Is Countrywide Heading Towards a BK

Here’s an interesting scenario that Credit Agricole’s analyst, Mike Mayo, paints. He suggests that Bank of America (BAC) might find a Countrywide bankruptcy the best alternative if things in the mortgage world continue to deteriorate.

From the WSJ’s Deal Journal, here is his reasoning:

1) The legal reason: Countrywide is a separate legal entity from BofA, and Mayo says “one would suspect the lawyers at Bank of America tried to limit its potential damage from Countrywide at the time of the merger.” As a possible precedent, he mentions Sam Zell’s buyout deal for Tribune, which filed for Chapter 11 a year later. Presumably, Mayo means Tribune was a separate entity from Zell and his real estate investment firm. That bankruptcy filing hasn’t exactly left Zell smelling like roses.

2) Bad mortgages are all Countrywide’s fault: BofA is neck deep in the Great FauxClosure Crisis of 2010. Mayo says most of those problems can be traced back to Countrywide, which he said originated 86% of BofA’s mortgage loans that are 60 days or more behind on payments.

3) Bankruptcy may be the cheapest option. Mayo figures a Countrywide bankruptcy could cost BofA less than the worst case scenarios of having to buy back huge swaths of mortgage securities from grumbling investors such as Fannie Mae and the Federal Reserve Bank of New York.

Intriguing! Mayo discounts the possibility of this happening because of the hit to its reputation and potential political fallout that would come BofA’s way.

Maybe, but you may remember that at the time of the Countrywide purchase and for a while thereafter there was a lot of talk to the effect that BofA had basically taken one for the team. That it bought Countrywide at the behest of the government to help avert what would have been a catastrophic failure of the firm.  If something along those lines did occur then there might be more than a couple of executives at the bank that are somewhat miffed about the politicians raking them over the coals about robo-signers as well as suggesting they might force them to buy back billions of suspect mortgages.

Perhaps the bank has decided that there is a point at which it makes no sense to continue to suffer hits to its overall franchise in order to prop up Countrywide and if that causes the political crowd to come looking for its scalp, well then there are tales to be told.

Pretty fanciful stuff, but then again a lot of things happened behind a lot of closed doors during the crisis.

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