The closely watched lawsuit has been seen as a test of the ability of bond insurers to hold banks accountable for losses incurred insuring securities at the heart of the financial crisis…

U.S. District Judge Jed Rakoff in Manhattan ruled that Flagstar had materially breached contracts specifying the quality and characteristics of loans to be packaged into the securities.

NEW YORK, Feb 5 (Reuters) - Flagstar Bancorp Inc was ordered on Tuesday to pay $90.1 million to bond insurer Assured Guaranty Ltd in a contract dispute over loans underlying $900 million in mortgage-backed securities.

…The Flagstar case mirrors other lawsuits by insurers such as MBIA Inc and Ambac Financial Group Inc. Defendants have included JPMorgan Chase & Co, Credit Suisse Group AG and Bank of America Corp's Countrywide Financial unit…

Reuters informs us that manyReuters also reminds its readers of a closely-related story from yesterday, when the

Naked Capitalism Publisher Yves Smith weighed-in on this developing story over the past couple of hours…



If you are late to this brawl, putback cases are also called representation and warranty cases, or rep and warranty. They occur when investors and bond guarantors who relied on the promises made by the originators and sponsors about the quality of the loans argue that the sellers broke those promises (“representations and warranties”). Their remedy is typically that they put dodgy loans back to the sponsor, and they either replace with a loan that was up to snuff or cash… … … On an admittedly small case, in dollar amount, Rakoff awarded bond insurer Assured $90.1 million of the $116 million it sought in damages against Flagstar over two home equity line of credit securitizations. That’s nearly 78%. Trust me, no big bank is reserving anything within hailing distance of those sort of numbers for bond insurer putback cases... ...

Wow, one of my big assumptions about mortgage putback cases has been turned on its ear, much to the detriment of Bank of America and JP Morgan. If you thought there were pitched legal battles on this front, a key ruling by Judge Jed Rakoff means you ain’t seen nothing yet.

I think this will probably have implications for the litigation reserves that banks are holding on other bond insurer cases (especially BofA) and for the big BofA and Rescap rep and warranty proposed settlements. The banks have been fighting hard on the insurer cases and refusing to settle – I think that’s about to change. I wouldn’t want to be a holder of BofA stock right now. This is the first rep and warrant case to go to trial and it was a big, big win for the plaintiffs.

Rakoff allowed statistically sampling and believed that the insurer didn’t need to prove causation. He didn’t even believe the insurer needed to collect only on defaulted loans (he obligated Flagstar to also buy back loans which were breaches, but on which Assured hadn’t paid claims yet).

Facts tell us our government and the MSM are so far down the Wall Street rabbit hole and in the pocket of the 1%, the public, more than four years after Wall Street crashed, may just be beginning to get a clue as to the real extent of the too-big-to-fail banks' losses.

Here’s a big dose of reality…

Five years since the start of the Great Recession, and well over $1 trillion in taxpayer subsidies (and that’s a very conservative number, I might add) to Wall Street later, Pulitzer Prize-winner Jessica Silver-Greenberg, via Monday’s New York Times’ front page (see: “Mortgage Crisis Presents a New Reckoning to Banks”), pointed out the excruciatingly inconvenient fact that as much as $300 billion in outstanding mortgage securities investor claims are, just now, heating up in federal and state civil courts. (And, those are just the new/most recent claims.)

Silver-Greenberg informs us that the litigation--and the ongoing obfuscation and industry denial of pertinent facts relating to basic solvency issues within our nation’s largest mortgage originators--will continue for quite awhile, and the worst may be yet to come.

Bank of America -- which, due to absurdly twisted Financial Accounting Standards Board [FASB] regulations that were modified in 2008 and 2009 under the auspices of our captured government, which were purposefully designed to obfuscate greater Wall Street insolvency realities than most Americans will ever even know about, let alone understand -- still, at end of 2012, owns “more than $1 trillion in troubled mortgages.” Per Silver-Greenberg, these so-called “assets,” include “more than $417 billion from Countrywide [Diarist’s Note: BofA acquired Countrywide in 2008] alone, according to an analysis of lawsuits and company filings. The bank does not disclose the volume of its mortgage litigation reserves.”

More from Silver-Greenberg…



Regulators, prosecutors, investors and insurers have filed dozens of new claims against Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and others, related to more than $1 trillion worth of securities backed by residential mortgages. Estimates of potential costs from these cases vary widely, but some in the banking industry fear they could reach $300 billion if the institutions lose all of the litigation. Depending on the final price tag, the costs could lower profits and slow the economic recovery by weakening the banks’ ability to lend just as the housing market is showing signs of life.

Frankly, while Silver-Greenberg provides details of hundreds of billions of dollars' worth of investor litigation aimed at other Wall Street too-big-to-fail firms, even the Times’ story paints a far rosier picture than the realities it belies.

“Slow the economic recovery?” If our recovery was any slower it would be in another “official” Recession. Don’t take my word for this. Here’s Paul Krugman’s latest on the subject. And, then there’s Joseph Stiglitz, from this past Thursday, on the tragedy of ever-increasing economic inequality.

How removed from Wall Street's financial reality have the 99% been these past few years? Consider THIS comment I made in THIS post by Laura Clawson, eight days ago:



The story BEHIND this story... Ten S&P 500 companies account for 88% of ALL earnings growth in 2012. With six of those companies being in the financial services sector; a seventh, GE, also being a too-big-to-fail financial services firm as much as it's a manufacturer (the remaining three are tech firms: Apple, IBM and Western Digital), and all seven being beneficiaries of the status quo's largesse with taxpayer money, the truth is that the majority of these "profits" wouldn't exist if it wasn't for the one percent's transgressions in Washington, DC over the past five years. Furthermore, with AIG, Bank of America and Citibank being on this list of ten, if it wasn't for FASB (Financial Accounting Standards Board) hocus pocus and a government backstopping them at the expense of the 99% meandering through a "recovery" that won't be significantly realized anytime (and a financial services sector that will take many more years to offload shitty mortgage assets) soon, the reality is that even the so-called "corporate profits" are almost as much of a con job as the recovery, itself! Make-believe profits; make-believe "recovery;" welcome to the new normal!!!

That’s four of the ten companies on the top-ten list for so-called “earnings growth” in 2012.

Now it’s easy to dismiss the severity of this situation by saying that banks will settle for pennies on the dollar. (And, Silver-Greenberg notes that, “…the five major sellers of mortgage-backed securities set aside $22.5 billion as of June 30 just to cushion themselves against demands that they repurchase soured loans from trusts, according to an analysis by Natoma Partners…”) But, if you read further, that is less likely to happen this time around.



“All of Wall Street has essentially refused to deal with the real costs of the litigation that they are up against,” said Christopher Whalen, a senior managing director at Tangent Capital Partners. “The real price tag is terrifying…”

… …But in the most extreme situation, the litigation could empty even more well-stocked reserves and weigh down profits as the banks are forced to pay penance for the subprime housing crisis, according to several senior officials in the industry. There is no industrywide tally of how much banks have paid since the financial crisis to put the mortgage litigation behind them, but analysts say that future settlements will dwarf the payouts so far. That is because banks, for the most part, have settled only a small fraction of the lawsuits against them.

The banks are battling on three fronts: with prosecutors who accuse them of fraud, with regulators who claim that they duped investors into buying bad mortgage securities, and with investors seeking to force them to buy back the soured loans.

When it comes to fraudulent mortgage originations, restitution may take the form of what is known as “putbacks,” wherein the originators (i.e.: the too-big-to-fail banks) are required to buy loans back from the entities that purchased them.

I’ve discussed the putback-severity issue in many posts over the past few years. (See: here, here, here, here, here, here, and here, for instance.) It has been, and still is, the 800 lb. gorilla in the room, despite folks accusing me of saying “the sky is falling.”

Let’s see. That’s $300 billion in new/recent mortgage putback claims, and then, as Monday’s NYT reminds us, there’s “…the $200 billion case that the Federal Housing Finance Agency, which oversees the housing twins Fannie Mae and Freddie Mac, filed against 17 banks last year, claiming that they duped the mortgage finance giants into buying shaky securities.”

The Times’ article reminds us that this case is currently being heard at the federal appeals court in Manhattan. “A favorable ruling could overturn a decision by Judge Denise L. Cote, who is presiding over the litigation and has so far rejected virtually every defense raised by the banks, and would be cheered in bank boardrooms. It could also allow the banks to avoid federal housing regulators’ claims.”

And, about that “recovery.” You might want to checkout these stories first:“NY Fed Mortgage Debt Data Says No US Recovery,” and “Shadow & Ghost Inventory Quantified.” And, then there’s this from Barry Ritholtz’s Big Picture blog, just 18 hours ago: Falling Incomes, High Unemployment, Rising Taxes and Tight Credit = Housing Recovery? Last but not least, there's THIS truly outstanding post by fellow Kossack gjohnsit, just posted this morning.

Yes, maybe this time IS different. Maybe bigtime investors will do unto the too-big-to-fail firms what they have been doing to the 99% for so long. Then again, it's the new normal; and, these days in U.S. society "the golden rule" means that those with the gold rule.