The news that PIMCO, the New York Fed and other investors are asking for billions of dollars worth of putbacks hit banks stocks like a bludgeon. But how big of a deal is this? Many assume the plaintiffs have a very strong suit, but it may not be that cut and dried. "Any litigation is going to be more of an uphill battle and less lucrative than the breathless reports would lead you to believe," Naked Capitalism suggests. It might not even get to a suit for a lot of those mortgages. 

The two big GHSEs, Fannie Mae and Freddie Mac, in their bid to recoup losses from the real estate implosion, have been requesting and winning more putbacks from the big banks. JPMorgan Chase (NYSE: JPM) and Bank of America (NYSE: BAC) are already acceding to some of their demands. We'll likely see this step up. Many think they are well positioned. "Fannie and Freddie have a lot more leverage," one expert tells Reuters. "If a lender doesn't buy back their loans," Fannie and Freddie could resort to some hardball tactics. "Private investors do not have that leverage," he said. That may be a bit simplistic, but we are seeing the two GSEs win more putbacks. 

Big private investors on the other hand may not be as successful, despite the media splash they made when they alleged widespread breaches of PSAs. Here's a list of RMBS at issue. 

Naked Capitalism notes legal differences at play, and that it is more straightforward for the GSEs to win putbacks than it would be for bond investors farther down the ownership daisy chain. The blog also has some inside sources who say bond insurers, the likes of Ambac, FGIC, Assured Guaranty and MBIA, who would certainly benefit from more putbacks and rescissions, "currently have access to the mortgage loan data and they have not been able to prove widespread fraud (or even widespread breaches), so I am skeptical that there is really a goldmine here for investors. What he is describing is a fishing expedition." 

Recent court activity suggests that putbacks are not guaranteed. A New York state judge recently nixed a class-action lawsuit against Bank of America on behalf of 374 trusts that bought mortgage securities from Countrywide. In September, a judge rejected fraud claims by two trusts suing Countrywide over mortgage securities. This month, a judge nixed a suit against Countrywide. 

The reality is that no one knows for sure how much this will ultimately costs the banks. Estimate run as high as $120 billion over several years in a worst case scenario, as calculated by JPMorgan analysts. But it could be much less than that. We'll just have to see. Enforcement actions may be the big wildcard. We may see some sort of costly global settlements with the states. Federal regulators may also be preparing a case. Lots of uncertainty remains. - Jim