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|Subject: What We're Reading: Another Round of Trouble||Date: 10/26/2010 3:44 PM|
|Author: TMFTheSnake||Number: 437 of 448|
This presentation by Branch Hill Capital attempts to quantify how much danger Bank of America is in regarding the mortgages Countrywide and Merril Lynch sold on to fixed income investors.
Why is this important to investors? This may explain why banks have been storing cash - they knew they had liabilities because they sold poorly documented or fraudulent paper on to institutional investors.
If the banks have to take back these securities, not only are they paying out money to investors, they are increasing the liabilities on their books, which impacts the amount of Tier 1 capital, which is what everyone watches to see if a bank is in danger of going bankrupt.
While the numbers being thrown around are in the tens of billions, there isn't any guarantee that bond holders will be getting full payment (or what definition of full payment will be used - market value vs. face value). Additionally, the legal battles that will likely erupt mean payment won't be made for several years.
For a discussion on this, check out Yves Smith's (author of the recently released book ECONned - http://mot.ly/bmKX5f) attempt to bring us back to earth:
So while this may not be the return of financial apocalypse, the big banks could be in for some hurting going forward, which will only slow any leak of liquidity in the US economy and may force a renewed effort at QE2 and all the repercussions that come with that.
All in all, a gigantic mess that may be hitting a gigantic fan in the coming months.
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