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The nationalizations begin: BoA sued by Allstate

December 28, 2010

I had a post this morning about how the big banks are likely to be nationalized.

Well, now BoA is being sued by Allstate – for securities fraud.

The suit, which seeks unspecified damages, alleges fraud, negligent misrepresentation and violation of U.S. securities laws. In addition to Bank of America and Countrywide, Allstate names as defendants former Countrywide officials including former chairman and chief executive officer, Angelo Mozilo.

I’ve read the trust documents and prospectuses for some of the securities purchased by the Fed and Pimco.  I have it from a former Countrywide guy that they used boilerplate language for nearly all of their documents – and I believe it.  Countrywide was issuing lots and lots of securities over the few years before the bubble burst.  The only way they could keep up was to standardize the process.

If you have a Bloomberg, you can pull up these documents yourself and read them.  It is quite clear that these were supposed to be nearly risk free.  Risks like losing 50% of the principle in 18 months were not disclosed, because these were AAA securities.  Not only that, you can see the average credit score for the remaining mortgages in the pool.

Somehow, 30% of people with 715+ credit scores are not paying their mortgages.

What are the options here for BoA?

  • Settlement
  • Win the lawsuit
  • Lose the lawsuit

Two of these options force immediate bankruptcy and nationalization for BoA.

Settlement opens up every Countrywide deal from 2005 on to a settlement, and must open them to charges of SEC-investigation-worthy securities fraud.  Losing the lawsuit does the same thing but in a more expensive manner.

So fight they will.  But with the fight comes discovery.  These documents will be part of the public record.

As a result, the risk for BoA is not just that Countrywide misrepresented the securities, but also that the entire robo-signing scandal will be uncovered with this lawsuit. Allstate’s lawsuit will put the entire conveyance process into the public record, and it is likely to show that a material portion of the notes were not conveyed to the trust in a proper manner.

The problems with conveyance are different from the Allstate allegations, but they will be uncovered as part of the discovery process.

You can picture the process easily:

  1. Allstate says “They lied to us about what kind of securities are backing the trust and how much risk these securities have”
  2. BoA says, “No, we did not.”
  3. Allstate says “We lost 50% on AAA rated securities in a matter of months. You didn’t say we could lose that much so fast. We agree with the securitization process, but the only way to lose so much so fast is for there to be far worse loans inside the trust than you represented.  Our question: What is really in that trust for the securities? Prove what is in the trust now, and what was in the trust when you sold it to us.”
  4. Judge says “Allstate has a point. That’s a lot of money to lose on AAA rated securities. Show me what is in the trust.”
  5. BoA says “A dog got into our files cabinet, and peed everywhere.  We don’t have it all.  Can you accept these fakes we just printed up?”
  6. Allstate says “Those are fakes.”
  7. Judge says, “I agree.”
  8. BoA gets nationalized.

BoA gets nationalized unless the paper work is in order. Every indication we’ve seen has shown this paperwork is not in order.

When you have large, smart, well-funded people suing BoA for misrepresentation of the securities, how much longer can the facade be left in place?

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