Dumping The Toxic Debt

The big news of the day this afternoon was that PIMCO, Blackrock, and the New York Fed will be suing Bank Of America to force them to take back $47 billion in mortgage loans.

This means that Bank Of America originally securitized (bundled) loans and sold them out to these entities.  With fraudclosure now sweeping through the banking industry, and the loans only being worth a fraction of what they were originally bought for, the final buyers are looking for a way to offload the toxic debt back to the original seller.

Imagine if you were underwater on your home by $200,000 and you found out that you could give your loan back to Bank Of America and walk away.  This is what is happening, only with much larger numbers.

This does not mean Bank Of America will be taking $47 billion in losses, that is just the total size of the mortgages.  However, this is only the first announcement and many other banks will soon line up to dump the toxic garbage back at the doors of Bank Of America.

The immediate losses will be difficult to determine due to the new accounting guidelines for banks.  Under standard accounting guidelines Bank Of America would already be insolvent and bankrupt (before these loans come back) so any major losses will just come from the "taxpayer" fund.

What we do know is that Bank Of America has already set up a rainy day fund for mortgage repurchases.  The following graph shows the size of their reserves (left) compared to the first $47 billion lawsuit announced today (right)  Let's just say that they have some capital to raise: