stock go down to $3, so even at $12, people are still nervous."

UNCERTAIN EXPOSURE

What touched off the bearishness in Bank of America shares was a report by a hedge fund outlining $74 billion in potential buyback exposure. The analysis by Branch Hill Capital was performed months earlier, but began gaining traction in the market the week of Oct. 11. The headline number was pooh-poohed by analysts and effectively disregarded by the company a week later.

In a presentation to investors on Oct. 19, executives outlined the elements of its buyback exposure - at least those that it felt comfortable predicting.

CFO Charles Noski cited nearly $13 billion in buyback requests, $4.4 billion of which management considered a liability. Most of the company's exposure came from requests by government-sponsored entities (GSEs) Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB). Management found it more difficult to estimate exposure to claims from private investors and monoline bond insurers, mainly because it had limited, inconsistent experience with them.

"Until we have a meaningful repurchase experience with these counter parties, we believe it is not possible to reasonably estimate this exposure," said Noski.

Officials at other large mortgage servicers have characterized exposure similarly. Wells Fargo (WFC - Get Report) executives outlined even less buyback exposure than BofA in an earnings report the following day, but then said in a quarterly filing that it "cannot estimate the possible loss or range of loss" from litigation. Similarly, JPMorgan Chase (JPM - Get Report) outlined higher buyback reserves and increased activity related to the GSEs. But commenting on other repurchase requests, CEO Jamie Dimon noted that "a lot of the private label stuff didn't have the same rules, requirements, disclosures, all that, so they're all different."

Indeed, just hours after its earnings call, news hit that BlackRock (BLK - Get Report) and Pimco had teamed with the Federal Reserve to formally request that Bank of America (BAC - Get Report) buy back $47 billion worth of mortgage-backed securities (MBS). Executives alluded to the letter sent by those investors during the call, but related exposure wasn't included in the quarterly numbers, which went through Sept. 30.

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