Banks’ Unknown Risk: WikiLeaks

WikiLeaks founder Julian Assange's threat to release five gigabytes of data revealing "flagrant violations, unethical practices" at a large U.S. bank has many wondering: What's the worst-case scenario?

Julian Assange
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Julian Assange

In November, WikiLeaks founder Julian Assange told Forbes that in early 2011 he is likely to release a "megaleak" consisting of “hundreds of thousands of documents" that could prompt investigations capable of ruining a major U.S. bank.

Analysts agree that bank stocks could dive and WikiLeaks could unravel a slew of federal investigations and lawsuits, but that remains a big assumption given how little is known today.

The headline risk could be even greater if it is true that the data came from Bank of America, as published reports have suggested.

According to several analysts, the so-called "megaleak" focused on large banks could touch on several issues:

- Information that Bank of America executives knew about the losses the bank would suffer prior to the shareholder vote on the Merrill Lynch acquisition;

- evidence that banks were creating faulty mortgage-backed securities;

- or that Assange has information concerning mortgage underwriting that reveals flagrant violations.

For some analysts, new information that could undermine the process of securitizing mortgages would be a significant threat for banks and shareholders.

"The worst-case scenario is if WikiLeaks suggests that banks were defrauding investors and customers by creating asset backed securities," said Rochdale Securities analyst Dick Bove. "If there is evidence that any bank did that, they would probably face four to five years worth of lawsuits and several banks would face serious problems."

But any leaks that specifically target Bank of America would need to be significant in order to create a major loss in value for shareholders.

"Could they create an issue for a bank with $2.6 trillion in assets? It could cost them some money, but probably not take them down. That is a pretty big leap," said Keefe, Bruyette & Woods analyst Jefferson Harralson. "I think the most likely outcome is that they add some color to issues that are already out there."

"It would have to be mortgage fraud related. I think that is the issue I am already worried about," Harralson said.

"It could be proof that the [entire] system was fraudulent in securitization," said FBR Capital Markets' analyst Paul Miller. "Another possibility is if [Bank of America] knew what the losses at Merrill would be before the shareholder vote. There is no absolute proof that anyone knew of those losses."

If WikiLeaks did open a can of worms at Bank of America it could prompt lawsuits and a drop in stock prices at JPMorgan Chase, Goldman Sachs, Morgan Stanley and Citigroup, all of which also face exposure to mortgage backed securities, the analysts argue.

But that assumption remains a fairly huge leap and the information could be much ado about nothing.

"Really, I don't believe that Assange has anything on the mortgage asset backed securities. These companies that were creating asset backed securities. There was a lapse in judgment there. That is stupidity, not fraud," explains Bove.

"I just don't think it is going to be a big deal," said Miller.

"We don't even know if it is a CEO that is still in place or at a bank that is still around. Most of the senior executives that got in trouble during the crisis were gone. Look at WaMu and the Smoking Gun emails that were exposed."

Of course, if any of those scenarios above were true you would have to wonder why Assange would choose to wait two years before revealing that kind of data. Any leak would also likely reflect badly on the Federal Deposit Insurance Corp.'s Sheila Bair or the Securities and Exchange Commission's Mary Shapiro, who have been thorough about pursuing investigations.

Currently, Assange is in the middle of facing his own legal battles at the moment. Until he provides further clarification, the kind of information Assange has is unclear.


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