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In mid-October, Bank of American stock price took a dive. The markets were spooked by a letter sent to Bank of America on behalf of major investors in mortgage-backed securities. They were demanding that Bank of America buy back billions of dollars in bad loans.
But as NPR's Tamara Keith reports, these investors and others face a lot of obstacles.
TAMARA KEITH: If you were to imagine an investor in mortgage-backed securities, it would probably be someone like Bill Frey. He owns Greenwich Financial Services and has millions of dollars worth of sour securities on his books. But he says it's entirely possible that you own these toxic investments too. And when they lose value?
Mr. BILL FREY (CEO, Greenwich Financial Services): Those are not hurting billionaires sitting in Greenwich, Connecticut or Palm Beach. There are just not enough of those people around. It's hurting American pension funds. It's hurting, you know, your sixth grade school teacher who's sitting in Daytona Beach, is having the security behind her pension eaten away.
KEITH: During the boom years, banks gave out hundreds of billions of dollars worth of home loans, packaged them into securities and sold them to investors in the form of bonds. Pension funds, mutual funds and life insurance companies bought them, because they promised good returns and relatively low risk. Of course, it hasn't exactly worked out that way. Investors complained that the mortgages put into the securities weren't as good as promised and that the banks aren't doing a good job of dealing with troubled loans.
Frey's 81-year-old mother is a retired schoolteacher.
Mr. FREY: As I explained this to her, her response was, we spent a lot of money on your education, now what are you going to do about it?
KEITH: What he's done is launch a campaign to protect investors' interests. He also stands to make a lot of money if he succeeds. Frey wants some of the nation's largest banks to buy back the bad loans. Many of the contracts that created the securities say that if the banks don't hold up their end of the deal, the investors can force them to take the loans back.
Three years ago, Frey thought it would be easy to get other investors to sign on. It hasn't been.
Mr. FREY: I was greeted as an insane person.
KEITH: Frey now claims to have won over more than 150 investors. That should allow him to clear the first hurdle: getting legal standing to even start the process. But there are a lot of other obstacles. Before they can file suit, investors have to provide evidence that the bank has breached the contract.
Attorney David Grais, who has worked with Frey, says there is a catch-22.
Mr. DAVID GRAIS (Attorney): You can't get access to the loan files unless you can prove that there's a problem with the loans. And you can't prove that there's a problem with the loans until you've had access to the loan files.
KEITH: Grais thinks they've found workarounds for these problems. But there are others. Getting investors to agree on strategy is a challenge, since they often have conflicting interests.�And get this - most investors don't even want their names made public.
Scott Simon, who oversees mortgage investments at PIMCO, a firm reportedly going after Bank of America, says getting groups of investors together is very hard.
Mr. SCOTT SIMON (PIMCO): The fact that it's taken as long as it has for really any noise to occur in spite of people being very upset and trying to do what was in the fiduciary best interests of their clients tells you it's a problem.
KEITH: And once investors actually do file a suit, the banks have made it very clear they aren't planning to roll over.
Bank of America spokesman Jerry Dubrowski hits the same themes as other major banks.
Mr. JERRY DUBROWSKI (Spokesman, Bank of America): It would be irresponsible on our part to settle the claims without doing a loan-by-loan analysis. You know, if there's a valid claim, we'll act responsibly and repurchase the loan. But if there isn't, we will contest it and we will defend our interests.
KEITH: Going through these claims loan-by-loan will be time consuming and for investors the legal fees will add up fast, without any guarantee of success.
Christopher Whalen at Institutional Risk Analytics says if the investors win, it could push the banks towards insolvency. The numbers are that big.
Mr. CHRISTOPHER WHALEN (Senior Vice President, Institutional Risk Analytics):�If they have the wherewithal to sue and to see their way through a miserable grinding litigation, I think they have a good chance of winning.
KEITH: But it's a gigantic if, one the banks appear to be betting won't happen, at least not on a large enough scale to do real damage.
Tamara Keith, NPR News, Washington.
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