Tag Archive for 'BAC'

Assured Files Suit Against Credit Suisse: Will There Soon Be Another Settlement?

Posted on October 25, 2011, 9:47 am. Closed

Assured Guaranty (AGO) filed suit against Credit Suisse (CS) last week. Here is a copy of the complaint. AGO wants CS to repurchase $1.8 billion in defective mortgage loans. The underwriting standards for these loans were just as egregious as what we’ve seen with the likes of Countrywide and WaMu. Approximately 93 percent of the 7,918 mortgage loans that Assured has reviewed breached one or more of the Mortgage Representations.

In the court filing there are lots of great examples of the lack of underwriting standards. One example of CS failing to fully investigate the borrower’s existing debt obligations: a re-underwriting of a $269,500 mortgage loan revealed that the borrower opened six mortgages totaling $1.7 million within 30 days of the subject mortgage loan’s closing date—a recalculation of the debt to income ratio yielded 135% which exceeds the max allowable DTI ratio of 60%.

Another excellent example is in regards to a failure to verify income. One borrower obtained a $479,900 mortgage loan claiming to be the owner of a maintenance and painting business with income of $358,800 per year. It turns out the actual income was $46,959 which gives a DTI ratio of 327%, exceeding the max allowable ratio of 60%—over 5 times the limit!

I suspect in the next 6–12 months there will be a settlement very similar in structure to the recent Bank of America/Countrywide settlement, meaning that AGO will likely receive about $1 billion in cash up front and another several hundred million later on along with some type of reinsurance or indemnity agreement.

Bank of America and the Power of Buffett

Posted on August 25, 2011, 8:45 am. Closed

Since the beginning of the year, Bank of America’s (BAC) stock price has declined in concurrence with multiple negative events. There have been humongous losses, large settlements, and multiple lawsuits. The public perception of BAC got so bad, that several weeks ago, Bruce Berkowitz of the Fairholme fund, held a conference call with Brian Moynihan and several other BAC execs to answer the “toughest questions” from Fairholme and BAC shareholders. The performance of Berkowitz’s fund has been horrible so far this year, and I feel like Berkowitz was forced into this conference call to qualm fears and help stanch the outflow of money from his fund. You can download the transcript of the conference call here.

Even more recently, some financial analysts have journalists (namely Blodget, who I think made some utterly ridiculous claims) have suggested the need for BAC to raise more capital. Some have pointed out that another capital raise was imminent just by looking at the stock price.

Throughout this mess, I held no strong opinion about BAC. I felt that was and still is the weakest and most poorly run of the remaining big banks, but I have not felt that it needs another capital raise. I also felt that this pessimism was reaching an apex, and somehow there would be some event that make the shortsellers and naysayers reverse course.

And lo and behold, we have news today of Warren Buffett’s $5 billion investment in newly-issued BAC preferred shares. BAC stock is up about 18% as I write.

This brings me to the power of Buffett. It never ceases to amaze me the power Buffett can have over the stock price of a single company just by making an investment. There is little doubt this investment will work out great for Buffett. The terms of the investment are not as great as the Goldman Sachs and GE investments, but that is understandable. Those investments were made during a time of real financial crisis and when an investment from Buffett probably helped save those companies. The situation at BAC is not as dire, and thus the terms for Buffett’s investment are somewhat relaxed. Kudos to Buffett for another opportunistic investment.