Cast your minds back to early 2003.
Wall Street was still at war with the pre-Dupré, New York state attorney general Eliot Spitzer — a man hellbent on exposing financials’ conflicts of interest. On April 28 of that year, Spitzer announced a settlement with the 10 biggest firms. They’d cough up $1.4bn and mend their evil ways, helping restore faith in the American marketplace.
Perhaps it’s unsurprising then, that JP Morgan (itself the subject of mortgage scandal) sees the potential for a Spitzer-style settlement over mortgages. It’s on the back of the growing tide of repurchase requests for faulty or misrepresented loans — for instance, the $47bn putback-ask on Countrywide-originated mortgages.
From a Friday note by JP Morgan’s banking team:
The ongoing concern amongst regulators and investors about the Mortgage problem facing the industry could potentially prompt an industry-wide probe followed by a settlement between major banks and regulators. In a statement, the [Federal Housing Finance Agency] said it is analyzing requested information and that “no decisions for future action have been made.” The FHFA hasn’t disclosed the targets of its subpoenas, though some banks have acknowledged receiving them. The probe is focused on private-label securities that were issued by mortgage companies, packaged by Wall Street firms and then sold to Fannie Mae and Freddie Mac.
The FHFA’s efforts could ultimately lead to an industry-wide settlement that would avoid protracted legal battles. In our view, a settlement would be in the best interest for all parties – the US economy, mortgage investors, banks and shareholders – creating clarity rather ‘living with’ the ongoing newsflow risk and capital at risk concern. As illustrated, at the time of the Spitzer settlement [2003] US banks outperformed the wider index illustrating the Spitzer settlement was already priced into bank stocks and welcomed by the market.
Accordingly then, JPM figure most of the capital risk at the banks has already been discounted in major financials’ share prices, largely because of that tricky ‘newsflow.’
As for the actual numbers — JP Morgan expects $20bn of losses in a benign scenario, $40bn in its base case and $90bn in a stressed situation.
No wonder a Spitzer-settlement is looking so good.
Related links:
The outing of the Robo-Signer conference attendees – FT Alphaville
The $11.1bn buyback pain at BAC – FT Alphaville
A different kind of bank repurchase – FT Alphaville