Are Wall Street Banks Concealing Their True Exposure to Mortgage Securities Problems


Bank of America has agreed to pay $2.6 billion to settle charges that Countrywide (which BofA acquired) made material misrepresentations about home loans it sold to Fannie Mae and Freddie Mac, according to articles in the New York Times by Gretchen Morgenson (“$2.6 Billion to Cover Bad Loans: It’s a Start”) and by Steve Dickson (“BofA Resolves Fannie, Freddie Loan Putback Dispute”).

But the settlement amount and the reserves set aside by BofA and other banks are miniscule compared with potential liabilities associated with more than $5 trillion in mortgage securities issued from 2005 through 2007, according to Ms. Morgenson.

Eleven large public pension funds recently asked the audit committees of the boards of the four largest banks to conduct in-depth reviews of all internal controls related to the banks’ mortgage operations, using different accounting firms from the ones that audit the banks’ financial statements.

“There is a fundamental problem in the banks’ procedures that endangers not just homeowners, but shareholders, and local economies,” John C. Liu, New York City comptroller was quoted as saying, adding: “Given the risks involved, only a swift and unbiased audit can reassure shareholders that the pension funds of 700,000 working and retired New Yorkers are in safe hands.”

Mr. Liu and the New York City pension funds are trying to put the proposed independent review to shareholder votes at the banks’ next annual meetings. The banks have already asked the Securities and Exchange Commission for permission to keep such proposals off the ballot.

The SEC has warned banks about their obligation to disclose potential liabilities associated with their mortgage operations. It will be interesting to see how the SEC deals with the banks’ request to avoid a shareholder vote on the independent review proposals.

Page Perry is an Atlanta-based law firm with over 125 years collective experience representing institutional and individual investors in securities-related litigation and arbitration all over the country. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 40 occasions.