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BofA and Fraudclosure: A Tragedy in 3 Acts

Wednesday, 20 Oct 2010 | 2:42 PM ET

Fraudclosure...Mortgage Mayhem in the Good Old USA...a Saga of Greed, Destruction and Redemption (?)…and the curtain opens...

Photo: Oliver Quillia for CNBC.com

Act 1: A smart mortgage guy I know from the West Coast asks a salient question: “How can the likes of BofA, (JPMorgan) Chase, Citi, et al be allowed to reduce their loan loss reserves to bolster their balance sheets in the midst of Fraudclosure and their liabilty exposure to buying back an estimated $80 Billion of MBS which were "improperly" packaged in CDOs?”

Act 1, Scene 1: My emailed response was this: “a good question, to which the only answers are A) they are performing accounting tricks because, well, they can, or B) "Fraudclosure" isn't going to be all it was cracked up to be. Read a note from one of the banks yesterday that suggested if worse comes to worse, the government will come in with some retroactive legislative ‘fix’ to prevent the scandal from getting out of hand. stay tuned....”

Act 1, Scene 2: I was able to dig up the note I referenced and it came from Credit Suisse. The relevant sentence stated: “We find it difficult to believe that after all of the costs and efforts that have been brought to bear to help stabilize the housing market that there would not be action by the Administration or Congress to ‘fix’ a procedural issue and ensure the stability of the market.”

Act 1, Scene 3: Will the government really backstop the Fraudclosure banks? If the financial crisis taught us nothing it is that politicians may jawbone how much they hate Wall Street, but at the end of the day they know which side of the bread the butter is on.

Act 2: Don’t discount the importance of hard feelings. We all remember that the reason Bear Stearns got the Wall Street bum’s rush during its downfall was not, no way, no sir, in part because it refused to participate in the Long Term Capital Management bailout.

Act 2, Scene 1: One wonders how much bad will Bank of America engendered from crusading pols and its own investors for backing up Angelo Mozilo. The former Countrywide head was fined $67.5 million for his role in the subprime fiasco, but a large chunk of his costs will be picked up by BofA, which bought out Countrywide when it was crushed by subprimes.

Act 2, Scene 2: Prolific banking analyst Dick Bove of Rochdale Securities issued a scathing note over the weekend regarding the BofA-Mozilo affair titled “Continuing Contempt for Shareholders???” The analyst dissected the Faustian bargain between the two sides, stating that “shareholders are losing billions based on decisions made at Countrywide under Mr. Mozilo’s leadership and at the same time they are paying Mr. Mozilo’s penalty fees. The management and the Board of Directors at the bank believe that this is fair treatment of shareholders. As one observer, I have a great deal of trouble with management and boards who treat their shareholders with total contempt as seems to be the case here.”

Act 2, Scene 3: Catfights don’t happen only in playgrounds and “Desperate Housewives of …” episodes. Even Wall Street titans can be catty, and you have to wonder how much of BofA’s tough slog this week is payback for the Countrywide bailout.

Act 3: Analysts have been taking reluctant turns at the confessional this week to downgrade BofA stock.

Act 3, Scene 1: Stifel Nicolaus, Deutsche Bank and Oppenheimer each cut their views of the stock as the bank battles its way through Fraudclosure. BofA shares have been hitting successive 52-week lows even as CEO Brian Moynihan has vowed to fight charges that the bank acted inappropriately during the housing market’s demise.

Act 3, Scene 2: Stifel was overtly apologetic in its downgrade, saying the move “sadly…goes against our better fundamental analysis/judgment.” Stifel analyst Chris Mutascio goes on to state that risk from Fraudclosure “is subject to assumptions that can vary wildly causing a significant range of potential loss estimates. This wide range is causing a great deal of uncertainty, forcing investors to shoot first and ask questions later.” Oppenheimer was even more resigned, opining that even though BofA’s operations look good, “there will be lots of (law)suits with big numbers, and there are lots of other good stocks to own.”

Act 3, Scene 3: Closing the show is the aforementioned Dick Bove, who despite his unrest with the BofA-Mozilo entanglement, still likes the stock. He states that even though the bank could lose $38.6 billion in mortgage recessions, the company would withstand the shock. So is this the moral of the story?

“In sum, the mortgage issue will not stop book value from growing,” he wrote. “Bank of America’s stock is selling at a discount to book value, tangible book value, and cash per share. Despite the heavy problems the institution is facing the issue is simply too cheap.”

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Companies mentioned in this post

Bank of America

Citigroup

JPMorgan Chase

Credit Suisse

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