Tatiana Kashyrskaia
Not so long ago the investors of the USA’s biggest financial institution called Bank of America (BofA) finally managed to force it compensate for the losses they suffered after the bank purchased unreliable assets (mortgage bonds).
The event is fairly significant because:
1. The compensation is the biggest one in the history of the U.S. banking sector - $8.5B.
2. American banks - the starters of the recent global financial crisis - keep paying for their mistakes
3. The claims were satisfied in pais.
4. Finally investors managed to develop an efficient procedure allowing them to prove the very fact of underhand dealing with mortgage bonds and get compensation.
BofA: general info
· It is the USA’s biggest bank. In late 2010 the bank’s assets were estimated at $2.26 trillion, deposits - $ 930B (over 10% of all the bank deposits in the country). The bank counts about 57M clients from more than 40 countries around the world.
· In terms of market capitalization BofA is the country’s second biggest bank.
· The bank’s scope of activity is fairly wide. Banking and investments, stocks, commodities and currency trading, investment consulting etc.
Bank of America’s “fatal” error
According to the US-Canadian Association of Traders and Investors under , before the crisis (in 2008) the bank’s management purchased the USA’s biggest mortgage company Countrywide Financial, spending $2.5B on it:
1. The scale of activity. According to Inside MBS & ABS , during the period of 2005-2007 Countrywide Financial managed to place its mortgage bonds to the amount of $405B.
2. Dirty tricks. The thing is that numerous loans were lent to suspicious borrowers (no confirmation of their income was provided). The interest rates were pegged to some specific indicators.
3. Global consequences. In 2006 the indicators started growing. The mortgage bonds began collapsing, thus provoking the mortgage crisis of 2007, which eventually led to the recent global economic crisis of 2008-2009.
4. Deception of investors. The bank’s investors blame Countrywide Financial for selling substandard mortgage bonds and for poorly servicing them and the debts connected with them. As a result, when the mortgage crisis broke out the bonds placed by Countrywide Financial were losing value faster than other mortgage bonds.
5. All the blame was put on Bank of America as it was the owner of Countrywide Financial.
How did investors manage to get their claims satisfied?
· After the crisis in 2010 some banks started compensating for their investors’ losses. For example, Goldman Sachs paid $500M, JPMorgan Chase - $153.6M. Bank of America paid $3B to Freddie Mac and Fannie Mae in early 2011 then Assured Guaranty got $1,6B in April.
· Legal actions were started against numerous American banks.
· BofA’s 22 major investors from around the world (including Freddie Mac, BlackRock, Goldman Sachs Asset Management, Pacific Investment Management Company (PIMC), Federal Home Loan Mortgage etc.) stared exerting pressure on the bank. All of them managed to prove that BofA hadn’t informed them about the actual risks when buying the mortgage bonds issued by Countrywide Financial.
· Taking into account all the current and future payments, Bank of America is expected to lose about $22B. The compensation will probably exceed the bank’s net income over the entire crisis and post-crisis periods (i.e. 2007-2011).
· Why did the bank decide to come to terms with its investors? At the beginning of 2011 the bank’s stock started depreciating and finally lost 19% of its value as traders were greatly concerned about possible compensation. Probably that is why the bank’s management decided to agree to compensate all the losses in order to clarify the situation and save the day. Shortly after the decision BofA’s stock gained 3%.
As for the current situation around BofA’s shares, the experts of the Department of Masterforex-V TS explain that by now the downward wave 14,95-10.40 is over. The price is currently rallying. It may encounter resistance around the MF pivot (11,90) and 50% Fibo level (12,65), as shown below. If the local low is overcome, it will indicate the formation of another bearish wave - 5/A of Daily.
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What helped investors to make Bank of America compensate for their losses?
· Their own authority and influence
· The U.S. judicial system
· Your own variant
Tatiana Kashyrskaia
