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Wednesday
Oct272010

New Threat to Banks: Mortgage Security "Put Backs"?

Photo Courtesy - PRNews Foto/Bank of America(NEW YORK) -- Could the whole U.S. banking system return to the brink if Bank of America is forced to buy back tens of billions in soured mortgage-backed securities?

At a public hearing Wednesday on loan modifications and foreclosures, a Treasury official dismissed that concern despite doubts raised by the Congressional Oversight Panel for the Troubled Asset Relief Program, the group charged by Congress with overseeing and assessing the effectiveness of the federal bank bailout.

Bank of America is facing a demand by investors, including the Federal Reserve Bank of New York, that the bank buy back $47 billion in mortgage-backed securities. The loans backing the securities, investors argue, didn't live up to pledges made about their quality.

At the hearing Wednesday morning, Phyllis Caldwell, the Treasury Department's chief of the Homeownership Preservation Office, said there was "no evidence of systemic risk" posed by such buy-back demands -- also known as "put backs." "It is still early. We are working very closely with 11 regulatory and federal agencies. We are watching this every day and that at this stage, there appears to be no evidence of a systemic risk," Caldwell said.

Her comments were met with skepticism by COP member and AFL-CIO policy director Damon Silvers, who noted that the Federal Reserve said the securities in question in the Bank of America demand have halved in value. "If the Fed's request to Bank of America is honored, Bank of America, assuming when they buy them back, they mark them to market, Bank of America will take a $23 billion loss," he said.

If the bank were to later face five such requests, it could amount to a loss that exceeds the bank's $115 billion market capitalization, he said.

Silvers urged Caldwell to retract her statement about systemic risk "because these things can be embarrassing later." Caldwell did later clarify, saying, "We didn't say there was no risk, we said there didn't appear to be evidence of a major systemic risk."

"I hope that if the Treasury comes back to us and is discussing if we need to deploy further public funds to rescue Bank of America, or such other institutions as might be affected by these events that we get a similar kind of indifference to their fate," Silvers responded.


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