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2. Selling MSRs the right move?

The House of Representatives, particularly the House Financial Services Committee, has emerged as ground zero in the move to roll back portions of Dodd-Frank, the landmark financial reform bill. To a certain degree, the zeal in the House reflects Wall Street lobbying activities, according to DealBook, which calls the committee "a magnet for Wall Street campaign donations."

Some might argue that the influence of big banks in the House has gotten a tad out of hand, especially after it was revealed that Citigroup essentially wrote one bill that would tailor derivative markets rules more to the industry's liking by exempting certain markets from heightened regulation. That said, some would argue that the bill is simply the best move to make, even if it boosts bank profits.

The proposal has no chance of ever becoming law, as it will not likely pass the Senate. Still, there are some political benefits for lawmakers, as they gain political mileage by opposing Dodd-Frank. At the same time, the episode has thrown Wall Street influence into a somewhat negative light, and that may ultimately spawn a backlash.

The fact remains, however, that the proposal has attracted bipartisan support, as many Democrats favor a liberalization of the controversial derivatives rules in Dodd-Frank. The right-most wing of the Republicans has yet to take a strong stand, however. It might be a tricky issue. Though they abhor excessive government regulation, they are also wary of the power of big corporations.

All in all, Dodd-Frank has emerged as a quite interesting prism through which to view larger political issues.

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By Jim Kim

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3. Massive JPMorgan settlement on hold for now

It's no secret that big banks have lost their ardor for mortgage servicing rights.

The reality is that new Basel III capital rules have made the business much harder to justify from a cost perspective. Citigroup has become the latest to acknowledge that it wants out of the business. Bloomberg reported that the bank has struck a deal to sell servicing rights on about $63 billion of loans, or about 21 percent of its total contracts.

Wells Fargo apparently began marketing rights on $41 billion of home loans last month. Bank of America has also been a seller.

Complicating the picture just a bit is that fact that MSRs serve as a natural hedge to higher interest rates, which tends to reduce refinancing and origination activity. But at this point, the value of such rights as a hedge does not outweigh the new capital requirements, which makes the business more costly to run. Banks are likely to proceed with their sales.

So who are the big winners? Two groups appear poised to benefit. Specialized mortgage-service companies have benefitted. The likes of Walter Investment Management, Ocwen Financial and Nationstar Mortgage "are capitalizing on such sales and building their business. Over the last couple of years, these companies have been purchasing MSRs from major banks," notes Zack's.

Some private equity and hedge funds also seem to be in a buying mood, notes Bloomberg. The lure: "assets that can increase in value when borrowing costs rise and giving them increased control over the rights to collect Americans' monthly mortgage payments." So it may be a weak bet on rising rates.

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Read more about: MSRs, Mortgage Servicing Rights
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By Jim Kim

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4. Bank of America faces new wave of litigation

People were hopeful that JPMorgan would by now be in a position to announce a $13 billion settlement with the Justice Department, one that would cover a wide array of charges by several government entities. Given the heavy volume of generally positive media leaks, the news that a snag has emerged is disappointing but not necessarily unexpected.

The Justice Department has nixed some proposals put forward by the bank.

The Department told JPMorgan that "it won't agree to language the firm submitted Oct. 27…. " The issue seems to be the government's attempt to "bar JPMorgan from trying to recover part of the costs" from the FDIC and "the company's bid to avoid criminal liability in cases that don't involve residential mortgage-backed securities," according to Bloomberg. The Justice Department and JPMorgan "also differ on whether to include an additional $1.1 billion payment in the FHFA pact as part of the total settlement."

It remains to be seen if this is a deal-breaker. But it would behoove the bank to settle, even if it does not prevail on every negotiating point. The benefits of wiping away a whole tranche of liability outweigh the costs of the settlement, even though you can't blame the bank for wanting to recover as much as possible.

My sense is that a settlement is still likely. But perhaps not as quick as originally expected. It just might take another round of personal talks between the CEO and the Attorney General.

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- here's the article

Read more about: JPMorgan Chase, Legal Settlements
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By Jim Kim

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5. Fed to maintain stimulus program

All of a sudden, Bank of America seems vulnerable to legal action related to misrepresentation of mortgages. Some might have thought that the bank, after spending $49 billion in legal expenses related to its ill-fated purchase of Countrywide, had put the bulk of its woes behind it. But recent events have put the lie to that assumption.

A jury in New York found the bank liable for Countrywide's widely panned Hustle program, which sought to aggressively (too aggressively in the mind of jurors) replace subprime volume with prime volume. The exact penalties will be set by no less than Judge Jed Rakoff later this year.

To compound the issue, Bank of America has disclosed in a financial filing that an undisclosed U.S. attorney plans to recommend that the Justice Department bring a civil lawsuit against the bank over defective mortgages. The state of New York is also expected to file charges against the bank's Merrill Lynch operations related to securitization issues. Other charges have already been filed. Recall that in August, the bank was sued by the Justice Department and the SEC in North Carolina for misleading investors when it sold $850 million in MBSs. There may well be other attorneys general around the country working on related cases.

The new activity reflects in part the work of a working group comprising the Justice Department, the SEC and the New York Attorney General.

All this will no doubt be costly. The bank also noted that possible litigation costs could rise to as much as $5.1 billion, up from an estimated $2.8 billion last quarter, notes Dow Jones.

Prosecutors just might feel emboldened by the in-the-works $13 billion settlement between JPMorgan Chase and the Justice Department.

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- here's the article

Read more about: Litigation, Bank of America
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By Jim Kim

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