Bank Of America's $8.5 Billion Settlement Deal Falls Apart

While Morgan Stanley only recently became a second derivative for everything European-related (thank you financial short selling ban in Europe, and also thank you Mr. Gorman for updating investors on your firm's $39 billion gross derivative exposure to French banks [15](not France the country). What's that? You didn't provide one? Oh, our bad, just as it is "anonymous bloggers" bad that your CDS blew out this quarter and generated over $3 billion in "income" for your firm - you are truly welcome), Bank of America has, for quite a while, been a proxy for all that is wrong with America's mortgage industry, courtesy of that most value-destroying purchase of the insolvent criminal entity that was Countrywide Financials. For a while the market was content that the proxy would not be in need of a shallow grave, unlike the US housing market (go ahead, ask where PrimeX closed today), after the bank managed to bribe enough "plaintiffs" and proceed with a quick and painless $8.5 billion [16]settlement on all of its mortgage putback claims. A settlement that, however, had a very weak link: "Article 77", a critical provision enabling the deal in its current form. And as we first reported and explained [17]back on August 26, said weakest link was attacked by David Grais of Walnut Place, who "filed a request to transfer the lawsuit from State Court to Federal Court where everything basically begins a new." Well, today Grais won, and Bank of America lost after US District Judge William Pauley ruled that "Bank of America Corp.’s proposed $8.5 billion settlement with Countrywide Financial Corp. mortgage-bond investors must be considered in federal court instead of the New York state court where it was first filed." Not content with making a factual statement, the Judge proceeded to skewer the bank which, on top of evertyhing, recently decided to stuff its depositors with a bill as large as $53 trillion [18]should things turn sour, added "The settlement agreement at issue here implicates core federal interests in the integrity of nationally chartered banks and the vitality of the national securities markets."  Integrity? From a bank which secretly, though with the Fed's blessing [19], has tried to put its client interests over those of depositors of over $1 trillion, and over the objections of the FDIC? Don't make us laugh.

The good news is that yet another rating downgrade is imminent once the rating agencies realize that as a result of the Article 77 clause elimination, BofA is now on the hook for tens, if not hundreds of billions in putback liabilities and civil liability exposure, and potentially the forced bankruptcy of its Countrywide unit. In other words: the financial meltup over the past 2 weeks was fun while it lasted.

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