‘Put-Back’ Push Back by Banks

Bank of America reported its lost $7.3 billion, or 77 cents a share for the quarter because of new federal rules on consumer accounts and credit cards that forced reduced fee income. Bloomberg reported that excluding one-time gains and costs BofA earned $3.1 billion, or 27 cents a share.

While that may be the headline if was not the real story.

The real story was the rising calls for ‘put back’ from buyers of BofA mortgage securities to take back the loans they sold for fear they are tainted by poor documentation.  There is a part of me that delights in this creative mischief as one financial institution tries to slit the throat of another to avoid taking financial or other accountability for their share in the mortgage mess that clouds the housing recovery.

‘It could not happen to nicer guys’ seems to be the public sentiment when spoken in polite company.  Behind the scenes the desire for revenge on the banks is palpable.

Perhaps sensing impending doom, BofA CEO Brian T Moynihan talked tough saying the bank will “defend our shareholders” from the unjustified demands that BofA buy back defective mortgages.  While not denying that there might be problems, Moynihan said that most claims “don’t have the defects that people allege,” in an interview on Bloomberg Television.  He said when the bank finds a problem it fixes it and puts the note back into the pool to be bundled and sold.

We feel little sympathy for BofA which stepped in this mess by being bludgeoned into buying Countrywide, but that does not mean we feel any better about the hoard of other miscreants lining up shouting ‘put back, put back, put back’ at the top of their lungs.  Bloomberg reported October 19th that Pacific Investment Management, BlackRock and the Federal Reserve Bank of New York want Bank of America Corp. to repurchase bad mortgages included in $47 billion of bonds Countrywide sold to them.

Is it possible that the markets will punish the banks far worse than Washington ever would consider for their misbehavior?

That is the real fear isn’t it?  The financial hocus pocus of thinking you could bundle many high risk loans together and resell them on the premise that they now are high quality loans instead is right out of a Michael Douglas Wall Street movie.  But that is exactly what these firms did—and they all knew exactly what was happening.  They just hoped they cold flip the bundles to some other sucker before the underlying loans went bad like an off key version of musical chairs.

But this win-lose game of put back could turn into lose-lose for the economy if it stalls the purging of foreclosed or foreclosable problems from the market and allows home prices and consumer confidence to go back up.

The real question is what is the appropriate pain threshold to discourage future bad behavior like this by imposing loses for past sins without the unintended consequence of imposing more pain on a slowly recovering economy?

Those who took out mortgages they could not afford should not be bailed out.  If there are paperwork problems—fix them and get the foreclosures finished.  Those who bought securitized mortgage bonds knew exactly what game they were playing so let them eat cake. Let’s hope bank profits and their share prices suffer just enough to deprive the CEO of his bonus even if he keeps his day job because the mess was started on his predecessor’s watch.

But if Washington ever needed a better reason to blow up Fan and Fred and sprinkle their pieces across the market in a score of smaller firms that must live or die by their business savvy not a federal subsidy this is it.

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