Bank Shorts Missed Foreclosure Crisis

NEW YORK ( TheStreet) -- Short sellers of big banks appear to have been blindsided by foreclosure-related woes that have hit shares of those companies in the past several days.

Short interest on the three banks with the biggest exposure to "put backs" related to sloppy home loans, Bank of America ( BAC), JPMorgan Chase ( JPM) and Wells Fargo ( WFC), all fell during the first half of October, according to data released by the New York Stock Exchange (NYSE) late Tuesday.

Short sellers borrow shares in the hope that they will fall. If they are right, they then buy the shares back at a lower price to repay the loan, while pocketing the difference. The NYSE releases data on outstanding short interest twice a month, with a roughly two week lag time.

Bank of America short interest fell to 128 million shares from 153 million in the previous period, Wells Fargo short interest dropped to 44 million from 53 million shares. JPMorgan Chase short interest was about 40 million shares, versus 42 million in the previous period while short interest on Citigroup ( C) ticked up slightly, to 404 million from 401 million shares. Citigroup is widely thought to have the least exposure to foreclosure-related problems.

The problems began to surface with court testimony from "robo-signers"--middle managers employed by the big banks who signed off on thousands of foreclosures per month in some cases, while falsely claiming to have personally reviewed the details of each foreclosure decision. Those worries ignited related fears about sloppy paperwork and potentially illegal corner-cutting throughout the foreclosure process, giving rise to potential claims from bond insurers like Ambac ( ABK) and holders of mortgage-related securities such as BlackRock ( BLK) and MetLife ( MET).

While the concerns overshadowed above-consensus third quarter earnings reports from many banks, investors nonetheless showed a willingness to make distinctions.

Wells Fargo shares, for example, have nearly recovered from their mid-October selloff, as investors appear to believe management has the foreclosure situation under control. Bank of America, on the other hand, despite a slight rebound Wednesday morning, has seen its stock fall roughly 13% over the past month.

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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