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.

Soros buys more gold and predicts bubble

I'm not a big fan of George Soros when it comes to his Keynesian and interventionist points of view, but one can only admire him when you look at his investment track record.

A couple of friends sent me a link to this Bloomberg report. Although I'm really not sure it will go up in a straight line from here and still expect a correction, it's worth knowing what investment gurus think.

March 1 (Bloomberg) -- George Soros is helping drive up gold prices by doubling his bet in a market even he considers a “bubble” as Goldman Sachs Group Inc., Barclays Capital and HSBC Holdings Plc predict more gains before it bursts.

Soros Fund Management LLC, which manages about $25 billion, increased its investment in SPDR Gold Trust, the world’s largest exchange-traded fund for the metal, by 152 percent in the fourth quarter, a Feb. 16 Securities and Exchange Commission filing shows. [...]

“When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment,” Soros said at the World Economic Forum’s annual meeting in Davos, Switzerland, in January. “The ultimate asset bubble is gold,” he said.

In a Jan. 28 Bloomberg Television interview, the 79-year- old billionaire recalled that former Federal Reserve Chairman Alan Greenspan warned of “irrational exuberance” in financial markets three years before the technology bubble burst in 2000. The Standard & Poor’s 500 Index rose 89 percent in the period. Buying at the start of a bubble is “rational,” Soros said.
[...]
Tudor Investment Corp., based in Greenwich, Connecticut, increased its stake in Newmont Mining Corp., the largest U.S. gold producer, almost fourfold in the final quarter of 2009. Gold is “just an asset that, like everything else in life, has its time and place. And now is that time,” Paul Tudor Jones said in an October letter to clients.
[...]
Soros’ New York-based firm became the fourth-biggest investor in the SPDR Gold Trust by the end of 2009, 17 years after he made $1 billion breaking the Bank of England’s defense of the pound. The SPDR fund holds 1,107 tons, more than either Switzerland or China.

Paulson &Co. is the ETF’s biggest investor, with 31.5 million shares, regulatory filings show. With each representing almost a 10th of an ounce of gold, the hedge fund firm’s stake is the equivalent of about 96 tons, exceeding the holdings of Australia and Kuwait.

New York-based Paulson is also the biggest investor in Johannesburg-based AngloGold Ashanti Ltd., Africa’s top producer. The Market Vectors Gold Miners ETF is Einhorn’s seventh-largest holding, according to a Feb. 16 filing.

John Paulson to invest $250 million in his new gold fund

Well, nothing more to add to this Bloomberg report:

Nov. 18 (Bloomberg) -- Paulson & Co., the hedge-fund firm run by billionaire John Paulson, is starting a gold fund that will invest in mining companies and bullion-related derivatives, a person familiar with the plan said.

Paulson will invest as much as $250 million of his own money in the fund, scheduled to begin Jan. 1, according to the person, who declined to be identified because the information isn’t public. John Reade, the former metals strategist at UBS AG in London, will join Paulson & Co. in mid-January, the person said. He was originally going to join Credit Suisse, the bank said Oct. 29. A spokesman for Paulson declined to comment.

John Paulson massively increases his gold position

We already knew that John Paulson had a long gold position when he took an 11% stake in AngloGold Ashanti but according to MarketFolly who studied John Paulson & Cie SEC fillings, the hedge fund has about half of all their assets in gold and gold related stocks:

Some New Positions by the end of March 2009:

• SPDR Gold Trust (GLD)
• Gold Fields (GFI)
• Gold Miners ETF (GDX)
• Anglogold Ashanti (AU)

(by % of portfolio):

• SPDR Gold Trust (GLD): 30.37% of portfolio (position: 1)
• Gold Miners ETF (GDX): 6.81% of portfolio (position: 5)
• Kinross Gold (KGC): 5.87% of portfolio (position: 6)
• Gold Fields (GFI): 2.21% of portfolio (position: 11)

Here's MarketFolly's commentary:

The first major move that everyone will be talking about is Paulson's big entrance into gold. His position in the Gold Trust (GLD) is brand new and is brought up to a whopping 30% of his portfolio. Now, there are indeed a few caveats with this move: Paulson & Co have said themselves that they have done so as a hedge, as they now own well over 8% of this exchange traded fund (ETF). Their hedge funds have a share class that is denominated in gold (instead of in US dollars or Euros). Still though, that's quite a large hedge to have. Not to mention, Paulson also has a copious amount of gold miners now littered throughout his equity portfolio. Previously, we had posted up when he started his large stake in Anglogold Ashanti. Now though, he has boosted his stake in Kinross Gold (KGC) and he has also started new positions in Gold Fields (GFI) and the Gold Miner ETF (GDX). Gold is clearly the name of the game for Paulson at present. And, such a massive position in gold and gold miners has to be for more than merely a hedge.

Obviously, it's good news for all the gold holders to have someone with such a the track record as John Paulson on their side.

It's also very interesting to see that they now have a gold denominated share class!

Also as of interest: John Paulson Starting Real Estate Recovery Fund

Related post:

• 2009-03-24 John Paulson goes long gold
• 2009-03-09 David Einhorn is buying gold to bet against central banks
• 2009-03-05 Bill Fleckenstein: Defend yourself with Gold

John Paulson goes long gold

An interesting report I had missed on AlphaVille:

This statement was released by Anglo American on Tuesday afternoon:
Anglo American announces the sale of its remaining 11.3% shareholding (39,911,282 shares) in AngloGold Ashanti Limited to investment funds managed by Paulson & Co Inc for $32.00 per share in cash, generating proceeds of $1.28 billion.

Here’s AngloGold’s chief executive Mark Cutifani on Paulson’s investment:
"Following Anglo American’s final selldown I’d like to welcome Paulson & Co. as one of AngloGold Ashanti’s largest shareholders. As the world deals with the global economic crisis the value of gold, as the only true "hard currency", is coming to the fore as evidenced by the investment choices of some of the world’s most seasoned investors," AngloGold Ashanti Ltd. Chief Executive Officer Mark Cutifani said. "We’re extremely pleased that someone with John Paulson’s track record and reputation has chosen AngloGold Ashanti as one of his investments through which to increase his exposure to the gold market. The Anglo American share overhang, with its depressing effect on our share price, has now gone and I’m excited about the opportunities that lie ahead for us."