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A Conversation About Put-Backs

The vast windows of the room had a terrific view of Central Park at night. It hardly seemed like the time or place to discuss the mortgage repurchase exposure of Citigroup, Bank of America and JP MorganChase.

But somehow the conversation had wandered in that direction.

“Here’s a good number to ponder—$500 million,” the young hedge fund manager said.

“What about $500 million?” I said.

“That’s the amount that Goldman Sachs spent litigating the Abacus deal with the SEC. A single deal gone bad. $500 million to wrangle with the SEC, and another $500 million in fines to settle the case.”

“Right. And the point is?”

“Take Citigroup . They have just under $1 billion reserved against put-backs. That’s what their legal fees are going to be. Got that? They are only reserving against expected legal costs. They have no idea—and no plans—about the tidal wave of put-backs that are going to hit.”

We both needed another scotch. While we waited, the hedge fund manager explained that this wasn’t a problem particular to Citi. JPMorgan Chase faced difficulties stemming from WaMu. Wells Fargo from Wachovia. Bank of America from Countrywide.

All were in denial about put-back exposure, he said.

I explained that fellow NetNetter Ash Bennington and I had written about this over and over again—and our arguments had mostly fallen on deaf ears. Wall Street’s analysts, investors in bank stocks and public policy makers do not seem to agree that this could become a very big deal.

“Thank God for that,” the hedge fund manager said with a smile. “Because that means I’m going to make a lot of money when everyone gets hit by the surprise.”

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