AIG sues BOA

AIG sues BOA

American International Group (AIG) is planning to sue Bank of
America (BOA) over hundreds of mortgage-backed securities, adding
to the surge of investors seeking compensation for the troubled
mortgages that led to the financial crisis.  The suit seeks to
recover more than $10 billion in losses on $28 billion of
investments, in possibly the largest mortgage-security-related
action filed by a single investor.  It claims that BOA and its
Merrill Lynch and Countrywide Financial units misrepresented the
quality of the mortgages placed in securities and sold to
investors.  A.I.G. AIG, still largely taxpayer-owned as a result
of its 2008 government bailout, is among a growing group of
investors pursuing private lawsuits because they believe banks
misled them into buying risky securities during the housing boom.
At least 90 suits related to mortgage bonds have been filed,
demanding at least $197 billion, according to McCarthy Lawyer
Links, a legal consulting firm. AIG is preparing similar suits
against other large financial institutions as part of a
litigation strategy aimed at recovering some of the billions in
losses the insurer sustained during the financial crisis.

Debt downgrade hit pride more than markets

By now we all know that S&P has downgraded the US credit rating
from AAA to AA+.  That's a far cry from Greece's junk status and
still the second highest rating out there.  The blow is more
psychological than material.  “What I think the S&P thing did
was to hit a nerve that there's something basically bad going on,
and it's hit the self-esteem of the United States, the psyche,”
said the former chairman of the Federal Reserve, in an interview
with NBC’s Meet the Press on Sunday.  Having attacked S&P’s
“terrible judgment” in an exclusive interview with CNBC, US
Treasury Secretary Tim Geithner said America is much stronger
than Washington itself and voiced his confidence in the “basic
regenerative capacity of the American economy and the American
people.”

Others, like Bernd Weidensteiner, an economist at Commerzbank,
agreed that equities could be in for a rough ride but said he
believes the effect on the Treasury market will be temporary.
“Money market disruptions are not to be expected since money
market funds will not be affected by the rating action. They have
only short-term Treasury paper in their portfolios, and the
short-term rating was not affected. Finally, haircuts in the repo
market will certainly not rise massively,” said Weidensteiner.

Olick - rising foreclosures

"Just as we saw a double dip in home prices, we may be seeing
another surge in foreclosures.  And just as the home price
scenario was caused by artificial government stimulus, in the
form of the home buyer tax credit juicing home sales only
briefly, the foreclosure scenario was caused by real negligence,
in the form of the 'robo-signing' paperwork scandal.  Banks and
servicers stopped foreclosures entirely for a time after the
malpractice was discovered, and courts delayed the process,
picking through papers as foreclosures were resubmitted; that is
now turning around.  The system is ramping up again, and
foreclosure starts are up dramatically, more than 10% in June
from the previous month, according to Lender Processing Services
(LPS). The good news of the past few months has been that while
the end game is quickening, as stalled foreclosures are making
their way through the system at a faster pace, new delinquencies
were decreasing, leading us all to believe that the crisis is
abating.  Well think again.

New delinquencies rose 2.4% in June, which isn't a lot, but it is
still the wrong direction. This as the pipeline is still so
clogged that foreclosure timelines continue to rise. The average
loan in foreclosure in June was delinquent a record 587 days, and
more than 40% of 90+-day delinquencies have not made a payment in
more than a year. For loans in foreclosure, 35% have been
delinquent for more than two years, according to LPS.  [Friday's]
surprisingly good jobs report for July did not do much to impress
economists, who cited still fewer people working in July than
June and far fewer job creations on average in the past three
months than in three months before that. Bottom line, we need
surging jobs to shore up consumer finances and consumer
confidence, both of which are vital to housing's recovery.  Even
as Fannie Mae reported a second quarter drop in mortgage
delinquencies in its portfolio, chief economist Doug Duncan had
this to say about the future:

'Economic growth at the current pace is insufficient to spur
sustained, robust job creation, which is required to boost
sentiment, spending and housing demand. Our July Fannie Mae
National Housing Survey, to be released next Monday, continues to
indicate a high level of caution among consumers regarding
additional financial commitments. In addition, 70% of Americans
believe that the economy is moving in the wrong direction,
according to our quarterly survey that will be released. The
impact of recent financial market volatility on household wealth
is an additional setback to confidence and the outlook for the
housing market.'

If the foreclosure numbers are not improving significantly, which
the latest data would indicate, and the weak economy is in fact
getting weaker, the Obama administration will have to reverse its
course of removing itself from housing and figure out new and
better ways to jump back in.  I am constantly amazed, and have
been for years, at how little the President speaks of our housing
disaster, especially of late. It's what got us into this mess in
the first place, and without its strong recovery, the economy
cannot walk out of this recession on anything but a crippled
foot."

Fed says it's business as usual

Federal Reserve officials publicly declared it was business as
usual in the face of Standard and Poor’s downgrade of US
government debt, but privately they acknowledged these were
uncharted waters.  Within 90 minutes of S&P’s decision, a joint
release from US banking regulators declared that, despite the
downgrade of US paper, there would be no change in the
risk-weighting of treasury bills, bonds and notes or any paper
guaranteed by the US government. In other words, banks do not
have to post any additional capital against their Treasury
positions.  Regulators also announced that the treatment of US
treasuries at the Fed’s discount window would be unchanged.
Typically, the riskier an asset, the more collateral banks have
to post to borrow from the Fed’s emergency lending facility.

Fed officials met in the past two days to consider the impact of
a downgrade on markets. They concluded that, other than the
unknowable impact on sentiment, there would be little impact.
They suggested that there was not much money that would have to
"mechanically" sell treasuries because of investment
restrictions. So they didn’t expect much, if any, forced
selling.  Even if there were, they concluded that interest rates
were so low that any potential rise in rates would cause little
economic damage. They noted that treasury yields actually fell
during the debt ceiling debate with its threat of default and
downgrade because the US is still considered a safe haven.  In
addition, they say that the S&P downgrade provides little new
information about the US debt situation that the markets didn’t
have already. And markets have been on notice from S&P for
several weeks of a possible change.  But Fed officials
acknowledge they cannot quantify the potential psychological
impact on markets of the downgrade.

Mortgage stocks decline

After experiencing double-digit percentage declines during the
Dow's dramatic 500-point plunge Thursday, mortgage stocks
finished the week on a low note despite the market rallying
somewhat on news of better-than-expected job numbers Friday
morning.  Mortgage insurers felt significant pangs as the
companies, which are already dealing with uncertainty over their
place in the future mortgage finance space, watched their stocks
riled by Thursday's storm on Wall Street.  The PMI Group, which
saw its stock plunge more than 50% Thursday afternoon and another
37% Friday, ended the week with its stock price trading as low as
25 cents per share. Standard & Poor's lowered the insurer's
ratings Friday. The company is dealing with several issues,
including by its own admission fears that it will have to stop
writing insurance policies in several states because of heavy
losses that left it with inadequate capital and an excessive
risk-to-capital ratio.

Fellow mortgage insurer MGIC Investment Corp., saw its stock drop
about one% Friday after experiencing a 20% decline during
Thursday afternoon trading. By weekend, it was valued in the
$3.18 per share range.   Other mortgage insurers fared better in
Friday trading. At closing, Old Republic's stock was virtually
unchanged from a day earlier, falling slightly from $9.78 on
Thursday to $9.77 at close Friday afternoon.  Radian Group's
stock fell 4.83% Friday, closing at $2.76 per share.  The big
banks also continued to face the headwinds of poor to lackluster
economic news. Bank of America saw its stock drop 7.47% Friday
afternoon, closing a little over $8 per share.  Wells Fargo fell
more than 2%, closing at $25.21 per share.  Citigroup fell almost
4% in Friday trading, while JPMorgan fared much better falling
less than one percent.