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Banks Are Way Too Complacent About Put-Backs

On Tuesday’s third-quarter earnings call, Bank of America’sexecutives downplayed the possibility that problems with bubble-vintage mortgage securitization could lead to a tsunami of mortgage repurchases—that would, in turn, punch a huge hole in bank balance sheets.

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“We don’t see the issues that people were worried about, quite frankly,” Bank of America’s representative said. “I don’t think the technical issues are a big deal.”

Citigroup officials sounded very similar in their analyst call on Monday. Last week, JP Morgan Chase CEO Jamie Dimon also said he did not think the put-backs would be a huge problem for his bank.

This is no doubt intended to reassure investors. And, at least on the earnings calls, most professional analysts seem to take assurance.

But, frankly, it is making me nervous. While I’m on record as predicting that we will not experience the Put-Back Apocalypse that has some financial writers very worried, this consensus of complacency is troubling.

It reminds me of 2007 and earlier, when banks were taking billions in write-downs on mortgage-linked assets, while indicating that a temporary market dislocation was occurring. We heard a lot about “kitchen sinks” in those days—as in, “The banks have written down everything, including the kitchen sink.”

Then, as now, banks were claiming to be prudent while admitting that they couldn’t really quantify the losses accurately. In 2007-2008, it was because the market had dried up for mortgage-backed securities. Now it’s the lack of historical precedent that is creating the lack of clarity. But, in both cases, bank executives seem to expect that these things will work out in their favor.

That didn’t happen in 2008. I guess the banks are hoping that this time it will be different.

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Companies mentioned in this post

Bank of America

Citigroup

JPMorgan

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