This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Wall Street Whispers: Bank Stocks' Real Risk

The letter caught management - and the market - off guard, sending BofA shares down sharply. The stock moved accordingly as exposure bounced around like a ping-pong ball from $74 billion to $13 billion to $375 billion to $31 billion in matter of three weeks.

But now, the market seems to have gotten its arms around the problem. A Bernstein report on Friday put exposure to private-label buybacks at $23 billion - for the entire banking industry. Analyst John McDonald pegged exposure to GSE putbacks a little higher, in a range of $28 billion to $34 billion.

He called the costs "manageable," and maintained "outperform" ratings on large mortgage servicers caught in the crosshairs, including BofA, Wells Fargo (WFC - Get Report), JPMorgan Chase (JPM - Get Report), PNC Financial Services (PN) and Capital One (COF - Get Report). However, McDonald expects litigation costs to be elevated and headline risk to persist: "Banks will face a significant amount of mortgage repurchase-related litigation and expense over the next few years," he concluded.

Similarly, Morgan Stanley (MS) analyst Betsy Graseck reiterated an "outperform" rating on Bank of America last week, declaring that the market "misunderstands" its buyback risk.

"Market is missing that the litigation around $352 billion of these claims were dismissed on November 4 as the plaintiffs don't have proper standing," said Graseck.

LEGAL OUTCOMES

The problem with most mortgage-related lawsuits against banks is that purported victims often doubled as bad actors. "It's kind of like a dance that they're all doing" in trying to assess each party's cost of the mortgage reckoning, says Adams.

In gauging the litigation risks for big banks, it helps to stop and consider the merits and motivations of various claims.

There are homeowners who signed up for mortgages they couldn't afford, then stopped paying the loan for months or years on end. Some are fighting banks in court, with the help of pro-bono attorneys or government officials, because they'd like to stay in their homes. At issue are sloppy and irresponsible practices by banks in which employees signed affidavits without having verified the information properly. But, by and large, the basis for foreclosure was accurate, even if the signatures on paperwork were not.

As Driscoll puts it: "Maybe I'm oversimplifying it but if someone borrows money, they owe the money back. That's pretty cut and dry."

Then there are mortgage-bond insurers whose business model relied on the viability of private-label RMBS. They are obligated to cover investors' losses on bonds that go bad.

Those insurers relied on ratings agencies' stamps of approval and processes in place - such as loan sampling -to ensure that deals were worth standing behind. But, as losses escalated, bond insurers have filed fraud charges against big banks whose deals they stood behind, claiming that the bonds were marketed dishonestly. They have also scrutinized loan documents to find flaws in representations and warranties. When those terms are proven to be breached, banks are required to buy back debt.

"They have plenty of responsibility to do due diligence," says Thomas Adams, a lawyer and former executive at two major monolines. "The bond insurers frequently did do due diligence prior to insuring the loans. They did their own file samples of 200 or 300 loans, prior to insuring the deal. So, it makes their case pretty hard."

Investors who have burned through the insurance protection to lose money on RMBS deals are suing the banks as well. Their claims have largely the same premise: We invested in stuff that was marketed as good, but turned out to be really bad. But the hedge funds and big institutional investors suing big banks are sophisticated market players with their own due diligence processes in place. They only started legal proceedings after losing tons of money on deals gone awry.

Randy Robertson, who headed mortgage divisions at Wachovia through 2008, notes that people simply got lazy about due diligence processes during the boom years.

"As originators' product saw heightened demand, people buying the pools did less and less sampling," Robertson, who's now a managing director at BlackRock, said in a recent interview with TheStreet . "So, you started at 25%, then it went to 15, then to 10 and in the end some people were doing 5% sampling due diligence on the loans when they securitized them."

As it stands, the litigation over buybacks, foreclosures and alleged mortgage fraud haven't gone much further than the negative headlines.

A few "robosigning" cases against Bank of America and Wells Fargo garnered a lot of attention but were also dismissed by courts. The coalition of regulators and attorneys general investigating banks' practices haven't yet announced any kind of monetary damages - despite Ohio Attorney General Richard Cordray's aim to get $25,000 for each court document that GMAC is found to have handled improperly.
3 of 4

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
BK $38.44 -3.40%
BLK $293.40 -3.00%
BAC $15.75 -3.60%
COF $75.14 -3.40%
GS $183.71 -2.60%

Markets

Chart of I:DJI
DOW 16,188.20 -339.83 -2.06%
S&P 500 1,929.60 -42.58 -2.16%
NASDAQ 4,690.9690 -85.5390 -1.79%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs