Bondholders are penalizing Bank of America Corp. the most of any of the largest U.S. financial firms as the investigation into the foreclosure crisis expands.
Credit-default swaps on the country’s largest bank by assets rose above those of its peers by a record margin, according to data provider CMA. The contracts, which imply Bank of America has lost its investment-grade rating, exceed Citigroup Inc.’s by the most ever and surpassed Morgan Stanley’s this week for the first time in a year.
Attorneys general from all 50 states joined to open an investigation into whether lenders and mortgage companies falsified documents as they sought to repossess homes. Charlotte, North Carolina-based Bank of America said Oct. 8 it would curtail foreclosure sales nationwide, as speculation rose the lender would have to buy back home mortgages with faulty documentation.
“As we look at the financial landscape and try to put pen to paper and figure out who might be most exposed to problems associated with foreclosure moratoria, with robo-signers, with mortgage put-backs, Bank of America’s at the top of the list,” said David Havens, a financial institution debt analyst at Nomura Holdings Inc. in New York.
Bank of America is being singled out for expanding its real-estate operations and acquiring Countrywide Financial Corp., then the biggest U.S. mortgage lender, in 2008 during the worst housing slump since the Great Depression, Havens said. The bank also increased its mortgage assets through the $29 billion purchase of Merrill Lynch & Co. in January 2009 under pressure from the Federal Reserve, which was trying to prevent failure of the U.S. banking system.
“There’s nothing different about our company today than yesterday,” Chief Executive Officer Brian T. Moynihan said after a speech in Boston yesterday. The bank’s review of foreclosures will take “a few weeks to get through,” he said.
Jerry Dubrowski, a spokesman for Bank of America, declined to comment further.
Elsewhere in credit markets, the extra yield investors demand to own company bonds instead of similar-maturity government debt rose 1 basis point to 168 basis points, or 1.68 percentage points, according to Bank of America Merrill Lynch’s Global Broad Market Corporate Index. The spread has narrowed 13 basis points since Aug. 31. Yields averaged 3.396 percent yesterday, the index shows.
Structured notes issuance in the U.S. reached a record, with banks selling $38.4 billion of the securities this year as investors turn away from stocks and toward fixed-income products. Sales of the products, which are bonds bundled with derivatives, compare with $33.9 billion last year and $37.6 billion in the previous record year of 2008, according to database StructuredRetailProducts.com.
Credit-default swaps on the Markit CDX North America Investment Grade Index, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, were little changed, rising 0.08 basis point to a mid-price of 98.54 basis points as of 12:58 p.m. in New York, according to index administrator Markit Group Ltd. In London, the Markit iTraxx Europe Index of 125 companies with investment-grade ratings increased 1.93 to 102.5.
The indexes typically rise as investor confidence deteriorates and fall as it improves. Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The cost to protect Bank of America’s debt for five years climbed for a fourth day, touching yesterday’s record of 205 basis points, according to Phoenix Partners Group. The difference between the swap price and the average of the five largest banks grew yesterday to 41.1 basis points, the most on record.
Citigroup’s swaps rose 3.2 basis points to 177 today and contracts on New York-based Morgan Stanley fell 2.2 basis points to 173, Phoenix data show. In February, Citigroup’s contracts were 94.4 basis points higher than those of Bank of America’s, according to CMA.
“For all of these residential real estate issues that are dominating the headlines today and have significant political implications in the 19 days going into the election, Bank of America sits there more exposed than Citigroup right now,” Nomura’s Havens said.
Prices on Bank of America’s credit-default swaps imply the debt is ranked Ba1 as of Oct. 13, five levels below its actual A2 grade, according to Moody’s Corp.’s capital markets research group. That’s the first time the firm’s swaps have signaled a junk ranking since May 6, the data show.
Bank of America’s $2.5 billion of 4.5 percent notes due in April 2015 fell 0.381 cent to 103.89 cents on the dollar as of 11:36 a.m. in New York, Trace data show. The bonds were issued at 99.9 cents in March to yield 215 basis points more than Treasuries. The bank has $360 billion of bonds outstanding, Bloomberg data show.
The rising price of swaps reflects potential costs that banks may face on so-called mortgage put-backs from investors. Put-backs occur when a mortgage lender is forced to repurchase a loan that’s been sold for securitization. Banks may also have to pay for legal challenges.
The Association of Financial Guaranty Insurers, a trade group for bond insurers, said in a letter last month to Moynihan that his bank should repurchase as much as $20 billion in home loans that were based on wrong or missing information.
Moody’s put Bank of America’s loan-servicing grade on review for a possible downgrade on Oct. 4, citing irregularities in the foreclosure process and deterioration of loss mitigation and collections.
The bank’s swaps have doubled this year, adding 106.4 basis points. That’s still down from 400.7 basis points in March 2009, CMA data show.
“You’ve had balance sheet repair but the work isn’t done,” said Joel Levington, managing director of corporate credit at Brookfield Investment Management Inc. in New York. “People need to get their hard hats back on.”