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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About Tom Lindmark 401 Articles

I’m not sure that credentials mean much when it comes to writing about things but people seem to want to see them, so briefly here are mine. I have an undergraduate degree in economics from an undistinguished Midwestern university and masters in international business from an equally undistinguished Southwestern University. I spent a number of years working for large banks lending to lots of different industries. For the past few years, I’ve been engaged in real estate finance – primarily for commercial projects. Like a lot of other finance guys, I’m looking for a job at this point in time.

Given all of that, I suggest that you take what I write with the appropriate grain of salt. I try and figure out what’s behind the news but suspect that I’m often delusional. Nevertheless, I keep throwing things out there and occasionally it sticks. I do read the comments that readers leave and to the extent I can reply to them. I also reply to all emails so feel free to contact me if you want to discuss something at more length. Oh, I also have a very thick skin, so if you disagree feel free to say so.

Enjoy what I write and let me know when I’m off base – I probably won’t agree with you but don’t be shy.

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