WikiLeaks Remains Banks' Unknown Risk

Could Julian Assange release data that could take down a large U.S. bank in 2011?
By Maria Woehr ,

NEW YORK(

TheStreet

) -- WikiLeaks founder Julian Assange's threat to release five gigabytes of data revealing "flagrant violations, unethical practices" at a large U.S. bank has many wondering: What's the worst case scenario?

In November, WikiLeaks founder Julian Assange told

Forbes

that in early 2011 he is likely to

release a, "megaleak,"

consisting of hundreds of thousands of documents," that could prompt investigations that could ruin a major U.S. bank.

Analysts agree that bank stocks could dive and WikiLeaks could unravel a slew of federal investigations and lawsuits, but that remains a big assumption given how little is known today. The headline risk could be even greater if it is true data came from

Bank of America

(BAC) - Get Report

, as published reports have suggested.

According to several analysts, the so-called "megaleak" focused on large banks could touch on several issues:

  • 1. Information that Bank of America executives knew about the losses the bank would suffer prior to the shareholder vote on the Merrill Lynch acquisition;
  • 2. evidence that banks were creating faulty mortgage-backed securities;
  • 3. or that Assange has information concerning mortgages underwriting that reveals flagrant violations.

For some analysts, new information that could undermine the process of securitizing mortgages would be a significant threat for banks and shareholders.

"The worst case scenario is if WikiLeaks suggests that banks were defrauding investors and customers by creating asset backed securities," said Rochdale Securities analyst Dick Bove. "If there is evidence that any bank did that they would probably face four to five years worth of lawsuits and several banks would face serious problems."

But any leaks that specifically target Bank of America would need to be significant in order to create a major loss in value for shareholders.

"Could they create an issue for a bank with $2.6 trillion in assets? It could cost them some money, but probably not take them down. That is a pretty big leap," said Keefe, Bruyette & Woods analyst Jefferson Harralson. "I think the most likely outcome is that they add some color to issues that are already out there."

"It would have to be mortgage fraud related. I think that is the issue I am already worried about," Harralson.

"It could be proof that the

entire system was fraudulent in securitization," said FBR Capital Markets' analyst Paul Miller. "Another possibility is if

Bank of America knew what the losses at Merrill would be before the shareholder vote. There is no absolute proof that anyone knew of those losses."

If WikiLeaks did open a can of worms at Bank of America it could prompt lawsuits and a drop in stock prices at

JP Morgan Chase

(JPM) - Get Report

,

Goldman Sachs

(GS) - Get Report

,

Morgan Stanley

(MS) - Get Report

. and

Citigroup

(C) - Get Report

, which also face exposure to mortgage backed securities, the analysts argue.

But that assumption remains a fairly huge leap and the information could me much ado about nothing. "Really, I don't believe that Assange has anything on the mortgage asset backed securities. These companies that were creating asset backed securities. There was a lapse in judgement there. That is stupidity, not fraud," explains Bove.

"I just don't think it is going to be a big deal," said Miller. "We don't even know if it is a CEO that is still in place or at a bank that is still around. Most of the senior executives that got in trouble during the crisis were gone. Look at

WaMu

and the

Smoking Gun

emails that were exposed."

Of course, if any of those scenarios above were true you would have to wonder why Assange would choose to wait two years before revealing that kind of data. Any leak would also likely reflect badly on the

Federal Deposit Insurance Corp

.'s Sheila Bair or the

Securities and Exchange Commission

's Mary Shapiro, who have been thorough about pursuing investigations.

Currently, Assange is in the middle of facing his own legal battles at the moment. Until he provides further clarification, the kind of information Assange has is unclear.

--Written by Maria Woehr in New York.

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Maria Woehr

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