$30 Billion – that's bound to get their attention!
According to the WSJ, the Federal Housing Finance Agency is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble. The suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the matter.
The suits stem from subpoenas the finance agency issued to banks a year ago. If the case is not filed Friday, they said, it will come Tuesday, shortly before a deadline expires for the housing agency to file claims arguing the banks, which assembled the mortgages and marketed them as securities to investors, failed to perform the due diligence required under securities law and missed evidence that borrowers’ incomes were inflated or falsified. When many borrowers were unable to pay their mortgages, the securities backed by the mortgages quickly lost value.
Fannie and Freddie lost more than $30 billion, in part as a result of the deals, losses that were borne mostly by taxpayers. In July, the agency filed suit against UBS, another major mortgage securitizer, seeking to recover at least $900 million, and the individuals with knowledge of the case said the new litigation would be similar in scope.
Tim Rood, who worked at Fannie Mae until 2006 and is now a partner at the Collingwood Group, which advises banks and servicers on housing-related issues, agrees with what I told Members in last night's chat:
"While I believe that F.H.F.A. is acting responsibly in its role as conservator, I am afraid that we risk pushing these guys off of a cliff and we’re going to have to bail out the banks again.”
In other words – MADNESS! What was the point of spending Trillions of Dollars bailing out the Banks if you are going to turn around and sue them for $30Bn and drop their stock price another Trillion, causing them to need another bailout?
Perhaps this is the denouement of a week of scary market rumors that seem to have been designed to stop the markets from breaking too high. We were speculating on this last night in Member Chat before this latest bit of news even happened. Clearly this is not really "NEWS" as the UBS suit was filed a month ago (July 27th), sending that bank's stock from $17.50 to $13.50 on Aug 8th (down 23%) along with the rest of the Financials as XLF fell from $15 to $12 (20%) and BAC, whose Countrywide unit is the poster child for fraudulent behavior, fell from $10 to $6.50.
Since then, UBS came back to $14.50 (up 7.5%), XLF made it to $13.50 (up 12.5%) and BAC hit $8.50 (up 30%) aided by a loan from Warren Buffett. Unless we assume Buffett and the rest of the investing community were unable to put 2 and 2 together from the UBS suit – I would say that this is very much old news and this dip that incites retail panic will be a good opportunity to buy like Buffett and pick up some of these stocks on the way down.
8:30 Update: No jobs were added in the US in August. Not the figurative "no" but ZERO, the Non-Farm Payroll number was exactly zero. That has sent our futures off a cliff and we are down 1.5% now, still trailing Europe, who are down over 3% at 8:35. This will send Treasuries flying and we will short TLT up around $111, hopefully selling the Sept $112 calls for $1.60 and buying the $114/111 bear call spread for $2 for net .40 on the $3 spread. That's a fun way to sell into the initial excitement on that trade.
Keep in mind that 45,000 jobs were subtracted due to the Verizon Strike. Those jobs will be added back next month. The only other sectors that had significant lay-offs were Government, with 17,000 (the brilliance of austerity!) and Retail, which shed 7,800 jobs. 35,500 Health Care Jobs were added along with 34,000 Temporary Workers and 28,000 Professionals Workers gained jobs – this is exactly the kind of overreaction to a headline number that we like to go long into!
We'll see what else looks oversold at the open so expect some trade ideas in the Morning Alert to Members (we already hedged for this drop earlier in the week). Yesterday's alert had the SDS weekly $22 calls at .70 and they finished the day at $1.06 (up 51%) after a wild ride at the 10 am ISM report. Unfortunately, our other trade idea of the morning was GLD Oct $160 puts at $1.50 and those finished the day at $1.33 (down 11%) but our plan was to roll those to a higher strike and DD if gold took off towards $2,000 (we already had a long spread from last week for that) and this morning gold is up another $50 at $1,877 as EVERYONE is panicking into gold.
We're not going to catch any falling knives into the weekend but we do look forward to being able to fill out some of the September's Dozen picks that got away from us. Obviously, with the economy stalling and jobs at ZERO, this should push our expectations of QE3 from "probably" to "how much." Unless the Fed is going to blow off their mandate, we are in danger of both deflation and 10% unemployment (U-6 Unemployment is already 16.1%) if they fail to act quickly and decisively.
All in all, it's going to be a good morning for some bottom fishing – they certainly look like they'll be biting!
Have a great weekend,
– Phil
