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Bank Of America's Backdoor Bailout - Dumping Mortgage Trash Onto Taxpayers Via Fannie Mae

This deal with Fannie is an outrage.  Now taxpayers are on the hook for any and all lawsuits associated with the fraud.  This was a transfer of liability more than anything else.  Details on today's taxpayer pillaging are below.


NEW YORK (TheStreet) -- The official bailout of the financial system may be over, but the government is apparently far from finished propping up big banks, as evidenced by the news that Bank of America has struck a deal to dump a bunch of near-worthless home loans on U.S. taxpayers.

According to a report in The Wall Street Journal Bank of America has sold the rights to process and collect payments on 400,000 home loans to Fannie Mae, the government-controlled mortgage giant. The loans have an unpaid principal balance of $73 billion, but are being sold for $500 million, according to the report.

Doesn't sound like a bad deal for the government, unless that $500 million price tag will soon be too steep, which is what "a person familiar with the deal," told the Journal.


FORTUNE -- Taxpayers may not realize it, but they just bailed out Bank of America again, this time to the tune of more than a half billion dollars.

The Charlotte, NC-based bank was one of the biggest recipients of bailout funds during the financial crisis. But Bank of America continues to face deep problems related to its troubled mortgage portfolio and investors have battered the stock, which has plunged over 40% so far this year. That's escalated concerns that the bank may need to raise more capital. Yves Smith at Naked Capitalism has even started a BofA death watch.

But apparently the federal government is determined to resurrect BofA: the Wall Street Journalreports the feds have just used Fannie Mae, which is controlled by the U.S. government, to infuse BofA with $500 million and ease one of the bank's biggest headaches.

Yesterday afternoon on CNBC, Bank of America CEO Brian Moynihan mentioned that five of BofA's six businesses were making money. The one black spot was its massive portfolio of problematic mortgages and the liabilities flowing from it. Moynihan also mentioned that BofA had just sold some "mortgage servicing rights" as part of its balance sheet strengthening efforts, but he didn't elaborate.

According to the WSJ, Fannie Mae spent $500 million to buy the servicing rights to a big chunk of the "seven million loans still causing the most problems." Although the $500 million is a paper loss to BofA, in that the rights were "originally worth more," it looks like BofA is still getting a good deal because the portfolio's "value is expected to deteriorate further."

In fact, the deal is worth much more than $500 million to BofA, because getting rid of those servicing rights lifts a huge cost burden off BofA's shoulders. And if securitized loans are involved, which they most likely are, the sale also limits the BofA's potential liability to investors for its current servicing violations. Finally, the $500 million is surely more than the servicing rights are worth in an arms-length transaction. How do we know? Beyond the comment that the loans are expected to "deteriorate further," the goal of the intervention can only be to fix Bank of America's capital structure, which is easier for the government to do if it overpays for the rights.

In short, purchasing these servicing rights was another Troubled Asset Relief Program.

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Reader Comments (11)

I figured BofA to be 2011's answer to Lehman Brothers and allowed to fail and be restructured (properly this time). Guess not. I just don't get it. At least LEH was one of the NY Fed's primary dealers. BAC comprises an assortment of Charlotte, NC rubes who couldn't find lower Manhattan without a limo driver.

And then we have this insofar as this announcement is concerned:

"And if securitized loans are involved, which they most likely are"

Since home equity loans aren't securitized, this sounds like we taxpayers are about to get an assload of worthless 2nd liens,

Unbelievable. I guess it all ends when we explode into the wall.
Aug 10, 2011 at 6:29 PM | Unregistered CommenterCheyenne

With all due respect, that Reich piece is a pile of misinformation:

"Without enough consumers, businesses won’t hire enough people and pay them enough to reverse the vicious cycle. So we’re dead in the water. Even the stock market has caught on to the truth.

 Which means government has to step in to boost the economy"

So let's get this straight. Wall Street has fleeced Main Street--with 100% government complicity--to the tune of say $14 trillion, or 1 year's worth of GDP. And Reich's response to this is for the corrupt government to spend more money--which will be harvested by Wall Street? Okay. Got it. All set.

Why doesn't Reich propose a real course of action such as following the law and putting Wall Street frauds in jail?

That the rule of law, which dates back to 1215 (unlike Reich's bromides, lodged, as they are, in 20th century egghead horseshit) doesn't occur to a smart guy like Reich, should be enough to dismiss the midget out of hand.

Until Wall Street is brought to heel for its crimes, we shan't move forward, growth is a chimera. It is time for people to cope with the question at bar: why the failure to prosecute criminals?
Aug 10, 2011 at 8:35 PM | Unregistered CommenterCheyenne
Pretty simple straight forward problem for an honest government to get over. Freemasonry + SCOTUS= recolonization of America by you-know-who. Hint: The queen of England is the Grand Patron of freemasonry. Freemasons tried this before in 1933 with others.
Aug 10, 2011 at 9:47 PM | Unregistered CommenterHoward T. Lewis III
Cheyenne...despite Sheila Bair's wishes, I don't see BAC being nationalized and restructured. They have too much political power behind them. This deal with Fannie is an outrage. Now taxpayers are on the hook for any and all lawsuits associated with the fraud. This was a transfer of liability more than anything else.
Aug 10, 2011 at 10:32 PM | Registered CommenterDailyBail
That Puts me right in the mix of it and lord only knows what's next with that said. But I do have to say.... the guy in the photo looks very happy.
Aug 11, 2011 at 1:50 AM | Unregistered CommenterDave

Good point. BAC has a history of transferring liability to the victims of its fraud. This is exactly what sent Judge Rakoff over the edge in the S.E.C. case re BAC's concealment of Merril Lynch bonuses from shareholders before the proxy vote.

What's your over/under on the restructuring or bk of any major bank between now and the next election? I can't believe there won't even be a token sacrifice. I didn't think it was possible to be dumber AND more captured than Bush.
Aug 11, 2011 at 2:11 AM | Unregistered CommenterCheyenne
Look - bonus season is just a few months away - and those poor barbers (hair cutters) struggling to snake oil investors at the BAC - need some x-mas shopping money and there ain't no way to get enough of that with their "magically jacked for no reason at all" card rates.

Pewee's Big Adventure offers the following
I say we kill `em
I say first we stab `em then we hang `em and then we kill `em
I say first let me have `em for a while

Jump mother f*ckers - jump! BoA is dead - 10 billion suit - stock is eating mud - but somehow they always seem to make it throuh?

I say "Not this time mutha f*ckas, you is food"
Aug 11, 2011 at 3:43 AM | Unregistered CommenterTHrob
This morning Donald Trump was touting his BAC stock (among other things) on CNBC
Aug 11, 2011 at 7:56 AM | Unregistered Commenterjohn
You all seem so surprised lol this has been going on for a while and BOA isn't the only one there is $6.3 trillion of that toxic crap obama kept off his budget yea those bankster's knew who to pay off and take a look at o's boy orzag and franklin raines .

Unlimited credit for GSEs seen as backdoor bailout


Is Fannie bailing out the banks?


Obama's Budget Has One Small, Missing Piece.... For $6.3 Trillion Dollars


“Peter Orszag was co-author of a study paid for by Fannie Mae back in 2000 or 2001,” Rosner said. “It argued that Fannie and Freddie are incredibly safe and sound, that the stress test that was going to be employed by the regulator insured their safety and soundness. And that there was something like a one in 500,000 chance that they would end up imperiled. And even if that happened, the cost to the taxpayers would be a few million dollars. That’s pretty much what the paper said.”

“Orszag ends up as the head of OMB. And when the government takes Fannie and Freddie into conservatorship, he says – there is about a five percent chance that the government could be on the hook for more than $100 billion. Wrong again. No one calls him out.”

“Orszag is now the vice chairman at Citibank


Franklin Raines’ Criminal Enterprise and Barack Obama, His Accomplice

Aug 11, 2011 at 9:39 AM | Unregistered CommenterLiberatedCitiZen
Pretty Bold....

I'm reading about 'Bank of America: CEO Defends Actions As Shares
Sink' on Fluent News. Here is the link: http://fluentnews.com/s/26953513
Aug 12, 2011 at 1:55 PM | Unregistered CommenterDave

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