Call us crazy but we are not surprised at all by today’s trading action in Bank of America (NYSE:BAC). Towards the end of today’s trading day mortgage servicers such as Bank of America (BAC) and Citigroup (NYSE:C) found their shares taking a beating with a sharp reversal on heavy volume. Why is that? Well if you didn’t catch our article this weekend on Three Reasons To Avoid Bank Stocks, let us elaborate.
We tried to explain how banks that issued and serviced mortgages and sold them to investors with claims of credit strength that was actually much higher than the mortgage pool itself was, are going to be vulnerable to lawsuits alleging fraudulent behavior. Ambac Financial Group (ABK) has been amid one of the hardest hit mortgage insurers and almost folded through this mortgage crisis. On September 29th, 2010, Ambac Financial Group (ABK) filed a lawsuit against Bank of America (BAC) alleging that 97% of the loans that Ambac insured were not conforming of Bank of America’s standards for lending (Link). This involved $16.7 billion in mortgages. This event foresaw a bigger tidal wave about to hit Bank of America that hit today.
Today, the New York Fed and a consortium of a total of 8 firms teamed up together to sue Bank of America (BAC) trying to force them to buy back $47 billion in bonds pegged to these mortgages. So between this lawsuit, which involves this consortium of companies such as PIMCO and BlackRock (NYSE:BLK), is for $47 billion in addition to the $16.7 billion lawsuit filed by Ambac Financial Group (ABK) just a short while ago.
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Disclosure: Net Long Ambac Financial