Bank of America Leads Lenders Lower on Report of a Lawsuit by U.S. Agency

By Jacob Greber and Laura Marcinek - Sep 2, 2011 8:37 AM ET

Bank of America Corp. (BAC) led declines among the biggest U.S. lenders in early New York trading after a report that more than a dozen large banks will be sued by the U.S. Federal Housing Finance Agency.

Bank of America fell 7.5 percent to $7.32 at 8:17 a.m. while JPMorgan Chase & Co. (JPM) slipped 2.1 percent to $35.55.

Bank of America, JPMorgan, Goldman Sachs Group Inc. (GS) andDeutsche Bank AG (DBK) are among firms that may be sued by the agency for misrepresenting the quality of mortgage securities sold at the height of the housing bubble, the New York Times said. A separate report in the Wall Street Journal said Charlotte, North Carolina-based Bank of America was told by the Federal Reserve to explain what steps it would take if its financial condition worsens.

“This market is all about credit and banks right now,” said Nader Naeimi, a Sydney-based strategist for AMP Capital Investors Ltd., which manages almost $100 billion. A potential lawsuit “is an uncertainty that can go on for years — that gets the market quite nervous,” he said.

“Bank of America, being at the epicenter of these problems, is going to get smashed,” Naeimi said.

The finance agency, which oversees mortgage finance companies Fannie Mae and Freddie Mac, may file the lawsuits today or on Sept. 6, before a deadline expires for the housing agency to file claims, which will seek billions of dollars in compensation, the Times said, citing three people briefed on the matter whom it didn’t identify.

Due Diligence

The agency will argue that the banks failed to perform the due diligence required undersecurities law while assembling and selling the mortgage securities, and missed signs that borrowers’ incomes were inflated or falsified, the newspaper said. Rather than demanding that firms buy back the original loans, the agency is seeking reimbursement for losses on the securities held by Fannie Mae and Freddie Mac, it said.

Deutsche Bank dropped 4.8 percent to 26.34 euros at 2:22 p.m. in Frankfurt.

“We can’t comment on a suit that we haven’t seen and hasn’t been filed yet,” Christian Streckert, a spokesman for the Frankfurt-based bank, said when contacted by Bloomberg News.

Larry DiRita, a spokesman for Bank of America, Kristin Lemkau at JPMorgan and Edward Naylor at Goldman Sachs declined to comment. Stefanie Johnson, a spokeswoman for the FHFA, also declined to comment.

Fannie Mae and Freddie Mac have operated under U.S. conservatorship since 2008, when they were seized amid subprime mortgage losses that pushed them toward insolvency.

Merrill Lynch

Responding to the Fed’s call for an explanation of how Bank of America would respond to a deterioration in its financial condition, the lender outlined a list of options including the issuance of a separate class of shares linked to the performance of its Merrill Lynch unit, the Wall Street Journal reported, citing people familiar with the matter who weren’t identified. Such a step isn’t imminent, the newspaper said.

Both Bank of America and the Fed declined to comment, the Journal said.

To contact the reporters on this story: Jacob Greber in Sydney at jgreber@bloomberg.net; Laura Marcinek in New York at lmarcinek3@bloomberg.net.

To contact the editor responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net.