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

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

Add another word to English as spoken on Wall Street: robo signer.

These are the folks at banks and mortgage servicing companies who signed hundreds of foreclosure documents a day. Frequently they didn’t read them at all. Even more frequently they didn’t bother to check that the financial information in the foreclosure documents was accurate or that the financial company bringing the foreclosure could even prove that it had actually owned the mortgage in question and had the legal right to foreclosure. 

But the robo signers signed away putting their signatures on a line that said they had reviewed the documents for accuracy.

The result is a virtual national moratorium on mortgage foreclosures and an investigation by every single state attorney general—yep, all 50 of them—into the mortgage servicing industry.

According to FBR Capital Markets, losses for banks and other mortgage servicing companies from the moratorium could run to $6 billion to $10 billion and stretch out for at least four or five years.

Ah, if only that was the biggest bill hanging over the U.S. banking industry. But it’s not. Potentially. There’s this little problem called “put-backs.” That could be much bigger. No one knows how much bigger or who owns how much of it. And that’s a huge issue for investors since we all know how much Wall Street likes uncertainty.

How much bigger? Read more

Saving the big banks but destroying banking

There have been no obituaries. No eulogies. No burial services.

But this quarter marks the death of traditional bank at the big money center banks.

Oh, I know we’ve seen amazing earnings reports from the likes of Goldman Sachs (GS) and JPMorgan Chase (JPM) this quarter. But their profits came from things like trading.

From everything in fact but what you and I—and certainly the preceding generation—called banking.

And it’s exactly those huge profits from everything but banking that have put the final nail in the big banks as bank.

Goldman Sachs and JPMorgan Chase and maybe Bank of America and Citigroup too will survive as financial institutions. But they won’t be banks.

That’s important because hate them though we may at the moment, banks play an important part in making our economy go. And the withdrawal of the nation’s biggest banks from traditional banking leaves a gaping hole in our economy. Perhaps other banks—smaller national banks and regional banks—can fill that hole. But it’s not certain. (I’ll be taking a look at the regional banks next week.) The absence of the big banks from traditional banking won’t bring the economy crashing down, but it will make the economy less efficient at a time when we need as much economic efficiency as we can get.

The model for what these big financial institutions will be is laid out in the most recently quarterly earnings reports from Goldman Sachs and JPMorgan Chase. Read more

Bad mortgages get worse at Wells Fargo stretching out schedule for paying back $25 billion bailout

Fear of the future trumps current earnings, as far as investors are concerned, when it comes to Wells Fargo (WFC).

On July 22, before the opening bell, the company reported second quarter earnings of 57 cents a share–far above the 34 cents a share Wall Street had projected, and revenue of $22.5 billion, again above Wall Street expections of $20.5 billion. As the company said in its conference call, “Wells Fargo earned another record profit this quarter: $3.17 bln. While many banks are struggling to earn consistent operating profits, we’ve had back-to-back quarterly record profits”

And once the stock market opened for trading, the stock sunk like a stone. By 11 a.m. ET shares had dropped by 6%.

Why? Because investors looked past current earnings and revenue to the bank’s huge portfolio of some of the riskiest types of mortgage loans in some of the nation’s worst real estate markets, and didn’t see much that they liked. Read more