The potential liability facing bankers arises from the $2 trillion in subprime, alt-A and option-adjustable rate mortgages that they underwrote and sold to investors, mostly as mortgage-backed securities during the home-lending boom of 2005 to 2007. The losses on the mortgages will be horrendous before the dust settles—over $700 billion on these and other so-called nonagency mortgage securities, according to New York mortgage-research specialist and broker Amherst Securities Group.

And now investors—from the federal housing giants Fannie Mae (NYSE: FNMA.OB - News) and Freddie Mac (NYSE: FMCC.OB - News) to major bond managers like closely held Pacific Investment Management and BlackRock (NYSE: BLK - News) —are fighting back. They are seeking to put back the mortgages to the banks from whence the investment flotsam came and force the banks to eat much of the mortgage losses.

The argument hinges on the arcane contract principle of representations and warranties, known as reps and warranties in legal jargon. Namely, did the mortgages go bad because of the unanticipated nationwide collapse in home prices (a so-called exogenous factor) or are the banks responsible for the mess because they "misrepresented" to the mortgage purchasers the shoddy quality of the mortgages they put in securities and pools?

lready some of the buyers have enjoyed a modicum of success in their putback efforts. Fannie Mae and Freddie Mac have managed to return over $13 billion in defective mortgages and are gearing up to do even more. Before it's all over, the banks may have to swallow more than $30 billion in losses from Freddie and Fannie putbacks alone, according to an estimate by the Washington, D.C., mortgage-research boutique Compass Point Research & Trading. That's because no bank in the mortgage business can afford to play hardball with secondary market behemoths like Fannie and Freddie, the government-sponsored enterprises (GSEs) that own or guarantee about half of all home mortgages in the U.S.

Consumer prices rose moderately in October but there was little sign of inflation as the cost of autos, clothing and hotels fell.

The Consumer Price Index rose 0.2 percent last month, the Labor Department said, mostly due to higher gas prices.

But excluding the volatile energy and food categories, the core index was unchanged for the third straight month. In the past year, core prices have risen by only 0.6 percent, the smallest annual rise since the index began in 1957.

The weak economy is keeping a lid on prices. Consumers, facing high unemployment and slow wage growth, are restraining their spending. Retailers and other companies don't want to risk losing frugal shoppers by raising prices.

The report provides support for the Federal Reserve's recent moves to boost the economy. The central bank said earlier this month that it would buy $600 billion in Treasury bonds in an effort to lower interest rates and spur more borrowing and spending.

That decision has come under extensive criticism. Many leading Republican economists said earlier this week that the Fed's actions risk triggering runaway inflation.

But several economists said Wednesday's report shows that concerns about inflation are misplaced.

"Fears about a potential outbreak of inflation from the Fed's recent moves are massively overblown and are completely out of sync with the reality of extremely competitive markets for ... products and services," said Brian Bethune, an economist at IHS Global Insight.

Dynegy's board has accepted a sweetened $603 million takeover bid by Blackstone Group LP but the deal still faces opposition from a prominent shareholder.

The private equity group on Tuesday increased its offer for the Houston power plant owner by 11 percent to $5 per share.

Shareholders vote on the deal later Wednesday and approval is far from certain. Financier Carl Icahn said Tuesday he would oppose the increased offer, saying it still undervalues the company. Icahn owns a nearly 13 percent stake in Dynegy.

Icahn also said the takeover agreement discouraged other bidders from submitting competing offers. Dynegy has agreed to pay Blackstone a $16.3 million breakup fee if the deal isn't approved.

The shareholder vote is expected later Wednesday in Houston.

Record company Warner Music Group Corp. said Wednesday that its fiscal 2010 fourth-quarter loss widened on lower revenue, reflecting the continued shift from CD sales to digital music.

The company lost $46 million, or 31 cents per share, compared with a loss of $18 million, or 12 cents per share, during the same period a year prior. Revenue fell 13 percent to $752 million from $867 million. The fourth quarter ended Sept. 30.

Analysts surveyed by Thomson Reuters expected a loss of 13 cents per share on $731.7 million in revenue.

"The company's revenue results continue to reflect the transition from physical to digital in the recorded music industry where increases in digital revenue have not yet fully offset the declines in physical revenue," the company said in a statement.

Revenue from recorded music fell 13.3 percent to $619.9 million during the quarter, with the U.S., Japan, and most of Europe the weakest markets. But digital revenue from the sector rose 7 percent to $183 million.

Just a day before its historic return to the New York Stock Exchange, General Motors confirmed Wednesday that it would expand its initial public offering of common shares by 31 percent.

The company, responding to superheated investor demand for its stock, said it will raise the size of its IPO to 478 million common shares from the previously announced 365 million. Most of the common stock will be sold by the U.S. government, which is trying to unload what is now a 61 percent stake in the country's largest automaker.

The IPO, scheduled for Thursday, will cap a stunning resurrection for an automaker that nearly ran out of cash in 2008 and lost more than $80 billion in the four years leading up to its bankruptcy filing last year.

"This is, in my knowledge, one of the most remarkable turnarounds in corporate history," said Anant Sundaram, a finance professor at Dartmouth College's Tuck School of Business.