Big U.S. banks are leading the U.S. stock market down today.

The driver here isn’t simply the prospect of slower economic growth represented by the lack of any job growth in August data released today—although that certainly doesn’t help.

Bank stocks are reeling because the big U.S. mortgage lenders and mortgage packagers are reportedly facing a suit be filed next week from the Federal Home Finance Administration, the agency that represents Fannie Mae and Freddie Mac, seeking to force these financial companies to repurchase bad mortgages. The amounts at stake, and it’s extremely hard to put a dollar figure on this suit, could dwarf the $20 billion sought in a suit brought by the nation’s states attorneys general. Fannie Mae and Freddie Mac own about $227 billion of the so-called private label mortgages that are the subject of this suit. (Bank of America probably faces the biggest exposure since it sold the most of these private label mortgages to Fannie Mae and Freddie Mac.)

No surprise then that Bank of America (BAC) was down 8.7% as of 3:30 p.m. New York time, JPMorgan Chase (JPM) 4.7%, Goldman Sachs Group (GS) 5%, Citigroup (C) 5.1%, and Wells Fargo 4.5%.

The suit would be the result of 64 subpoenas issued last year to originators and servicers of mortgage-backed securities. The statute of limitations is due to expire next week so the Federal Home Finance Administration has to file or forever hold its piece.

The subpoenas and the likely suit focus on so-called private label mortgage-backed securities originated by mortgage lenders, packaged by Wall Street investment companies, and then sold to investors. Fannie Mae and Freddie Mac were permitted to buy slices of these securities that carried AAA ratings. As of the end of July, the two companies, now owned by taxpayers, held nearly $78 billion and $149 billion in such securities.

Private label mortgage-backed securities have been among the worst performing mortgage-backed assets, showing the kind of losses nobody expects from AAA-rated securities. The likely suit would allege that the banks in question misrepresented the content of the mortgage pools when they packaged them and sold them to Fannie Mae and Freddie Mac. Testimony in front of the Financial Crisis Inquiry Commission showed that a large percentages of mortgages included in mortgage-backed securities deals had received inadequate due diligence and that the big Wall Street investment companies ignored those problems and packaged them in the mortgage pools anyway.

A suit from the Federal Housing Finance Agency would be a nightmare for the big mortgage banks not just because of the sums involved, but because it would also pretty much blow up all other efforts to put together settlements that would cap bank liabilities. Forget about the proposed settlement with state attorneys—a settlement already in danger. And it would almost certainly bring other investors into court demanding that banks buy back their mortgage paper too.

But the effects don’t stop there. Read more

The sharks are no longer circling Bank of America (BAC). They’ve moved in with jaws wide open.

Who knew that the $4 billion acquisition of Countrywide Financial would keep adding fresh blood to the water even now three years after Bank of America acquired the mortgage lender in 2008?

Bank of America tried to stem the attack first with a $5 billion investment from Warren Buffett and then with the announcement today that the bank would sell half its stake in China Construction Bank. That sale would raise $8.3 billion. About $3.5 billion of that would go to improve the bank’s Tier One capital position.

But neither move put off the mortgage sharks.

First, the $8.5 billion deal brokered by Bank of New York Mellon back in June threatens to come apart. Read more

It’s official: Citigroup (C) is no longer the most troubled big U.S. bank.

That honor now goes, hands down, to Bank of America (BAC).

Yesterday morning, July 19, the bank posted the largest quarterly loss in its history thanks to a nasty combination of problems: revenue continued to slide and losses from defective mortgages continued to climb.

Revenue, including mortgage costs, plummeted to $13.5 billion, a 50.2% drop from the second quarter of 2010. Even excluding those mortgage costs, revenue still fell by 10% from the second quarter of 2010 and declined 2.2% from the first quarter of 2011.

Earnings for the second quarter including these mortgage-related charges came to a loss of 90 cents a share. Excluding those charges the bank reported net income of 33 cents a share. On that basis Bank of America reported earnings of 27 cents a share in the second quarter of 2010.

Bank of America’s mortgage problem is different from that faced by many of its big bank peers. At Citigroup, for example, the bank had to put aside reserves for mortgages that might default. Those reserves came out of earnings but recently as the rate of credit losses has fallen, those reserves have started to add back into earnings.

At Bank of America, though, the big problem has been lawsuits from investors in mortgage-backed assets and from bond issuers who have sued the company claiming that Bank of America, or more specifically the mortgage business, Countrywide Financial, it bought in 2008, had used false or misleading information in writing mortgages that later defaulted. On June 29 Bank of America told investors that it would book more than $20 billion this quarter in charges from faulty mortgages. The $20 billion wound up breaking down this way: $8.5 billion in a June settlement with a group of big investors who had bought mortgage-backed assets that went sour; $5.5 billion to cover future claims; and $6.4 billion for a number of other charges.

Not all the bank’s businesses turned in bad quarters. Read more

Looks like a tough earnings season ahead for the biggest U.S. banks

Investors won’t get their next dose of bank earnings reports until JPMorgan Chase releases second quarter earnings on July 14, but earnings season is already looking awfully iffy for the big U.S. trading banks.

Trading revenues are forecast to fall again for the quarter. That would mark the fifth straight quarterly year-over-year drop.

Revenue from fixed income trading at U.S. banks will fall 30% from the first quarter, according to a report from Citigroup this week. Revenue from equity trading will drop by 15%. Total trading revenue at the five biggest Wall Street banks–Goldman Sachs (GS), JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), and Morgan Stanley (MS)–may drop 4.4% in the second quarter of 2011 from the second quarter of 2011, and 17% from the first quarter of 2011, according to a report by Oppenheimer & Co. Trading accounted for almost a quarter of these bank’s revenues last year.

Analysts have been busy cutting their earnings estimates for the group–according to Bloomberg, seven analysts have cut their earnings estimates for Goldman Sachs and Morgan Stanley, for instance, in the last four weeks. So the question for earnings season will be have the stocks fallen so much—10% or more since March 31—and have estimates come down so much, that bank shares will actually rally on just the expected degree of bad news.

In an earlier quarter—say the last quarter of 2010—I would have voted for “Rally on the bad news.” But I think that’s unlikely this quarter.

Why? Read more

Tomorrow’s Bank of America earnings release spooks bank stocks today

Be afraid. Be very afraid.

Of Bank of America’s (BAC) earnings report for the first quarter of 2011 scheduled for release tomorrow, April 15, before the market opens in New York.

Worries about what the bank will say tomorrow are, in my opinion, what sent bank stocks down in today’s session. Today JPMorgan Chase (JPM) dropped 2.8%. Wells Fargo (WFC) fell 1.7%. And Bank of America itself was down 1.1%.

Wall Street analysts are expecting the bank to report net income of $2.87 billion for the quarter. That would be up very slightly from the $2.83 billion in net income in the first quarter of 2010.

I think, as with JPMorgan Chase, that Bank of America could actually beat on the earnings line thanks to the release of reserves against bad loans.

But the likelihood is that the revenue line will be ugly. Really ugly. Read more