Some months ago, we had mentioned that Bank of America was keen to avoid taking on Countrywide’s liabilities (who wouldn’t be?). The possibility that the giant bank might not provide a guarantee for Countrywide’s debt came to the fore again. Without BofA backing, the Countrywide paper is a pretty dodgy proposition. From Bloomberg:
Bank of America Corp., the second- biggest U.S. bank, said it may not guarantee $38.1 billion of Countrywide Financial Corp.’s debt after taking over the mortgage lender, fueling speculation that Countrywide’s bondholders face renewed risk of default.
“There is no assurance that any such debt would be redeemed, assumed or guaranteed,” the Charlotte, North Carolina- based bank said in an April 30 regulatory filing, adding that no decision has been reached….
Countrywide’s $1 billion of 6.25 percent notes maturing in 2016 traded at 90.25 cents on the dollar yesterday with a yield of about 7.9 percent, according to Bloomberg data. The debt traded as low as 46 cents in January, with a yield of 20 percent, just before Bank of America announced the purchase.
“I’d be quite concerned if I was a bondholder if the intent of Bank of America is as it reads in the filing,” said Gary Austin, founder of PDR Advisors LLC, an investment management firm in Charlotte. His firm, which manages about $600 million, doesn’t hold Countrywide debt…
“This confirms how tenuous this transaction is,” said Christopher Whalen, managing director at Institutional Risk Analytics, a banking research firm, from Torrance, California….
The wording in the bank’s filing is new, Victoria Wagner, a credit analyst at Standard & Poor’s Corp., said in an interview yesterday.
“If they let the debt fail, it would have implications for their other obligations,” she said. “They are still going to wholly own Countrywide.”.
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Sooo BoA bought Spreademwide’s, er, _Country_wide’s assets, but not it’s debts? Tell me how THAT one works.
—But there is a lot of this kind of thinking in the recent capitalizations and involuntary mergers we have seen in big financials like WaMu, and more money poured after bad in the pit that is Citi. Folks seeem to think they are investing in the assets while the liabilities are somehow stuck to senior stakeholders, ‘swapped off’ into the shadows, or otherwise other peoples’ problems. Actions such as these are all part of the ‘season of denial’ we are seeing which the Fed and the Treasury have bought with their auction swaps, a time of pretending that unpleasant facts are immaterial since not imminent or in view. Somewhere, somehow, and sometime much sooner than is thought, someone is going to have to take the hit for the losses on Countrywide’s assets, and that is just as true for everyother inflated asset or dodgy hedge. But as we see, big bankers and bond bagmen don’t act like ‘rational investors’ when the longjohns they have sewn to their hides start to spontaneously combust.
Tell me how THAT one works.
Not sure in this case — legal genius maybe — but we all know how it worked with JPM for the BSC bailout, err takeover, err whatever.
Without BofA backing, the Countrywide paper is a pretty dodgy proposition.
An understatement, to say the least.
I doubt BofA can acquire Countrywide’s assets without acquiring its liabilities, except perhaps by paying a fair price for the gross assets, which is then used to repay the debt, and even then there might be a variety of risks.
However, BofA might buy the stock of Countrywide, and thereby avoid liability for the Countrywide debt. If Countrywide filed bankruptcy, Countrywide might propose a plan of reorganization reducing the Countrywide debt and wiping out all pre-bankruptcy equity. However, the plan might give BofA first crack in acquiring the post-bankequity equity in Countrywide, in exchange for an investment of new cash. The key is that Chapter 11 generally gives debtors first crack at proposing the plan of reorganization, can get a plan approved over the opposition of some creditors, and can get equity in exchange for a new investment.
This isn’t legal advice; seek your own advisor.
they’re trying to get the same deal jp morgan got, i.e. let the government eat the shit, and let BA smell the roses.
BAC bought the stock – not the assets. They are not liable for the debt – they are stockholders. They could become liable for the debt for various reasons if they did not treat CW as a seperate entity.
By the way, interesting that no one is talking about the $50 billion that CW owes the Federal Home Loan Bank. What do you suppose the collateral is for that loan?
Since last July, when everything about “funny paper” became more public, I have not seen anything to be done except lending institutions holding that paper go into bankruptcy to get out of those obligations. Surely everyone who ever bought such junk didn’t thing this would all end any other way?
If the FED ends up with all the debt, no President or Representative of the people is going to make the people take it (trillions&trillions?) on themselves.
That “private bank” the Fed itself is history, face it.
anon 3:11,
I’d guess the $62B of collateral CFC pledged as security for the $51B of FHLB advances are bad stuff, like primary mortgages in states with anti-deficiency statutes, loans secured by secondary liens where the primary mortgage is underwater, underwater loans with borrowers who are judgement proof due to low income or assets, and securities backed by those. You know the junky stuff.
And yes, no one things BofA necessarily needs to take on the bond debt. The question is the extent to which it can underpay them or force the taxpayers to eat losses.
To Anon of 3:11, thanks for the fact check; I couldn’t remember whether this was equity or outright. If BoA stands off from Countrywide’s bonds, the latter just about has to be headed for bankruptcy—unless, Outcome 1, the Fed strips out the bad stuff and guarantees the bonds at par, leaving BoA to wholly acquire the retail and servicer, which is what they wanted all along. Then, too, we don’t really know what sub rosa guarantees BoA may have gotten from the Feds, if any, for plunging, what?, $7B into Countrywide in the Fall at a crisis point. The alternative, Outcome 2, would be what bobo suggested, Countrywipe files C-11, thumbs its nose at its bondholders sending panic waves through the bond markets, and blithely cuts a side deal for the assets with BoA. Outcome 2 stinks so high I’m not sure that this one would float if it went down deep.
Sooo, yeah, BoA’s announcement sorat reads like a pitch to the Feds for a formal bailout leaving them as receivers, JPM style. We all knew we would see more of these (st)deals, right?
From the Bloomberg article:
“Whalen expects Bank of America to absorb the best assets, including Countrywide Bank, while the debt remains with a new company created by the merger, Red Oak Merger Corp. Red Oak may then file for bankruptcy, shielding Bank of America from liability, Whalen said.”
Basically make a shell corporation to absorb the liabilities, but not the assets, and then it declares bankruptcy. Everybody wins, except the bondholders.
If BofA just bought the stock, that wouldn’t screw over the bondholders. They may have to go to court (which nobody wants to do) but they are owed money, and can collect it from Countrywide assets and/or earnings.