The market got a fresh jolt this afternoon, when it was reported that the NY Fed is one of the entities suing Bank of America over mortgage secutiries in an attempt to get BofA to buy back soured mortgages. The inclusion of the names seemed to really grab people’s attention; after all, the story had been reported this morning in the Journal, but sans names was buried in the public consciousness under China’s surprise rate hike and high-profile earnings.
So, why is the Fed forcing an issue like this? Whether BofA should be forced to absorb those loans isn’t the issue I’m getting at. This move runs counter to everything the Fed’s done to prop up the banks since the crisis started. It just seems, well, odd.
The consortium includes the NY Fed, BlackRock and Pimco, according to Bloomberg. Those are big, big names. Those are names that carry a lot of water in the markets. The NY Fed, a branch of the Federal Reserve, is ostensibly an independent entity, but obviously is rather closely aligned with the government. Pimco and BlackRock are obviously independent entities, but collect fees for advising the government in various capacities. I’m not suggesting this is some government-sponsored action. I’m not sure if there even is a point there. But it sure is interesting.But the Fed’s involvement seems very odd to me. We’re talking about the central bank here.
Why did the Fed spend the past two years trying to save the banks, if they were just going to turn around and go after BofA? What’s the point in doing something like this now? Just seems odd to me.
Sure, the NY Fed has a stake in some of these mortgages through its Maiden Lane vehicle, which it used to absorb bad loans from Bear Stearns and AIG. But this could be a precedent-setting move. You don’t know where something like this ends up. It could cost the banks billions, and given the fragile state of the mortgage and housing markets and (believe it or not, still) the banking sector, Lord only knows where it could lead. If private bondholders can force BofA to eat billion in bad loans, what other banks will be forced to do the same?
The lid on Pandora’s Box keeps opening wider.
Here’s our recap of today’s action on the News Hub: