Bank stocks plunged 11% on Monday in their biggest one-day drop since April 2009, Hardest hit was Bank of America, the largest bank in the US, which saw its stock tumble 20% and the cost of insuring its bonds against default surge 50%. The bank has now lost 34% of its value since August 1. The drop has raised fears the bank will need to raise more capital to boost its balance sheet. It said yesterday that it had no plans to make such a move.Adding to BofA’s problems, yesterday insurance giant American International Group Inc. said they are suing the bank for more than $10 billion US, saying the bank cheated it by selling residential mortgage-backed securities that were overvalued. AIG said Bank of America and two companies that were later gobbled up by the bank, Countrywide and Merrill Lynch, sold the insurance company $28 billion in securities backed by home mortgages between 2005 and 2007, at the height of the housing boom. It. said it looked at more than 260,000 of the underlying mortgages, and found that the bank’s “stated metrics” for 40 per cent of the securities were false.
Bank of America has rejected AIG’s assertions. ”AIG is the very definition of an informed, seasoned investor, with losses solely attributable to its own excesses and errors,” it said. (Bank of America is not likely to be AIG’s only target it is expected to pursue other litigation to recover losses from counterparties that “sought to profit at our expense.” Taxpayers still own 77 per cent of the New York-based insurer, which received $182.3 billion of government bailouts.
American banks this year are likely to have the worst revenue growth they have experienced since 1938. But Bank of America in particular has lagged its rivals in improving the quality of its loan portfolio, while facing potentially steeper payouts, including from lawsuits over mortgage securities.