Via Manal Mehta:

Bank of America is trying to settle $108 billion of losses with a $8.5bn settlement. This “settlement” forms the basis for BAC’s private label putback reserves. If deal doesn’t go through, there’s a HUGE problem for BAC as it would be severely under-reserved.

From the transcript:

MR. ROLIN: I’m handling motion sequence number 30, which is the RRMS Advisors…That expert’s name was Brian Lin, L-I-N, and the firm that he worked for is RRMS Advisers.

…the trustee, in reviewing the Lin reports, turned a blind eye to fundamentally flawed expert analyses. And if the trustee didn’t scrutinize Mr. Lin’s people, somebody has to. We believe we have to…

But for Mr. Lin, who’s got over a million dollars’ worth of billing records, for Mr. Lin, none of those have been turned over.

Your honor, the trustee delegated to RRMS the function of determining these two critical issues, the reasonable settlement amount and the servicing agreement. And the trustee did not evaluate it itself.

There is a small bit of testimony. Mr. Reilly asks Ms. Lundberg “Do you know what, if anything, was done by the trustee to evaluate losses to the certificate holders arising out of Countrywide’s violation of reps and warranties?”

She says “Outside of consulting with RRMS, I’m not aware of anything else.”

There’s other testimony that confirms this.

The trustee delegated lock, stock and barrel the entire process in evaluating the settlement amount…to a third party. That’s the trustee’s evaluation. And there’s no question that the trustees evaluation is at issue in this case and is relevant to the Court’s final determination of good faith and the other issues identified in the proposed final order and judgment.

You can’t del[egate]—you can’t take a trustee task, delegate it to a third party, say only what the trustees did is relevant but whatever this third party did you can’t have all of that information. That is the trustee’s investigation. It simply delegated to somebody else.

The RRMS methodology for coming up with the damages amount is about this funnel. They take the original balance of the loans, put all of the loans and all of the covered trusts and they run it through this funnel and have a series of haircuts along the way, and what it spits out is what they call the reasonable settlement amount.

The first thing two things they do, they first try to figure out how many loans have gone into default or how many loans are likely to go into default. Then they try to figure out severity, how much money is ultimately going to be lost by the trust and it comes up with the losses.

And you can see Mr. Lin’s numbers are on the right. The numbers on the left are the numbers that were provided by the institutional investors. The institutional investors, based on publicly available information, not disputed by Mr. Lin, come up with losses of about $108 billion in the trust. Mr. Lin’s losses, he starts out with $76.8 billion. And it’s very important because losses are the jumping off point for the rest of the analysis. There’s a $31 billion swing in there. And that swing is a consequence of some decisions that Mr. Lin made, in calculations that he made, some industry expertise that he says that he relies on. But they’re nowhere to be found in the information provided to us and he was unable to testify about them at his deposition. Those are big numbers, those are very important decisions that were not provided to us.

The information provided by the institutional investors, based on re-underwriting of similar loans, come up at $32.3 billion. In Mr. Lin’s analysis, in which he relies on Bank of America data, he relies on breach and success rates that come from the opponents, that have the opponents’ legal theories embedded in them, resulting in a much lower number. This is information that’s apparent to the trustee on the face of the report.

…it is clear from the face of the report that the trustee knew or certainly should have known that Mr. Lin’s analysis was deeply flawed. And we have to and the Court ought to want to look into and find all the calculations that he made so we can make a reasonable presentation about whether they’re reasonable or not…

MR. CARROLL: I’m here for both AG’s…

It’s indisputable that the settlement was negotiated by a subset of the investors and it will bind all the investors and will extinguish all the rights. The sensible approach, consistent with the law, is to consider all the information that bears on this.

The settlement number is the heart of the settlement. RRMS was instructed by the trustee, was directed by the trustee. It opined on the settlement number. The Court should have all of that information. The relevance rule says so.

MR. ROLLIN: It goes to the larger point. If it’s information that Mr. Lin relied on, they’ve got it, there’s no reason to not give it to us. Again, notes and calculations, the industry reports, bills an records, some other—

THE COURT: Well, I mean, you’re asking me at the end of the day, at the end of the hearing in May and through June to make a lot of findings. And they’re going to say, well, how would I know that it was reasonable for the trustee to rely on RRMS if we don’t know what RRMS relied on to come up with their figures.

Mr. Rollin showed his little funnel there and explained that there were – that different people arrived at different numbers. I mean, institutional investors came up with one thing and the Bank of America came up with something else and RRMS came up with something else and, eventually, you got to the $8.5

That’s a pretty big number. It’s a pretty big settlement. It’s—you’re asking me to decide the reasonableness of it. So I—it’s really hard to draw a line.

I mean, if this is your expert, wouldn’t it be helpful to see the things he relied on to reach that settlement amount? Which is – I mean, the settlement amount, that’s what this is all about. I mean, this was the 8.5. I mean, was that number reasonable – was that reasonable? And that sounds like a very simple question, but it’s taken two years of lots of things going on for you to be in a position to be able—I mean, you would have liked to present it to me right at the beginning, I understand. But you’re asking me to make this determination at the end of the line. There’s an awful lot that’s gone on here.

And it would seem to me that—why not show them, if you’ve got documents of things that Mr. Lin relied on? I understand he may not have put everything into his report, but wouldn’t that be helpful to me, rather than waiting until the hearing when they say, “You know, Judge, I think this should have happened” and I say “You know what? I agree with you.” Then you’re going to want to spend two more months getting me documents nad having a continued hearing.

So it seems to be that, when you come in May, you want to have dealt with all the problems we could have dealt with and I either say it’s reasonable or they can convince me that it wasn’t. Wouldn’t that like sort of jump ahead and help me at the end of the day?

MR. LOESER: Your Honor, I represent the Federal Home Loan Banks of Boston, Chicago and Indianapolis.

Just by way of example, your Honor, Jason Kravitt, who is Bank of New York’s counsel, was not allowed to answer questions on following important topics:

Whether the trustee and institutional investors actually contemplated litigating put-back claims against Bank of America—because we can’t forget we’re here because of Bank of America. This is a Bank of America liability and it’s a tremendous liability and it’s a put-back liability. So Mr. Kravitt was not allowed to answer questions about whether there was actually contemplated put-back litigation a foundation for this settlement.

Mr. Kravitt was not allowed to answer whether an event of default actually occurred. And we know, your Honor, we’ve had a lot of conversation in this courtroom about the importance of event of default. It’s a hugely important event in terms of the trustee’s duties and in terms of certificate holders rights. And it’s important that we understand the trustee’s position on that. That is a huge hold in the information we have…

Mr. Kravitt was not allowed to answer the question of whether it was necessary to undertake loan file sampling in order to assess Bank of America’s legal liability. Again, that is a huge issue. The way these cases get litigated, when they do get litigated, is based on a sample of loan files.

Read full attachment entitled “MUST READ transcript – BAC 8.5 billion settlement.pdf” – BAC’s $8.5bn BoNY settlement is an exercise in obfuscation and tortured logic. No way courts will rubber stamp it…Brief summary of notable quotables from the transcript are above.

BAC’S PUTBACK RESERVES ARE A HOUSE OF CARDS – ALL RELY ON FINAL ADJUDICATION OF THE $8.5BN PRIVATE LABEL SETTLEMENT – IF THAT SETTLEMENT IS NOT APPROVED BY THE COURTS, THEN PRIVATE LABEL RESERVES WILL NEED TO INCREASE.

From: financearticles@googlegroups.com[mailto:financearticles@googlegroups.com] On Behalf Of Manal Mehta
Sent: Thursday, August 4, 2011 5:29 PM
To: financearticles@googlegroups.com
Subject: [Interesting Finance Articles] BofA’s Flawed Assumptions, re: “Repurchase Rat…

From BAC’s just released Q2 2011 10-Q (Read this first AND then read the Objection below to the proposed $8.5bn settlement): REPURCHASE RATE ASSUMPTION

At June 30, 2011 and December 31, 2010, the liability was $17.8 billion and $5.4 billion. For the three and six months ended June 30, 2011, the provision for representations and warranties and corporate guarantees was $14.0 billion and $15.1 billion compared to $1.2 billion and $1.8 billion for the same periods in 2010. Of the $14.0 billion provision recorded in the three months ended June 30, 2011, $8.6 billion was attributable to the BNY Mellon Settlement and $5.4 billion was attributable to other non-GSE exposures, and to a lesser extent, GSE exposures. The BNY Mellon Settlement led to the determination that we now have sufficient experience to record a liability related to our exposure on certain other private-label securitizations. This determination, combined with changes in our experience with the behavior of certain counterparties, including the GSEs, in the first six months of 2011, was the driver of this additional provision. A significant factor in the estimate of the liability for losses is the repurchase rate, which increased in both the three and six months ended June 30, 2011.

From David Grais Objection to BoNY settlement:
As an example, even if just the last assumption were changed from Countrywide and Bank of America having to repurchase all, rather than just 40%, of loans that were both in default and breached Countrywide’s representations and warranties, then Mr. Lin’s estimate of a reasonable settlement would rise from a range of $8.8 to $11 billion to a range of $22 to $27.5 billion. Modifying any of his other three assumptions would cause that range to rise much more.”

From: financearticles@googlegroups.com[mailto:financearticles@googlegroups.com] On Behalf Of Manal Mehta
Sent: Thursday, July 21, 2011 8:19 AM
To: financearticles@googlegroups.com
Subject: [Interesting Finance Articles] BofA’s Flawed Assumptions Re: Proposed Settlem…

“Each of these assumptions has a great effect on Mr. Lin’s estimate of the amount of a reasonable settlement. As an example, even if just the last assumption were changed from Countrywide and Bank of America having to repurchase all, rather than just 40%, of loans that were both in default and breached Countrywide’s representations and warranties, then Mr. Lin’s estimate of a reasonable settlement would rise from a range of $8.8 to $11 billion to a range of $22 to $27.5 billion. Modifying any of his other three assumptions would cause that range to rise much more.”

“To get from $61.3 billion to a “reasonable” settlement range of $8.8 to $11 billion, Mr. Lin made two more assumptions. He assumed that only 36% of loans that go into default will have breached Countrywide’s representations and warranties about the quality of its underwriting. That assumption is difficult to understand. Mr. Lin did not do any independent analysis of this assumption. Instead, he simply adopted Bank of America’s estimates of this percentage, which in turn appear to have been based on a completely different portfolio of loans that were subject to the underwriting standards imposed by Fannie Mae and Freddie Mac. Moreover, Mr. Lin’s assumption is inconsistent with widely publicized reports by professional loan auditors that even Countrywide loans that are merely delinquent (that is, behind on payments but not yet in default) have a “breach rate” of well over 60% and often as high as 90%. Finally, Mr. Lin assumed that only 40% of loans that both go into default and have breached Countrywide’s representations and warranties could be successfully put back to Countrywide and Bank of America. This assumption similarly demands investigation. It is hard to imagine why a court would not require Countrywide and Bank of America to repurchase all loans, not just 40% of loans, that are both in default and have breached a representation or warranty.”

Third, BNYM notes that it has now released on a website “all of the expert reports submitted to the Trustee in connection with the Settlement” and implies that those reports may provide all the additional information that the FHLBs need to decide whether to object to the proposed settlement. Unfortunately, however, the expert reports raise more questions than they answer. By way of example, BNYM published a report from Mr. Brian Lin of RRMS Advisors about the reasonableness of the $8.5 billion that BNYM agreed to accept as part of the proposed settlement. Mr. Lin concluded that “a settlement figure somewhere between $8.8 and $11 billion is reasonable.” But to reach that conclusion, Mr. Lin made certain assumptions, the bases for which are not fully disclosed in his report.
Mr. Lin started with the full remaining principal balance of the loans in the 530 trusts that would be covered by the proposed settlement, plus the amount that the trusts have lost on loans that have already been liquidated. Together, Mr. Lin calculates that to be $208.9 billion. Mr. Lin then assumed that (1) only a certain percentage of those loans would go into default and (2) even for those loans that went into default, the trusts would recover between 45% and 60% of the principal balance through foreclosure. Both of these assumptions are quite controversial, and the FHLBs need to understand Mr. Lin’s basis for them. Using those assumptions, Mr. Lin concludes that the potential shortfall to the trusts, and therefore the amount that the trusts could potentially recover from Countrywide and Bank of America, is reduced from $208.9 billion to $61.3 billion.
To get from $61.3 billion to a “reasonable” settlement range of $8.8 to $11 billion, Mr. Lin made two more assumptions. He assumed that only 36% of loans that go into default will have breached Countrywide’s representations and warranties about the quality of its underwriting. That assumption is difficult to understand. Mr. Lin did not do any independent analysis of this assumption. Instead, he simply adopted Bank of America’s estimates of this percentage, which in turn appear to have been based on a completely different portfolio of loans that were subject to the underwriting standards imposed by Fannie Mae and Freddie Mac. Moreover, Mr. Lin’s assumption is inconsistent with widely publicized reports by professional loan auditors that even Countrywide loans that are merely delinquent (that is, behind on payments but not yet in default) have a “breach rate” of well over 60% and often as high as 90%. Finally, Mr. Lin assumed that only 40% of loans that both go into default and have breached Countrywide’s representations and warranties could be successfully put back to Countrywide and Bank of America. This assumption similarly demands investigation. It is hard to imagine why a court would not require Countrywide and Bank of America to repurchase all loans, not just 40% of loans, that are both in default and have breached a representation or warranty.
Each of these assumptions has a great effect on Mr. Lin’s estimate of the amount of a reasonable settlement. As an example, even if just the last assumption were changed from Countrywide and Bank of America having to repurchase all, rather than just 40%, of loans that were both in default and breached Countrywide’s representations and warranties, then Mr. Lin’s estimate of a reasonable settlement would rise from a range of $8.8 to $11 billion to a range of $22 to $27.5 billion. Modifying any of his other three assumptions would cause that range to rise much more.
Similarly, BNYM also published a report by Prof. Robert Daines about Bank of America’s liability as a successor to Countrywide. But Prof. Daines’s report leaves unanswered several critical legal and factual questions. Indeed, Prof. Daines admits that his opinion is “limited by the available factual record and certain assumptions that I make,” and he concedes in several parts of his report that he relied on unverified information provided by Bank of America.
In short, although the expert reports that BNYM has now published do provide some additional information about the proposed settlement, they raise many new questions and certainly do not enable any of the FHLBs to decide whether or not to oppose the settlement.

[cid:image001.png@01CC477E.022A26B0]FILED: NEW YORK COUNTY CLERK 07/21/2011 INDEX NO. 651786/2011
NYSCEF DOC. NO. 76 RECEIVED NYSCEF: 07/21/2011

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK

In the matter of the application of

THE BANK OF NEW YORK MELLON (as Trustee under various Pooling and Servicing Agreements and Indenture Trustee under various Indentures), BlackRock Financial Management Inc. (intervenor), Kore Advisors, L.P. (intervenor), Maiden Lane, LLC (intervenor), Maiden Lane II, LLC (intervenor), Maiden Lane III, LLC (intervenor), Metropolitan Life Insurance Company (intervenor), Trust Company of the West and affiliated companies controlled by The TCW Group, Inc. (intervenor), Neuberger Berman Europe Limited (intervenor), Pacific Investment Management Company LLC (intervenor), Goldman Sachs Asset Management, L.P. (intervenor), Teachers Insurance and Annuity Association of America (intervenor), Invesco Advisers, Inc. (intervenor), Thrivent Financial for Lutherans (intervenor), Landesbank BadenWuerttemberg (intervenor), LBBW Asset Management (Ireland) plc, Dublin (intervenor), ING Bank fsb (intervenor), ING Capital LLC (intervenor), ING Investment Management LLC (intervenor), New York Life Investment Management LLC (intervenor), Nationwide Mutual Insurance Company and
its affiliated companies (intervenor), AEGON USA Investment Management
LLC, authorized signatory for Transamerica Life Insurance Company,
AEGON Financial Assurance Ireland Limited, Transamerica Life International
(Bermuda) Ltd., Monumental Life Insurance Company, Transamerica
[cid:image005.png@01CC477E.B9022A40]Advisors Life Insurance Company, AEGON Global Institutional Markets, plc,
LIICA Re II, Inc., Pine Falls Re, Inc., Transamerica Financial Life Insurance
Company, Stonebridge Life Insurance Company, and Western Reserve Life
Assurance Co. of Ohio (intervenor), Federal Home Loan Bank of Atlanta
(intervenor), Bayerische Landesbank (intervenor), Prudential Investment
Management, Inc. (intervenor), and Western Asset Management Company
(intervenor),

Petitioners,

-against-

FEDERAL HOME LOAN BANK OF BOSTON; FEDERAL HOME LOAN BANK OF CHICAGO; FEDERAL HOME LOAN BANK OF INDIANAPOLIS; FEDERAL HOME LOAN BANK OF PITTSBURGH; FEDERAL HOME LOAN BANK OF SAN FRANCISCO; and FEDERAL HOME LOAN BANK OF SEATTLE (proposed intervenor-respondents),

Respondents,

for an order pursuant to CPLR § 7701 seeking judicial instructions and approval of a proposed settlement.

Index No.
651786/2011

Assigned to: Kapnick, J.

REPLY MEMORANDUM IN SUPPORT OF PETITION TO INTERVENE

The Bank of New York Mellon (BNYM), which initiated this proceeding, has stated that it takes no position on the petition of proposed intervenors Federal Home Loan Banks of Boston, Chicago, Indianapolis, Pittsburgh, San Francisco, and Seattle (collectively, the FHLBs) to intervene. And the 22 investor intervenors state that they do not oppose the petition. Thus, the FHLBs’ petition to intervene is unopposed. Because the FHLBs have at least the same standing to intervene as did the 22 investors that have already been permitted to do so, the FHLBs respectfully request that the Court grant their petition without delay.
Both the 22 investors and BNYM filed memoranda in response to the FHLBs’ petition, to which the FHLBs respond briefly below.
First, the 22 investors note correctly that none of the FHLBs has decided whether to

object to the proposed settlement. For the avoidance of doubt, however, each of the FHLBs seeks to intervene as a party in this proceeding with the full rights of a party, including, of course, the right to oppose the proposed settlement should any of them ultimately decide to do so.
Second, BNYM states that the proposed order that it submitted on July 11 does not try to prevent investors like the FHLBs from intervening. That is an important clarification, because BNYM’s proposed order appears to provide that any petition to intervene (such as the present petition) would be treated as an “objection.” An objector, unlike an intervenor, would not be a party to the proceeding and would not have the rights of a party under the CPLR. The reason why the FHLBs are seeking to intervene, rather than merely filing “objections,” is to gain the full rights to which a party is entitled. The FHLBs together own certificates in 73 of the trusts that are part of the proposed settlement, for which they paid more than $8.8 billion. The FHLBs believe that to protect those interests they must intervene as full parties to this proceeding. Moreover, BNYM argues that it wishes to “hold in abeyance any requests for additional information or
other requests for relief, until . . . all potential objectors had an opportunity to object.” But one of the express purposes of the FHLBs’ petition to intervene is precisely to gather “additional
information” through the disclosure process before deciding whether to object. BNYM

- 2 -

essentially is asking the Court to hold such requests for information “in abeyance” until the information would no longer be useful.
Third, BNYM notes that it has now released on a website “all of the expert reports submitted to the Trustee in connection with the Settlement” and implies that those reports may provide all the additional information that the FHLBs need to decide whether to object to the proposed settlement. Unfortunately, however, the expert reports raise more questions than they answer. By way of example, BNYM published a report from Mr. Brian Lin of RRMS Advisors about the reasonableness of the $8.5 billion that BNYM agreed to accept as part of the proposed settlement. Mr. Lin concluded that “a settlement figure somewhere between $8.8 and $11 billion is reasonable.” But to reach that conclusion, Mr. Lin made certain assumptions, the bases for which are not fully disclosed in his report.
Mr. Lin started with the full remaining principal balance of the loans in the 530 trusts that would be covered by the proposed settlement, plus the amount that the trusts have lost on loans that have already been liquidated. Together, Mr. Lin calculates that to be $208.9 billion. Mr. Lin then assumed that (1) only a certain percentage of those loans would go into default and (2) even for those loans that went into default, the trusts would recover between 45% and 60% of the principal balance through foreclosure. Both of these assumptions are quite controversial, and the FHLBs need to understand Mr. Lin’s basis for them. Using those assumptions, Mr. Lin concludes that the potential shortfall to the trusts, and therefore the amount that the trusts could potentially recover from Countrywide and Bank of America, is reduced from $208.9 billion to $61.3 billion.
To get from $61.3 billion to a “reasonable” settlement range of $8.8 to $11 billion, Mr. Lin made two more assumptions. He assumed that only 36% of loans that go into default will have breached Countrywide’s representations and warranties about the quality of its underwriting. That assumption is difficult to understand. Mr. Lin did not do any independent analysis of this assumption. Instead, he simply adopted Bank of America’s estimates of this percentage, which in turn appear to have been based on a completely different portfolio of loans
that were subject to the underwriting standards imposed by Fannie Mae and Freddie Mac.

- 3 -

Moreover, Mr. Lin’s assumption is inconsistent with widely publicized reports by professional loan auditors that even Countrywide loans that are merely delinquent (that is, behind on
payments but not yet in default) have a “breach rate” of well over 60% and often as high as 90%. Finally, Mr. Lin assumed that only 40% of loans that both go into default and have breached Countrywide’s representations and warranties could be successfully put back to Countrywide and Bank of America. This assumption similarly demands investigation. It is hard to imagine why a court would not require Countrywide and Bank of America to repurchase all loans, not just 40% of loans, that are both in default and have breached a representation or warranty.
Each of these assumptions has a great effect on Mr. Lin’s estimate of the amount of a reasonable settlement. As an example, even if just the last assumption were changed from Countrywide and Bank of America having to repurchase all, rather than just 40%, of loans that were both in default and breached Countrywide’s representations and warranties, then Mr. Lin’s estimate of a reasonable settlement would rise from a range of $8.8 to $11 billion to a range of
$22 to $27.5 billion. Modifying any of his other three assumptions would cause that range to rise much more.
Similarly, BNYM also published a report by Prof. Robert Daines about Bank of America’s liability as a successor to Countrywide. But Prof. Daines’s report leaves unanswered several critical legal and factual questions. Indeed, Prof. Daines admits that his opinion is “limited by the available factual record and certain assumptions that I make,” and he concedes in several parts of his report that he relied on unverified information provided by Bank of America.
In short, although the expert reports that BNYM has now published do provide some additional information about the proposed settlement, they raise many new questions and
certainly do not enable any of the FHLBs to decide whether or not to oppose the settlement.

- 4 -

CONCLUSION

For all of these reasons, the FHLBs respectfully request that the Court grant their petition and amend the caption to add the FHLBs as intervenors-respondents in this Article 77 proceeding.

Dated: New York, New York
July 20, 2011

KELLER ROHRBACK L.L.P.

By: /s/ David S. Preminger
David S. Preminger

770 Broadway
New York, New York 10003
(646) 495-6198
(646) 495-6197 (fax)

KELLER ROHRBACK L.L.P. Lynn Lincoln Sarko
Derek W. Loeser
Amy Williams-Derry
Elizabeth A. Leland

1201 Third Avenue
Seattle, Washington 98101 (206) 623-1900
(206) 623-3384 (fax)

KELLER ROHRBACK P.L.C. Gary A. Gotto
3101 North Central Avenue Phoenix, Arizona 85012 (602) 248-0088
(602) 248-2822 (fax)

Attorneys for Federal Home Loan Banks of
Boston, Chicago, and Indianapolis

ROBINS, KAPLAN, MILLER & CIRESI L.L.P.

By: /s/ Heather Y. Fong
Heather Y. Fong

601 Lexington Avenue
New York, New York 10022
(212) 980-7400
(212) 980-7499 (fax)

Thomas B. Hatch
800 LaSalle Avenue
Minneapolis, Minnesota 55402
(612) 349-8900
(612) 339-4181 (fax)

Attorneys for Federal Home Loan Bank of
Pittsburgh
[cid:image006.png@01CC477E.B9022A40]GRAIS & ELLSWORTH LLP By:

David J. Grais (DG 7118) Kathryn C. Ellsworth Owen L. Cyrulnik
Leanne M. Wilson

40 East 52nd Street
New York, New York 10022
(212) 755-0100
(212) 755-0052 (fax)

Attorneys for Federal Home Loan Banks of San
Francisco and Seattle

- 5 -


Posted By Manal Mehta to Interesting Finance Articles<http://distressedinvestor.blogspot.com/2011/07/bofas-flawed-assumptions-re-proposed.html> at 7/21/2011 11:18:00 AM


Posted By Manal Mehta to Interesting Finance Articles<http://distressedinvestor.blogspot.com/2011/08/bofas-flawed-assumptions-re-repurchase.html> at 8/04/2011 08:28:00 PM

From: financearticles@googlegroups.com[mailto:financearticles@googlegroups.com] On Behalf Of Manal Mehta
Sent: Wednesday, May 2, 2012 5:14 PM
To: financearticles@googlegroups.com
Subject: [Interesting Finance Articles] MUST READ – BAC’s CIRCULAR AND FLAWED LOGIC – *BOFA FIGHTS BID FOR LOAN FILES IN $8.5 BILLION MORTGAGE DEAL the Trustee did not review loan files in reaching its decision to enter into the Settlement…relied on repurchase e

BANK OF AMERICA –> HIRES EXPERT BRIAN LIN WHO USES HISTORICAL REPURCHASE EXPERIENCE WITH FANNIE MAE AND FREDDIE MAC TO DETERMINE IF THE SETTLEMENT AMOUNT OF $8.5BN IS REASONABLE –> IGNORES THE FACT THAT FANNIE MAE DISPUTES BAC’S INTERPRETATION OF HISTORICAL REPURCHASE EXPERIENCE LEADING TO THE CURRENT DISPUTE WHICH IS CAUSING GSE REPUCHASE CLAIMS AT BAC TO BALLOON –> CHANGE LIN’S ASSUMPTIONS AND THE $8.5BN GOES TO $27BN (SEE BRANCH HILL ANALYSIS BELOW)

“Bank of America Corp. asked a judge to reject a demand for loan files in litigation over the bank’s proposed $8.5 billion mortgage-bond settlement…American International Group Inc. and Walnut Place are “leading the charge” on getting the loan files, Bank of America said. A sample of loan files that was requested would total more than 200 million pages and “require untold years to evaluate,” the bank said.”

COMPARE TO COMMENTS MADE BY MOYNIHAN ON BAC’S 3Q 2010 EARNINGS CALL:
“…we execute repurchases on a loan by loan basis…”
“And as we learn more, and again, our perspective on this – we’re going to be quite diligent as I said in defending the interest of our shareholders. This really gets down to a loan-by-loan determination and we have, we believe, the resources to deploy against that kind of a review.”

Notable Quotables From BofA’s response fighting loan file request

(Their defense relies on Brian Lin from RRMS advisors – http://www.zerohedge.com/article/brian-lin-next-incarnation-joe-cassano):

“There is no dispute: the Trustee did not review loan files in reaching its decision to enter into the Settlement. Instead, it relied on Countrywide’s actual repurchase experience with Fannie Mae and Freddie Mac for approximately 100,000 loans that were originated during the same years and on the same platform as loans in the covered trusts – real world adversarial experience over some four years that far exceeds whatever loan-by-loan litigation on loan files is conceivable in this or any other litigation. Accordingly, the only question is whether the Trustee’s decision not to also review loan files rendered the Trustee’s exercise of its discretion unreasonable. If the Trustee is correct that it was within the bounds of its discretion to approve the Settlement without reviewing loan files, then the Settlement should be approved.”

“In early July 2011, the Trustee posted the expert opinions reference in the Verified Petition to a public website it created (www.cwrmbssettlement.com<http://www.cwrmbssettlement.com>). One of the Trustee’s experts, Brian Lin of RRMS Advisors, opined that “the settlement range of approximately $8.8 billion to $11 billion is reasonable without applying any legal haircuts.” Mr. Lin reached this conclusion by estimating a repurchase rate for loans in the covered trusts and applying that rate to the estimated loans in the trusts. Thus, Objectors have long known precisely what analysis was undertaken to estimate a repurchase rate, and that this analysis did not include a review of loan files. In their motion to compel addressed to the Trustee, Objectors contend that Mr. Lin relied on “publicly-available third party sources” in estimating a repurchase rate. Objectors are wrong, as Mr. Lin’s report makes evident. Mr. Lin relied on Countrywide’s “actual repurchase experience,” not third-party data. As Mr. Lin explains in detail, the parties used Countrywide’s extensive prior repurchase experience with Fannie Mae and Freddie Mac (the “GSEs”) as a basis for an indicative repurchase rate for loans in the covered trusts. That real-world experience with the GSEs covered over four years of repurchase claims – actual arm’s-length, adversarial negotiations at a loan-by-loan level with highly sophisticated repurchase counterparties on approximately 100,000 loans that were originated during the same years and on the same platform on the loans in the covered trusts. That comprehensive actual experience provided a basis far superior to any conceivable post-hoc, made-for-litigation “sampling” of loan files. As Mr. Lin stated: “it would be reasonable to utilize BofA’s percentages for both ["breach" and "success"] rates since they are based on the performance of a mortgage pool representing actual repurchase experience.” All of the information Mr. Lin considered – including all of the actual presentations and data on the GSE experience provided by Countrywide – has been or will be produced to Objectors.”

Bank of America’s Response ignores this – BAC’s repurchase requests from Fannie have been escalating due to a disagreement on “historical repurchase experience” so how can “historical repurchase experience” with Fannie (which doesn’t accurately represent what’s happening today) be a basis for the settlement?

BAC’s Q1 2012 Earnings Call Transcript:
: Okay. Last one for me. Reps and warranty claims continue to rise. Just curious if you can give us an overall comment on a, what’s driving it and b, when we might see a leveling off?

: I think what I would say on that, Glenn, I would say it’s really consistent with what we talked about when we discussed year-end numbers and with the disclosures that are in the slides, the majority of the increase in the backlog of reps and warrants is in the GSE category. It largely relates to Fannie Mae. And if you saw and compared the balance at the third – at the end of the third quarter of 2011 with the balance at the end of the first quarter you would see that the majority – a substantial amount of the amounts that are coming in are for borrowers that have paid well north of 24 months. And we obviously continue to have a disagreement with them about whose responsibility those are.

<http://3.bp.blogspot.com/-aDTy0xXMoww/T6HNuvQR1UI/AAAAAAAAHN0/w-lFm9gk1q0/s1600/image001-726001.png>[http://3.bp.blogspot.com/-LiwD9KqGlPo/USSAfsIWepI/AAAAAAAAV6Y/_2u-V9ymogQ/s320/image005-785761.png]<http://3.bp.blogspot.com/-LiwD9KqGlPo/USSAfsIWepI/AAAAAAAAV6Y/_2u-V9ymogQ/s1600/image005-785761.png>

*BOFA CLASH WITH FANNIE INTENSIFIES AS INSURERS REJECT BAD LOANS

http://www.bloomberg.com/news/2012-03-02/bofa-s-clash-with-fannie-intensifies-as-insurers-reject-more-loan-claims.html

Flaws with Brian Lin’s work – Analysis by Branch Hill Capital:

<http://1.bp.blogspot.com/-cqmgcgYl5Rs/T6HNuq-n-II/AAAAAAAAHOA/4vMPVtptqHM/s1600/image003-726858.png>[http://2.bp.blogspot.com/-jOS2iFQbOFM/USSAf1V81rI/AAAAAAAAV6k/nzYlmX9_Bgc/s320/image006-787617.png]<http://2.bp.blogspot.com/-jOS2iFQbOFM/USSAf1V81rI/AAAAAAAAV6k/nzYlmX9_Bgc/s1600/image006-787617.png>

BofA Fights Bid for Loan Files in $8.5 Billion Mortgage Deal (1)

2012-05-02 22:34:05.34 GMT

(Updates with court filing in second and third paragraphs.)

By David McLaughlin

May 2 (Bloomberg) — Bank of America Corp. asked a judge to reject a demand for loan files in litigation over the bank’s proposed $8.5 billion mortgage-bond settlement, saying it threatens years of delay.

The files are irrelevant to the case and producing them for investors would “dramatically transform” the proceeding, Bank of America said in papers filed today in New York State Supreme Court.

“Loan-file review will answer no questions,” the Charlotte, North Carolina-based lender said. “It will lead only to interminable delay and unnecessary litigation, loan-by-loan- by-loan. It will bog down this proceeding for no good reason.”

The settlement with Countrywide Financial mortgage-bond investors is before a state judge for approval, and some investors have said they need information about the agreement and negotiations leading up to it.

American International Group Inc. and Walnut Place are “leading the charge” on getting the loan files, Bank of America said. A sample of loan files that was requested would total more than 200 million pages and “require untold years to evaluate,” the bank said.

Attorneys for AIG and Walnut Place didn’t immediately respond to e-mails seeking comment.

The case is In the matter of the application of the Bank of New York Mellon, 651786-2011, New York State Supreme Court (Manhattan).

For Related News and Information:

Bloomberg legal resources: BLAW

Top Legal News: TLAW

–Editors: Fred Strasser, Mary Romano

To contact the reporter on this story:

David McLaughlin in New York at +1-212-617-4817 or dmclaughlin9@bloomberg.net

To contact the editor responsible for this story:

John Pickering at +1-212-617-1708 or

jpickering@bloomberg.net

BAC US

BK US

AIG US


Posted By Manal Mehta to Interesting Finance Articles<http://distressedinvestor.blogspot.com/2012/05/must-read-bacs-circular-and-flawed.html> at 5/02/2012 08:10:00 PM

From: financearticles@googlegroups.com[mailto:financearticles@googlegroups.com] On Behalf Of Manal Mehta
Sent: Thursday, July 21, 2011 7:22 PM
To: financearticles@googlegroups.com
Subject: [Interesting Finance Articles] Zerohedge on Brian Lin

Is Brian Lin The Next Incarnation Of Joe Cassano?
[http://1.bp.blogspot.com/-afr7xNpEqDw/USSAgomYMuI/AAAAAAAAV6w/1M3cPgplmnI/s320/image001-790438.jpg]<http://1.bp.blogspot.com/-afr7xNpEqDw/USSAgomYMuI/AAAAAAAAV6w/1M3cPgplmnI/s1600/image001-790438.jpg>

In a must read Op Ed<http://www.bloomberg.com/news/2011-07-21/curse-the-geniuses-who-built-bank-of-america-jonathan-weil-1-.html>, Bloomberg’s Jon Weil takes another long hard look at the balance sheet of the most undercapitalized bank in America (thank would be Bank of America) courtesy of the worst M&A transaction in history, namely its purchase of Countrywide, observes what everyone, even John Paulson now knows, that due to trading at half its book value nobody in the market gives even remote credit to the bank’s asset “marks”, and concludes that this organization, courtesy of an extremely lax regulatory and audit structure, which continues to allow it to mark any assets at whatever price it desires, could well be the next AIG: “There’s more at stake here, however, than whether Bank of America’s shares are a “buy” or a “sell.” The main thing the rest of us care about is the continuing menace this company and others like it pose to the financial system, knowing we never should have let ourselves be put in the position where a collapse in confidence at a single bank could wreak havoc on the world’s economy. Here we are again, though. Curse the geniuses who brought us this madness.” Indeed: once again, right before our eyes, day after day we allow various higher status quo-embedded individuals to take advantage of the gullible public by misrepresenting the massive risk that the left side of BAC’s balance sheet represents, which can have only one conclusion: the same epic implosion that brought down AIG one the market reality caught up the with book myth. Yet in the case of AIG we can all at least put the blame on one person: the man at the heart of AIG FP, Joe Cassano, whose reckless bets nearly brought down capitalism. So our question is: is there someone at or affiliated with Bank of America that could soon double as a Joe Cassano for the 2010s? We have one suggestion (although certainly not exhaustive): Brian Lin of RRMS Advisors.

Who is Brian Lin?

<http://www.nytimes.com/2008/12/18/business/18pay.html?pagewanted=all>[http://2.bp.blogspot.com/-gVgQ8us3bLI/USSAhCPvXdI/AAAAAAAAV68/BszJhRGZlVw/s320/image007-792700.jpg]<http://2.bp.blogspot.com/-gVgQ8us3bLI/USSAhCPvXdI/AAAAAAAAV68/BszJhRGZlVw/s1600/image007-792700.jpg>Let’s step back and look at some of the recent developments regarding Bank of America. As most know by now, the biggest wildcard regarding Brian Moynahan’s bank, and the biggest wildcard as pertains to the “known unknown” that is the bank’s massive undercapitalization, is that it has hundreds of billions in legacy non-performing Countrywide loans. The same loans which the bank recently scrambled to settle with a group of litigants for the paltry sum of $8.5 billion. This is also the Rep and Warranty reserve that Bank of America took out this quarter after repeatedly promising that it was well over reserved for any future such litigation<http://www.zerohedge.com/article/85-bank-americas-net-income-comes-reserve-release-and-msr-adjustment-capitalization-ratios-p>. Incidentally Zero Hedge has said repeatedly that this amount will be far higher when realistic assumptions are used, whether for modelling purposes, or when the full reality of the deterioration of the loan quality is uncovered.

Sure enough, in a filing today at the Supreme Court in New York, the Federal Home Loan Banks which are pursuing more information from the bank in an attempt to generate greater recoveries, have suggested that the the entity conducting the recovery assumptions that generated the $8.5 billion settlement was potentially incompetent (and arguably criminally negligent – our assumption not theirs), and that a “reasonable settlement” would nearly triple the amount of money that Bank of America would have to charge off: a range of $22 billion to $27.5 billion. Of course, should BAC do this, its Tier 1 Capital would plunge, it would immediately be forced to access the equity capital markets, and confidence in the bank’s books would evaporate instantaneously, with all the nightmarish AIG-esque consequences envisioned by Jon Weil materializing immediately.

So who is the person largely responsible for the “overoptimistic” analyses that have so far spared Bank of America from a death spiral?

The abovementioned Eddie Lin of RRMS advisors…. And formerly of Bank of America!

Let’s take a look at the FHLB’s filing:

BNYM notes that it has now released on a website “all of the expert reports submitted to the Trustee in connection with the Settlement” and implies that those reports may provide all the additional information that the FHLBs need to decide whether to object to the proposed settlement. Unfortunately, however, the expert reports raise more questions than they answer. By way of example, BNYM published a report from Mr. Brian Lin of RRMS Advisors about the reasonableness of the $8.5 billion that BNYM agreed to accept as part of the proposed settlement. Mr. Lin concluded that “a settlement figure somewhere between $8.8 and $11 billion is reasonable.” But to reach that conclusion, Mr. Lin made certain assumptions, the bases for which are not fully disclosed in his report.

Mr. Lin started with the full remaining principal balance of the loans in the 530 trusts that would be covered by the proposed settlement, plus the amount that the trusts have lost on loans that have already been liquidated. Together, Mr. Lin calculates that to be $208.9 billion. Mr. Lin then assumed that (1) only a certain percentage of those loans would go into default and (2) even for those loans that went into default, the trusts would recover between 45% and 60% of the principal balance through foreclosure. Both of these assumptions are quite controversial, and the FHLBs need to understand Mr. Lin’s basis for them. Using those assumptions, Mr. Lin concludes that the potential shortfall to the trusts, and therefore the amount that the trusts could potentially recover from Countrywide and Bank of America, is reduced from $208.9 billion to $61.3 billion.

To get from $61.3 billion to a “reasonable” settlement range of $8.8 to $11 billion, Mr. Lin made two more assumptions. He assumed that only 36% of loans that go into default will have breached Countrywide’s representations and warranties about the quality of its underwriting. That assumption is difficult to understand. Mr. Lin did not do any independent analysis of this assumption. Instead, he simply adopted Bank of America’s estimates of this percentage, which in turn appear to have been based on a completely different portfolio of loans that were subject to the underwriting standards imposed by Fannie Mae and Freddie Mac. Moreover, Mr. Lin’s assumption is inconsistent with widely publicized reports by professional loan auditors that even Countrywide loans that are merely delinquent (that is, behind on payments but not yet in default) have a “breach rate” of well over 60% and often as high as 90%. Finally, Mr. Lin assumed that only 40% of loans that both go into default and have breached Countrywide’s representations and warranties could be successfully put back to Countrywide and Bank of America. This assumption similarly demands investigation. It is hard to imagine why a court would not require Countrywide and Bank of America to repurchase all loans, not just 40% of loans, that are both in default and have breached a representation or warranty.

Each of these assumptions has a great effect on Mr. Lin’s estimate of the amount of a reasonable settlement. As an example, even if just the last assumption were changed from Countrywide and Bank of America having to repurchase all, rather than just 40%, of loans that were both in default and breached Countrywide’s representations and warranties, then Mr. Lin’s estimate of a reasonable settlement would rise from a range of $8.8 to $11 billion to a range of $22 to $27.5 billion. Modifying any of his other three assumptions would cause that range to rise much more.

Similarly, BNYM also published a report by Prof. Robert Daines about Bank of America’s liability as a successor to Countrywide. But Prof. Daines’s report leaves unanswered several critical legal and factual questions. Indeed, Prof. Daines admits that his opinion is “limited by the available factual record and certain assumptions that I make,” and he concedes in several parts of his report that he relied on unverified information provided by Bank of America

A closer look at Mr. Lin’s biography indicates that he may have just a little conflict of interest when conducting his analysis, which most likely ended up being used in the bank’s own application of settlement calculations, and reciprocally used as well by the counterparties, which we are more than certain are doing all they can to merely shut the case, instead of actually seek equitable damages. After all, as a reminder the adversaries to BAC in the case are the who’s who of comparable borderline illegal marking pratices: Maiden Lane III, LLC; Metropolitan Life Insurance Company; Trust Company of the West; Neuberger Berman; Pacific Investment Management Company LLC; Goldman Sachs Asset Management; Thrivent Financial; Landesbank BadenWuerttemberg; LBBW Asset Management plc, Dublin; ING Bank and so forth. To say that these parties are not comparably guilty of similar practices would be beyond naive.

Anyway, back to Mr. Lin, and specifically his LinkedIn Profile where we learn that before RRMS he worked at… Merrill Lynch, and not just anywhere, but in the bank’s Non Agency Trading. To wit:

<http://www.linkedin.com/pub/brian-lin/0/9b9/a57>[http://3.bp.blogspot.com/-vgxq95dBSTg/USSAhopS3AI/AAAAAAAAV7I/LP5vSbrfFBI/s320/image004-794528.jpg]<http://3.bp.blogspot.com/-vgxq95dBSTg/USSAhopS3AI/AAAAAAAAV7I/LP5vSbrfFBI/s1600/image004-794528.jpg>

Surely while developing a skillset about evaluating security impairments at Bank of America, Mr. Lin also developed numerous relationships. One may only wonder to what extent these relationships were “utilized” in assisting him in forming his opinion on what the proposed trust shortfall, and thus settlement, and thus potential material undercapitalization of Bank of America, should be.

But why pick only on Brian: let’s take a look at the pristine organization that is RRMS. For that we turn to Crain’s New York <http://www.crainsnewyork.com/article/20090104/SMALLBIZ/901039988> where we read that…

At RRMS Advisors’ offices in an aging building on East 40th Street, Vincent Spoto and his four partners share space with a small headhunting outfit, and they hold meetings in a windowless conference room the size of a large closet…

Mr. Spoto, who was laid off more than a year ago from his position as a mortgage specialist at Credit Suisse, is grateful that he has a job. He has reinvented himself as a consultant to investors who hold toxic mortgage investments…

“There’s a stigma out there, no doubt, because I was part of Wall Street,” …along with a dash of guilt—he is among the band of survivors of Wall Street’s collapsed mortgage machine who are getting the chance to assist in sorting out the financial mess they helped create. In fact, some of them are in high demand because they are among the few who understand complex instruments such as mortgage-backed securities, collateralized debt obligations and other products whose imploded values can only be guessed at…

“These are the people who can fit the key in the lock,”…”The problem for a lot of these Wall Street guys is that they don’t know much about real estate,” says Robert Baron, president of American Real Estate Executive Search Co. in Manhattan. “All they know is a lot about slicing and dicing mortgages and selling them.”…

Over his 20-year career, Mr. Spoto worked mostly with mortgage servicing companies to ensure they were collecting on the mountains of loans that investment bankers packaged into securities and sold…Brian Lin, a veteran mortgage trader who was formerly with Merrill Lynch and other companies…

The firm also has Robert Pardes, who was chief lending officer at New Jersey-based OceanFirst Financial Corp. until May 2007. He was ousted after the bank disclosed that employees were hiding losses in the subprime lending division, which it had acquired from Mr. Pardes seven years earlier”

The plot thickens: not only do we have a person who may have a conflict of interest courtesy of prior professional relationships with Bank of America Merrill Lynch, but the firm he currently works boasts such individuals who were terminated for knowingly misrepresenting and hiding losses in RMBS books.

Does one now see why perhaps Mr. Lin may not have been the best choice to evaluated the trust shortfall, and the “settlement” process. Perhaps somebody slightly more objective would figure out that instead of $8.5 billion, Bank of America is actually on the hook for an amount that is at least 3 times greater if one uses proper impaired security valuation protocols?

However, as noted above, the question becomes “what then?” Should the true extent of deterioration of Bank of America’s books be revealed, then its market cap would be not $100 billion but some modest fraction thereof. In fact, even John Paulson, formerly the biggest believer in BAC has now washed his hands. And he doesn’t give up (read: look foolish to the investment community) easily. Our advice is to have a chat with Jon Weil: after all he is the man who said to “Curse the geniuses who brought us this madness.”

In the meantime, and in the absence of Mark to Market, we are confident that the legal process will prevail and that the presiding judge on this case, and if not him then certainly the New York District Attorney, will step up and demand a thorough reevaluation of the settlement process. Because if law itself is held hostage by a bank’s massive undercapitalization, then one may as well admit that America has devolved into complete fascism.

As for our question if Mr. Lin is the second coming of Joe Cassano, the answer is likely no. It iseveryone that behaves just like Lin, in allowing what is blatant disregard for fair and equitable process, to continue… in exchange for give or take 30 pieces of silver (physical, not paper).

Unfortunately in our rapidly devolving society we have gotten to a point where the next epic collapse will have not one but an army of Joe Cassano’s behind it.

h/t Manal Mehta

Category: Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

One Response to “How Under Reserved is BAC?”

  1. EMichael says:

    If it wasn’t so sad, it would be funny.

    The criminal is being allowed to tell you how much he stole.

    geez