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US Banks: At The Tipping Point?

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Bloviating Zeppelin: US Banks: At The Tipping Point?

Bloviating Zeppelin

(in-ep-toc'-ra-cy) - a system of government where the least capable to lead are elected by the least capable of producing, and where the members of society least likely to sustain themselves or succeed, are rewarded with goods and services paid for by the confiscated wealth of a diminishing number of producers.

Wednesday, October 20, 2010

US Banks: At The Tipping Point?

The stock market lost 200 points on Tuesday the 19th.

And it has to do with American banking.

Myself and other Conservative bloggers made our voices heard last year, this year and continuously. We collectively said: there isn't anything quite too large to fail. GM should not have been saved. The banks and other monetary institutions should not have been saved. There would have been a fiscal hit; given. But by now we likely would have impacted actual bottom and then begun a real recovery.

Now, because of demands made by Pimco, Black Rock and the New York Federal Reserve Bank -- up to and including suit -- I fear the entire US banking scheme is truly on the precipice of a potential national systemic failure.

Yet you've likely not heard of this or had it framed quite this way for you.


The New York Federal Reserve Bank is part of a consortium of eight large institutional investment firms that is demanding that Bank of America repurchase loans included in mortgage securities.

Bloomberg reported earlier Tuesday that the New York Fed had joined with the Pacific Investment Management Company, better known as Pimco, and investment management firm BlackRock in an attempt to force BofA to buy back $47 billion in mortgage bonds.

Kathy Patrick, lead attorney for the consortium, confirmed in a statement Tuesday that the group holds more than 25 percent of the voting rights in more than $47 billion worth of Bank of America securities.

Pimco and BlackRock had no comment when contacted by CNBC.

Shares of Bank of America [BAC 11.80 -0.54 (-4.38%) ], a component of the Dow Jones Industrial Average [.DJIA 10978.62 -165.07 (-1.48%) ], were more than 4 percent lower Tuesday.

A law firm on Tuesday sent a notice alleging failures by Countrywide Financial to properly service loans that were part of certain mortgage-backed securities. Countrywide was acquired by Bank of America in 2008.

"We want to enforce the holders' contract rights," Kathy Patrick, the lead attorney representing the bond holders, told CNBC. "Today's action begins the clock ticking ... If these issues of non-performance are not addressed and cured, then our clients will be able to enforce their rights in court."

The demand revolves around what is called "put-backs." And the demand is for a full 100-cents on the dollar. No discount.

The immediate exposure, as you read, is $47 billion dollars on the part of B of A.

More useless detail? you ask. More "inside baseball" that doesn't apply to me? you ask.

No, ladies and gentlemen; I submit this is The Real Earth Shaker making an appearance before both you and me, front and center.

The NY Fed is jumping in (the bank regulator in the northeast) with these other major investment firms wanting to sue Bank of America regarding mortgage securities and the investments made in these mortgages, essentially saying that B of A sold them a "bill of goods" -- in which B of A doesn't even possess the requisite records or notes.

The firms are saying to B of A: you don't even have the note; you sold us something you don't even own. How do you sell a security if you don't have a secured interest in the investment in the mortgage, if you don't have the note?

A "put-back," by the way, is the process of a bank admitting a selling error, saying "so we'll buy it back from you."

The potential size of the problem is the key issue; an issue I have yet to see addressed sufficiently by any media outlet -- and a situation of which you need to be made aware. A situation I am addressing here and now on BZ:

JP Morgan Chase has now indicated that, in a proverbial "worst-case scenario" estimate, the banking industry could be forced to buy back $120 billion dollars worth of mortgages.

But in truth, this is simply way too low. That estimate falls much short.

Some Fox business analysts estimate that, if Countrywide alone (B of A agreed to purchase Countrywide, if you recall, in January of 2008) is on the hook for $47 billion dollars, then it appears the $120 billion initial estimate appears to be remarkably minuscule.

The bottom line, at least at this point, is: no one knows the true exposure/liability for American banks in this mess. Not yet.

And this certainly does nothing for the credibility of American banks, and the confidence that people can have in said banks.

The US government already owns Fannie Mae and Freddie Mac; and they in turn own 95% of American mortgages -- so what is their exposure/liability?

Will the US government -- meaning the US Taxpayer -- have to shell out more billions upon billions in order to "save" these financial entities again, at the order-by-fiat of Mr Obama?

If the suit goes through, banks will absolutely be crippled. This is about banks failing to service their mortgages and taking them cavalierly.

The potentially-suing investors carry $16.5 billion dollars worth of mortgages.

And, further, do you have mutual funds that invest in mortgages? If so, what shall be your personal exposure?

Questions posed; answers pending.

Be aware, ladies and gentlemen.

Be aware.

You read it here first on:


Due to its importance, this post may exist for a few more days in the digital ether.


Blogger Well Seasoned Fool said...

My late father taught me two important lessons. After every "boom" there is a "bust". Prosperity based on mortgages changing hands won't sustain; cash in fist is what matters.

In the car business, we saw many people with home mortgages we couldn't get financed in a car. the most common mortgage company? Countrywide.

The biggest problem with a bank collapse is small businesses not being able to finance inventories and have operating capital. Most small businesses ARE NOT profitable month to month. A usual ratio is 7to5 or 8to4 months in the black to months in the red.

Tue Oct 19, 07:21:00 PM PDT  
Blogger Bloviating Zeppelin said...

Gird thy loins, people.

Gird thy loins.


Tue Oct 19, 07:29:00 PM PDT  
Blogger Always On Watch said...

I'm not sure what we can do to protect ourselves on this one.

Perhaps the only survivors will be those who don't have a mortgage at all.

I predict that the federal government will become the new mortgage company.

I would also point out that this question of who holds the note may impact local governments. If one doesn't really own the property taxed, were those taxes collected fraudulently?

Wed Oct 20, 03:50:00 AM PDT  
Blogger Maggie Thornton said...

While I feel empowered that maybe we can do something at the congressional level, we can't do a thing about banking (including Obama's financial reform).

It's terrifying. Great article.

Wed Oct 20, 09:36:00 AM PDT  
Blogger Z said...

I wish I could grow a garden in my patio.
I think we're all going to need one.

Wed Oct 20, 10:35:00 AM PDT  
Blogger Z said...

by the way, I mean VEGETABLE garden, of course. Flowers will be grown after we've weathered this hideous storm you so well warn us of.

Wed Oct 20, 10:36:00 AM PDT  
Blogger Z said...

don't print this, but I have to tell you I'd come here much more often if I didn't have the damndest time backing out of your blog once I've read and posted! I click my back arrow and it says DONE and you're still there...ten times, that happens! What's up?!!

Wed Oct 20, 10:37:00 AM PDT  
Blogger TexasFred said...

The Dow is back up today... +129.35 from yesterday...

If you'll remember, I told you, and everyone, here and on my blog, this is a game and the money people are playing it well...

The market WILL recover, perhaps to 12K just before elections, and then it's BOOM, 9K again... And it will ALL point to Obama...

That's what I am being told by *people in the know*...

And after the election, we'll get back to some form of normal...

We'll see...

Wed Oct 20, 01:26:00 PM PDT  
Blogger Bloviating Zeppelin said...

Fred, wish I had your optimism. You and I both know the market reacts every bit with emotion as well (or more) as it does to actual logic.

Banks and the government have been playing fast and loose for so long, I'm not sure they have a firm foothold on much of anything but vapor any more.

Ask yourself, dear readers:

How MANY times has YOUR loan been sold, that you're aware of. I am aware of my loan having been sold THREE times. That's just one small fat guy from Fornicalia.


Wed Oct 20, 06:32:00 PM PDT  
Blogger Old NFO said...

I got out of the market in 2008, and I'm glad I did... My mortgage is with a small company in OK that I went with 16 years ago and they've never sold the mortgage. Of course, since I went VA, and I've never been late, they LIKE me.

Wed Oct 20, 08:38:00 PM PDT  

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