The Future of Bank of America at stake with the mortgage mess

I'm curious to see what this securitized mortgage mess will end up. So far, it seems like the biggest loser is Bank of America, probably thanks to Countrywide Financial and Merrill Lynch, the acquisition that Ken Lewis made a couple of years ago already. Let's remember:

When asked why he didn't wait until Monday to get Merrill at a lower price, Bank of America CEO Ken Lewis stated "the strategic opportunity was so compelling it couldn't wait."

Now, fast forward to October the 20th, 2010:

Oct. 20 (Bloomberg) -- The Federal Reserve Bank of New York joined with the biggest bond investors in the U.S. in seeking to force Bank of America Corp. to buy back bad home loans packaged into securities, as the battle over who will bear mortgage losses intensifies.

The regulator joined a group including Pacific Investment Management Co. and BlackRock Inc. in a letter to the lender and to Bank of New York Mellon Corp., the trustee for $47 billion of mortgage-backed bonds sold by Bank of America’s Countrywide Financial Corp. unit, people familiar with the matter said. Countrywide failed to service loans properly, law firm Gibbs & Bruns LLP said in a statement that didn’t name the firms.

The action follows a foreclosure freeze that drove bank stocks lower this month as shareholders reconsidered the risks of home loans sold before the housing crash. The New York Fed acquired mortgage debt through its 2008 rescues of Bear Stearns Cos. and American International Group Inc., and the Fed’s participation may raise the odds of prevailing against Bank of America, said Scott Buchta of Braver Stern Securities LLC.

This shows also that the Fed might be the most corrupt institution in the US, but it still not willing to make losses on their "investments" and give away free money to BofA. This should also put hyperinflationists on the right track. There are very strong consequences to the current actions from the Fed.

“Individual investors have been trying for years to get these big banks to buy back loans at par, and haven’t had a lot of luck,” said Buchta, head of investment strategy for the New York-based securities firm. The New York Fed “in your corner, that adds weight and might give you a better chance for success.”
[...]
Charlotte, North Carolina-based Bank of America will “defend our shareholders” by disputing any unjustified demands it buy back defective mortgages, Chief Executive Officer Brian T. Moynihan said yesterday
[...]
The letter covered 115 separate mortgage securitizations, with $105 billion in original balances, from “eight investors purportedly owning interests in these transactions,” Noski said.

Banks’ costs from repurchasing mortgages in securities without government backing may total as much as $179.2 billion, Compass Point Research and Trading LLC analyst Chris Gamaitoni estimated in August, including expenses related to lawsuits against bond underwriters.

JPMorgan Chase analysts said in an Oct. 15 report the costs may reach $80 billion, reduced in part by the difficulty investors have getting trustees to act and a typical requirement that misstatements about loan quality must be “material.”

It seems clear that BofA's existence might be on the line. Or at least, the way we currently know it. Even for BofA, $80 billion is enough to sink the company.

The initiative covered by the letter sent to Bank of America and BNY Mellon yesterday is separate from the effort coordinated through Dallas lawyer Talcott Franklin, Patrick said. That firm is coordinating action for a larger group of mortgage-bond investors holding more than $500 billion of the debt.

Participants in that so-called RMBS Investor Clearing House include BlackRock, Pimco, Fortress Investment Group LLC, Fannie Mae and Federal Home Loan Banks, people familiar with the matter said last month. MetLife isn’t part of that group, Calagna said.

Membership in the clearing house has risen to 110 from 65, during the last two weeks, said Bill Frey, head of Greenwich, Connecticut-based securities firm Greenwich Financial Services LLC. Frey this month lost a lawsuit against BofA seeking to force the bank to purchase any modified loans out of bonds.

So far so good for BofA. But should they lose a single one of these lawsuits, many more might investors could join the party...

Let's remember that geniuses like John Paulson and David Tepper have allocated a major part of their hedge-fund's portfolio to Bank of America shares:

[On the 29th of September], Paulson did divulge some of his latest views at a lecture for New York's University Club. Simply put, he said to buy stocks and sell bonds. His favorite stocks are blue-chips with dividends such as: Johnson and Johnson (JNJ) and Coca Cola (KO). Playing on his 'recovery' theme, he also continues to like Bank of America (BAC).

On this infamous buy-stocks-they-can-only-go-up call, Tepper advocated shares of Bank of America (BAC) and thought they could see $27 in the next year.

So far, what's the outcome? The share price has collapsed by 15-20%, precisely a few days after they made their fabulous calls.