Subpoena-Fest at BAC-Countrywide

It seems the BAC-Countrywide dashing duo are holding a subpoena-fest, with an open invitation to all federal and state regulatory agencies. For starters, Bank of America Corp. (NYSE: BAC) said it received subpoenas and requests for information with regards to auction-rate securities from multiple federal and state government agencies. And four class-action lawsuits have been filed against BAC, on behalf of purchasers of auction-rate securities in-between May 2003 and Feb 2008.

Secondly, Connecticut Attorney General Richard Blumenthal filed suit against Countrywide Financial Corp., accusing Countrywide of "pushing consumers into deceptive, unaffordable loans and workouts, and charging homeowners in default unjustified and excessive legal fees". To make matters worse, Countrywide has responded to a subpoena from the SEC, according to a regulatory filing by BAC (see link under references), and now faces a criminal SEC investigation.

Worse yet, the Director of the Washington State Department of Financial Institutions has initiated administrative proceedings against a Countrywide wholly-owned subsidiary, alleging, among other things, that the loan products made available to Washington borrowers of protected races or ethnicities were less favorable than those made to others situated in the same area.

And its not like either BAC or Countrywide didn't already have legal troubles. Last month, California, Illinois and Florida filed suit against Countrywide (background) with allegations similar to those made by Connecticut. And in June 2008, Washington Gov. Chris Gregoire announced plans by the state to fine Countrywide Home Loans $1 million for discriminatory lending. In addition, she said that the company will be required to pay more than $5 million in back assessments the company failed to pay. Gregoire also announced that the state is seeking to revoke Countrywide’s license to do business in Washington for its alleged illegal activity.

The new SEC subpoena and investigation is probably related to former CEO Angelo Mozilo exercising stock options and making millions (background) while at the same time Countrywide stock was tanking.

The one bright spot in this legal barrage is that BAC as yet remains clear of Countrywide's problems. But at the end of the day, any settlements made with shareholders and the states and/or fines levied by the SEC and/or other regulatory organizations will come out of BAC's pocket, considering that they now own Countrywide. Best bet for them would be to work out some kind of one-time settlement with all 50 states. Otherwise, the subpoena festival will have to be kept open year round.

But then, BAC has its own set of legal problems. These new subpoenas and queries faced by BAC related to auction-rate securities is a part of an expanding investigation and legal fallout over whether banks misled investors about the auction-rate debt risk.

Yesterday, CitiGroup reached an agreement with federal and state regulators to buy back about $7.5 billion in securities from its brokerage clients. Immediately after Citi's agreement was announced, Merrill Lynch & Co. said it would offer to buyback $10 billion in auction-rate securities from retail clients. This is no doubt where BAC, and all other banks faced with legal blowback over auction-rate securities, are headed for.

And if that's not enough to make the subpoena party hot enough for you, BAC also is 'co-operating' with a criminal anti-trust investigation by the DOJ which is looking into whether banks conspired to rig auctions in collusion with advisors to municipalities. Oh, and BAC could still face civil charges in this matter from the SEC.

References:
http://www.ct.gov/ag/cwp/view.asp?Q=420722&A=2795
http://investor.bankofamerica.com/seccapsule/seccapsule.asp?m=f&c=71595&vid=5816363&dc=
http://www.governor.wa.gov/news/news-view.asp?pressRelease=933&newsType=1
http://www.bloomberg.com/apps/news?pid=20601087&sid=ady1qyweQDYo
http://www.reuters.com/article/ousiv/idUSWEN737720080808