US government attempts bank raid | FT Alphaville

US government attempts bank raid

Friday promises to be an ugly day for US financials:

Stories in the New York Times the Wall Street Journal on Friday suggest that a grand mortgage settlement is farther away than ever and that banks — or at least one bank (guess which!) — are coming under increasing pressure to prepare for the worst.

The NYT has the biggie:

U.S. Is Set to Sue a Dozen Big Banks Over Mortgages

The federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation.

The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the matter.

The piece explains that the suit comes now because a three-year window for the agency to file claims is set to close in the next few days. Perhaps this is a straw that banks can clutch — the FHFA is keeping its options open.

However, the move comes nearly two months after the agency filed suit against UBS, looking to reclaim $900m in losses. “Negotiations between the agency and UBS have yielded little progress,” writes the NYT.

The suit also marks a worrying — for the banks — shift from a US government focus on buybacks by banks to compensation for losses on the crappy subprime assets sold to the GSEs.

The big unknown here is how serious and how united the US government is in wanting to reclaim losses from the banks. The NYT notes how there are differing views between the FHFA and the US treasury.

Does the former’s desire for compensation outweigh the latter’s desire for the housing market to avoid a further collapse?

As Bloomberg Businessweek reminds us on Friday, the US government is actually the biggest owner of repossessed homes — it’s hard for it to avoid masochism.

For sale or rent by distressed owner: 248,000 homes. That’s how many residential properties the U.S. government now has in its possession, the result of record numbers of people defaulting on government-backed mortgages. Washington is sitting on nearly a third of the nation’s 800,000 repossessed houses, making the U.S. taxpayer the largest owner of foreclosed properties. With even more homes moving toward default, Fannie Mae (FNMA), Freddie Mac (FMCC), and the Federal Housing Administration are looking for a way to unload them without swamping the already depressed real estate market.

In case you’re lost in the mire of all these different lawsuits, note that the FHFA’s suit is separate from the negotiations between the 50 state attorneys general and the big mortgage servicers, and distinct from the various parties trying to sue Bank of America.

BofA is cause for special attention from the Fed, according to the WSJ:

Fresh Scrutiny of BofA

U.S. regulators have pushed Bank of America Corp. to show what measures it could take if conditions worsen for the Charlotte, N.C., lender, according to people familiar with the situation.

Executives of the bank recently responded to the unusual request from the Federal Reserve with a list of options that includes the issuance of a separate class of shares tied to the performance of its Merrill Lynch securities unit, these people said. Bank of America purchased Merrill Lynch in 2009, and it has become the bank’s most profitable division.

Bank of America did the analysis at the Fed’s request in late July and early August and then provided the Fed with its menu of options, said people familiar with the situation. Some items, such as the tracking stock, were more theoretical than others.

Mr. Moynihan isn’t giving the tracking stock serious consideration at this point, said a person familiar with the situation, but he included it on the list to show the company has multiple levers to pull.

Not that the idea is fully within Moynihan’s gift, of course.

The idea of isolating (or indeed selling off) Merrill has been around for a while but these are the first signs that BofA is under pressure from the Fed and giving it some form of consideration.

Looks like the Buffett deal may be a mere temporary reprieve.

Related links:
Robo-Signing Redux: Servicers Still Fabricating Foreclosure Documents – American Banker
How the FHFA lawsuits could imperil mortgage-settlement talks – Felix Salmon
Bank of America – not Citi and not being bought by JPM – FT Alphaville