At this point in the credit crisis it would seem that anybody claiming to have a firm handle on everything going on is either crazy, dishonest or a singular genius. Take the latest news from Bank of America (NYSE:BAC) - the terms of a deal to settle much of its liability to Freddie Mac (Nasdq:FMCC) and Fannie Mae (Nasdaq:FNMA) for mortgage put-backs not only surprised most observers, but angered a lot of people all over again. Moreover, there is uncertainty everywhere an investor cares to look regarding whether or not other banks will be able to strike similar deals and how these banks will deal with other claimants.

IN PICTURES: 9 Simple Investing Ratios You Need To Know

A Quick Take on the Deal
Early in January, Bank of America announced a deal with Freddie and Fannie whereby it was settling its potential put-back obligations to these entities for a total of $2.8 billion. This deal covers just mortgages related to Countrywide (which Bank of America bought), but will avoid more litigation regarding BAC's ultimate responsibility in buying back misrepresented or outright fraudulent mortgages under the terms of the put-back agreements that it had with these agencies.

In many respects, this was a deal so favorable to BAC it was close to outright theft. The liability between BAC and Freddie/Fannie could have been anywhere from $10 billion to upwards of $20 billion depending upon the assumptions an investor wanted to make about the settlement. As it stands, even more than $20 billion would have represented only about a 1% delinquency rate for these loans, when the actual rate has been running more like 11%.

It is also worth mentioning that this is tantamount to another bailout for the banks. Freddie/Fannie are under direct government control, while Bank of America (along with Citigroup (NYSE:C), Wells Fargo (NYSE:WFC) and many others) needed very cheap government money to stay liquid. What is interesting about this move, though, is that it avoids the splashy headlines of another TARP-like program that would be announced from a White House or Congressional podium. (For more, see Liquidity And Toxicity: Did TARP Fix The Financial System?)

More to Come
Although this deal takes care of a lot of Bank of America's liability to the government-sponsored enterprises (GSEs), it is not over yet. There are still upwards of $3 billion in non-CFC-related claims to cope with, though the mortgages in this pot have had significantly lower default rates.

Beyond that is the question of how the banks will handle the monoline insurers and private investors. BAC likely owes billions of dollars to companies like Assured Guaranty (NYSE:AGO) and MBIA (NYSE:MBI), and it seems unlikely that they would take the same pennies-on-the-dollar deal as the GSEs. By the same token, given that the market caps on just those two companies alone are $3.7 billion and $2.5 billion, even a heavily discounted deal could be really good news.

Then there is the question of the private investors. Allianz (NYSE:AZ), which owns the huge bond firm PIMCO, likely has billions of dollars in claims, and who knows what the bill is for companies like Fidelity, BlackRock (NYSE:BLK), T.Rowe Price (Nasdaq:TROW) and so on. Can any of these companies give a similarly sweet deal to B of A and face their investors (or their investors' attorneys)? Even if the government called them up and asked them to "take one for the team", there is a limit to how much they can write down these obligations.

It's Not Over Yet
Investors can likely count on years of negotiation and legal wrangling for BAC, Citigroup (NYSE:C), Deutsche Bank (NYSE:DB), Goldman Sachs (NYSE:GS), Wells Fargo and a whole host of others. Hardly anybody was innocent in this affair - ranging from duplicitous mortgage borrowers to avaricious mortgage brokers, greedy banks, and opportunistic investment banks (and let's not forget the sleepwalking regulators).

While many people will be furious with what they regard as yet another bailout of major financial institutions, the fact is that this is often how business works. Right or wrong, fair or unfair, companies that are large enough to threaten the stability of the entire system don't pay the same penalties as small fry who can be punished severely with no systemic risk. For bank investors, though, this is likely good news - it is uncertain to what extent other banks can replicate B of A's deal with Freddie and Fannie, but any progress towards a resolution of this mess, at a discount to the probable real liability no less, has to be seen as good news. (For more, see Top 10 Bailout Money Recipients.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center