Published:
Monday, 8 Aug 2011 | 3:03 PM ET
Text Size 
By: Ash Bennington
NetNet Writer, Special to CNBC.com
NetNet Writer, Special to CNBC.com
 |
Photo: Oliver Quillia for CNBC.com
|
Major bank stocks are trading down far more sharply than the broader markets.
Bank of America [BAC
6.51
-1.66
(-20.32%)
] and Citi Group [C
27.95
-5.49
(-16.42%)
]
stock has suffered double digit losses on a percentage basis: As of the
time of this writing, BofA is down 16 percent and Citi is off 14
percent, while the DJIA is trading down only 4 percent.
-1.66
(-20.32%)
] and Citi Group [C
27.95
-5.49
(-16.42%)
]
stock has suffered double digit losses on a percentage basis: As of the
time of this writing, BofA is down 16 percent and Citi is off 14
percent, while the DJIA is trading down only 4 percent.
The
proximate cause of BofA's huge sell off would seem to be investor fear
of mortgage putback exposure. (Mortgage Putback exposure, which John Carney and I wrote about earlier this year
, is the risk that investors may sue banks for losses on mortgage
backed securities, on the grounds that the banks provided investors with
false or misleading information on the underlying value of the
mortgages those securities contained.)
Specifically,
the sell-off of today's biggest loser of the majors, Bank of America,
may be driven by news of AIG filing a $10 billion law suit against BofA.
According to the Wall Street Journal,
the AIG suit is alleging "massive fraud" by BofA in its creation and
sale of securities involving "hundreds of thousands of defective
mortgages."
(The suit also covers mortgage securities created by Countrywide Financial, which is now owned by BofA.) The New York Times is
reporting that Bank of America has responded via email: "A.I.G.
recklessly chased high yields and profits throughout the mortgage and
structured finance markets. A.I.G. is the very definition of an
informed, seasoned investor, with losses solely attributable to its own
excesses and errors. We reject A.I.G.'s assertions and allegations."
This
is more than a He Said / She Said story over which institution acted
more recklessly during the height of the bull market—the insurance giant
who recklessly chased another hit off the high yield crack pipe or the
bank pusher who cooked up the securitization rock in the first place.
The
story matters most for this reason: As the US economy approaches stall
speed—banks become progressively less willing to lend, because their
management's primary concern becomes protecting their own balance sheet,
not taking additional risk through putting new capital to work.
When
bank stocks sell off sharply, their Tier 1 Capital collapses, which
means their core financial strength takes a nosedive. And that's not a
position any bank CEO wants to be in—especially with the increasing
prospect of a nasty double dip ahead.
Worst
of all: When banks fear lending it can rapidly create a vicious
downward spiral for the broader economy: The cliché about banks being
the economic heart of the country is true—without capital being pumped
throughout the body politic, the economy becomes far more likely to
deteriorate further.
In short, the AIG lawsuit against Bank of America could not have come at a worse time.
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