Courtesy of John Nyaradi
The big shocker on Friday was the $196 Billion lawsuit by the Federal Housing Agency against 17 banks for allegedly misleading Fannie Mae and Freddie Mac regarding mortgage backed securities bought by Fannie and Freddie.
The list is a stunning marquee of the biggest names in banking including Bank of America, JP Morgan, Barclays, Citigroup, Countrywide Financial, Deutsche Bank, Goldman Sachs, Merrill Lynch and Morgan Stanley.
Of course, many of these illustrious names were deemed “too big to fail” at the outset of the financial crisis and so were bailed out by the American taxpayer, including Fannie and Freddie who got $140 Billion to keep them from imploding.
So now the question must be, after rescuing the “too big to fails” will the government now be the cause of one or more of these mega banks to fail as a result of this recent action?
The numbers are staggering, especially for Bank of America, America’s largest bank:
1. Bank of America: $6 Billion
2. Countrywide Financial: $25 billion
3. Merrill Lynch: $25 Billion
Add these up and the total approximate liability for Bank of America and its subsidiaries is north of $50 Billion, substantially dwarfing Warren Buffett’s recent $5 Billion investment in the banking giant.
In total, the losses involved in the suit exceed $200 Billion and could certainly add significant problems to the already weakened industry. Not surprisingly, the “blame game” is already underway as the banks say Fannie and Freddie are trying to dodge responsibility for the sub-prime fiasco and no matter what happens, this will likely further tarnish the reputation of big banks and weaken confidence in “Wall Street.”
Of course, a raft of other lawsuits over the subprime and “foreclosure gate” issues now added to this latest claim could further reduce banking earnings, hurt capital levels and raise the risk of a big bank failure, “contagion” or even systemic failure.
Maybe the biggest problem of all is that no one quite knows for sure how much Bank of America’s or any other institutions total liabilities might be when it’s all said and done. But the market isn’t taking any chances with Bank of America dropping 8.3%, JP Morgan Chase dropping 4.6% and Citigroup shedding 5.3% on Friday.
Overall, isn’t the irony almost palpable as the Federal government bailed out the “too big to fail” group and now is putting them closer to the edge of failure yet again?
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