Last Call

The one thing that Foreclosuregate has really done is rip the cover off of the secret fraud factory the banks have been running for years in the mortgage business.  Now the institutional investors that bought this toxic mess are suing to get their losses back.  It's one thing when a small company does it, but when the nation's biggest auto insurance company weighs in with a big-ass lawsuit against the nation's biggest bank over this, you know it's about to get ugly.

Allstate has sued Bank of America and 18 other defendants over losses it said it suffered on more than $700 million of mortgage debt it bought from Countrywide Financial.

In a complaint filed Monday in Manhattan federal court, Allstate, the largest publicly traded U.S. home and auto insurer, alleged that Countrywide misled it into believing the securities it bought were safe, and that the quality of residential home loans backing them was high.

"Defendants knew the loans offloaded onto Allstate were a toxic mix of loans given to borrowers that could not afford the properties, and thus were highly likely to default," the complaint said. Allstate suffered "significant losses" as a result, the complaint said. 

Among the defendants are several former Countrywide officials, including long-time Chief Executive Angelo Mozilo. 

Allstate won't be the last company to sue the banks over subprime losses either.  And these two corporate heavyweights have the money and the muscle to make this a full 15-round fight.  But it looks like the tale of the tape strongly favors Allstate.  Tyler Durden:

Allstate's sample sizes of Mortgage Loans are more than sufficient to provide statistically-significant data to demonstrate the degree of misrepresentation of the Mortgage Loan characteristics. Analyzing data for each Mortgage Loan in each Offering would have been cost-prohibitive and unnecessary. Statistical sampling is an accepted method of establishing reliable conclusions about broader data sets, and is routinely used by courts, government agencies, and private business. As the sample size increases, the reliability of its estimations of the total population increase as well. Experts in RMBS cases have found that a sample size of just 400 loans can provide statistically significant data, regardless the size of the actual loan pool, because it is unlikely that so large a sample would yield results vastly different from results fro the entire population.

In other words, Allstate used statistical analysis to show that no matter what random package of loans that Countrywide sold them, the loans themselves were all fudged.  In the most damning evidence, Countrywide claimed that 0% of the instruments they sold Allstate contained any mortgages that were underwater, i.e. not a single mortgage loan packaged for investment had a homeowner who owed more than the home was worth.

That of course was complete bull.  Every single tranche of mortgages that Allstate inspected had at least some underwater mortgages in it.

Every. Single. One. Ranging from 3.3% to 14.5%.

Let's say you are a major investor and are looking for something to sink capital into. I come to you and say "I have a chain of used car lots I would like you to invest in." You say, "Okay, let's see your inventory."

I show you all this paperwork that says these cars are popular and will sell well. I say to you "I promise that zero of these cars are defective." You go "Okay, let's invest."

And then you lose your shirt, and you find out later that I was lying about the car's prices and values, and you do some digging on your own and find out from a random audit of my car lots that 3.3% to 14.5% of the cars sold from my lot were lemons. You'd want your damn money back.

Something pretty similar happened here. Allstate is suing to get its money back and they have a pretty devastating case, according to the filing. Countrywide flat out lied.

Mmm, fraudtastic.  This one's going to get nasty, folks.