Bank stocks plunged for a second day Friday while the cost of buying protection for bank debt surged, driven by mounting fears about depth of mortgage losses.
Major mortgage players including Wells Fargo & Co. (NYSE: WFC), JPMorgan Chase & Co. (NYSE: JPM), Citigroup Inc.( NYSE:C) , and Bank of America Corp. (NYSE: BAC) kept falling.
Although big banks had seen a strong recovery from the financial crisis, there raised concerns about the health of major banks due to flaw foreclosure documents and recent revelations about mortgage fraud. In addition, investors doubted how quickly banks will be able to put the mortgage mess behind them.
Standard & Poor graded Bank of America stock as “Hold” on Friday. Previously, the nation’s biggest bank had received “Strong Buy”. According to S&P analysts, it is possible that the bank lacked cash to offset losses on fraudulent loans.
Two days before Friday morning, it cost 10 percent less to insure bonds issued by Wells Fargo, Citigroup Inc., Bank of America, and JPMorgan. Investors viewed that the banks would not be able to pay back bondholders.
In January 2008, Bank of America announced they would buy Countrywide Financial for $ 4.1 billion.
Wells Fargo bought Wachovia for about $ 14.8B in an all stock transaction in October 2008. In the same year, JPMorgan Chase bought most of the banking operations of Washington Mutual from the receivership of the FDIC. After taking on deposits and branches of Washington Mutual, the bank raised $ 10 billion in a stock sale to cover writedowns and losses.
Such big banks took on billions in bad loans for the purchases, leading to their deeper mortgage problems.
Many major banks have halted foreclosures. Bank of America delayed foreclosure proceedings in 23 states to stall the process amid documentation problems across the U.S. The U.S. largest bank’s move added to a growing list of mortgage companies suspending foreclosures including J.P. Morgan Chase and Ally Financial Inc.’s GMAC Mortgage unit.
The employees of mortgage companies signed documents in foreclosure cases without paying attention of the verification of information in them. Bank of America, JPMorgan, and Wells Fargo face billions in losses on fraudulent loans.
However, the foreclosure suspension is not just bad for banks. They can delay writing down loans in foreclosure due to slow foreclosure process.
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