THE BASIS POINT

BofA Bad Loan Ripple Effect

Let’s see: the US government helps out BofA, and is now asking them to buyback loans? An investor group (including PIMCO, BlackRock, and the Federal Reserve Bank of New York) is deciding whether to sue BofA even after BofA’s recent loan buyback settlement with Fannie and Freddie.

As BofA is hammered by bond investors to buy back loan pools that comprise those bonds, one big question is whether BofA would go back to those smaller banks who originally did the loans (and sold them to BofA) and try to collect from them. Which defeats the goal of regulators to broaden out consumer lending choices from big banks to smaller banks. One thing that gets lost in the regulatory propaganda is that the big banks are a support system for the small banks. And if this scenario where BofA pushes accountability down the chain, small banks would suffer. It’s a tangled web.