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

Bad news banks: Citigroup and Bank of America results show a slowing U.S. economy

Yesterday’s second quarter earnings report from JPMorgan Chase (JPM) raised concern among investors. The bank reported falling revenue—just 6% it’s true—in its investment banking business. That seemed to confirm concerns that the Wall Street side—investment banking, trading, and the like—of the big banks was slowing.

But today’s earnings reports from Bank of America (BAC) and Citigroup (C) have escalated that concern to at least worry and maybe all the way to fear.

The banks didn’t just show the same revenue problems on the Wall Street side of their business, although that was bad enough. Bank of America, for example showed lower revenue in the second quarter from its trading unit, and Citigroup attributed its decline in second quarter revenue and net income from first quarter levels to lower revenue from parts of its investment banking and trading businesses.

No, the real problem was that both banks showed a decline in loan demand, a big enough decline that their loan portfolios contracted in the quarter. Read more

An intelligent guess at who’s at risk after the SEC charges Goldman Sachs

Who’s next?

Now that the SEC (Securities & Exchange Commission) has filed a civil fraud suit against Goldman Sachs (GS), Wall Street’s favorite game is guessing which big bank the agency might name next.

Some of the lists have no credulity at all—they’re simply guess-work mixed with spite.

Others depend solely on whether you believe the source is somehow in the know.

A list from Credit Suisse (CS) that’s making the rounds today from hand to hand and in a Bloomberg story does, however, have a reasonable methodology and solid numbers.

And it makes very interesting reading. Read more