Wednesday, August 31, 2011

You a taxpayer? Here's a part of what you paid for

This week marked the last day to file objections to an $8.5 billion Bank of America settlement with investors who lost money on collateralized debt obligations.

Investment in these securities, based on underlying pools of mortgages and packaged by Bank of America acquisitions such as Countrywide and Merrill Lynch, lost billions upon billions of dollars for institutional investors such as BlackRock, PIMCO and MetLife.

At the time, the bank had contracted with the Treasury Department to advise the government on how to stop the national skid into financial chaos.

Now these investors are joined by Goldman Sachs in their objections, saying the securities were based on collateralized mortgages which did not meet the stated quality standards. What's more, they allege that Countrywide did not keep accurate records of the loans. In the last analysis, they couldn't prove what they did and did not own.

Then they allegedly turned around and foreclosed on properties using phony papers. The Federal Housing Finance Agency, which now regulates Fannie Mae and Freddie Mac for the new owners, the United States of America, has joined the fray, along with U.S. Bancorp, a trustee for one of Countrywide's mortgage pools allegedly valued at $1.75 billion to make the bank buy back the mortgages it sold the company. They join the insurance giant AIG, which is suing Bank of America for $10 billion in a separate case involving mortgage-backed securities.

Not only does the bank not make any money, it's lost $3.2 billion over the past three years; it's had negative income for the past two, has accepted a $5 billion investment from Warren Buffet, and sold half its stake in China Construction Bank for around $8 billion.

Reuters estimates that the bank actually paid $30 billion when you add in all the write-downs, legals costs and settlements attached to its $4 billion deal to acquire Countrywide in 2008.

There was a method to this madness. Two investigative journalists wrote a Pulitzer Prize-winning analysis of the how and why of the collateralized debt obligation market.

Quite simply, underwriters and sellers offered the securities to institutional investors, then bought in through insider trading in bets that the deals would lose money, collected their profits from the insurance companies that guaranteed the government-backed mortgages, and walked away happy.

Such a deal.

In the midst of these developments, the bank also announced this week that it will sell off its correspondent mortgage business. That's the division that buys loans from smaller lenders, sells them, then continues to service the loans. About 1,000 employees work there in that line of business, which represents an estimated 47% of Bank of America's mortgage operations during first quarter 2011.

So, that's who your government contracted with to advise its policies through the bursting housing bubble of 2008.

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