Home Loans has been bought by Bank of America, but its future remains in doubt.
Countrywide’s acquisition by Bank of America Corp. was supposed to help keep the troubled mortgage lender from collapse. Things might not turn out exactly as planned.
The people who did the deal that a strong bank would rescue a weak one. But the deal’s structure may have only delayed the inevita-ble — Countrywide still could face bankruptcy or a federal takeover potentially involving taxpayer dollars.
We aren’t facing either yet, but it would be naive to count them out.
“This deal is so rancid and unpredictable,” said Christopher Whalen, managing director at the consulting firm Institutional Risk Ana-lytics. “Bank of America’s executives can’t even articulate what the total liabilities from this deal are.”
Trouble at the combined company may spell big problems in the Bay State. Bank of America is the largest mortgage lender in Massa-chusetts, while Countrywide ranks second, according to data from The Warren Group, Banker & Tradesman’s parent company.
In recent weeks, Countrywide’s troubles have been overshadowed by headlines at other financial companies. There has been Indy-Mac Bank’s collapse and its government takeover in what was the largest regulated thrift to ever fail, in terms of assets. The continuing losses piling up at banks on their mortgage-related debts have also grabbed attention.
Sinking Ship
Countrywide’s acquisition by Bank of America was supposed to be the lender’s lifeline. Once the nation’s largest mortgage originator, Countrywide has been plagued by the deepening housing slump and lingering credit crisis. The Calabasas, Calif.-based company lost about $1.6 billion in the last six months of 2007 and another $3.2 billion in the first half of this year. It also faces numerous investigations and lawsuits related to its lending practices.
The $2.5 billion acquisition by Bank of America closed on July 1, but not everyone involved is pleased with the outcome. Countrywide bondholders have been agitated that Bank of America didn’t structure this as a direct merger. Instead, it shuffled Countrywide’s $38 bil-lion in outstanding debt into a wholly owned subsidiary.
Executives at Charlotte, N.C.-based Bank of America have also publicly said the company does not intend to back Countrywide’s debt commitments.
“All I can say at this point is, we don’t intend to guarantee the public debt but we understand the ramifications of not paying at matur-ity,” Bank of America CFO Joe Price said during a conference call on July 21.
That has disturbed bondholders, some of whom filed a lawsuit against Countrywide seeking $2 billion in repayment for their notes.
Bank of New York Mellon Corp., as the trustee representing some Countrywide debtors, alleges in a complaint that holders of Coun-trywide’s Series B floating rate convertible notes due on 2037 should have received the option to keep the notes or cash them in once the Bank of America acquisition closed, according to the lawsuit filed on July 31.
That right falls under the debt’s indenture agreement, which said should there be a “change in control” at the company then bondhold-ers would essentially be entitled to their money back. Countrywide failed to mail the “Fundamental Change Repurchase Notice” to hold-ers and the trustee by the July 16 deadline, the complaint said.
Excessive Authority
The complaint also states that the structure of the deal gives Bank of America “the power, in the service of its own corporate interest, to cause Countrywide to engage in acts or transactions detrimental to the business and financial condition of Countrywide.”
Bank of America spokesman Scott Silvestri said the bank disagrees with the “allegations in the lawsuit and the company will vigorously defend itself.”
But banking experts say the problem for Countrywide is that debtors have used a technical issue to stake out their turf, and their legal fight could lead other creditors to file their own claims. Should that happen, the experts say, the idea of the Countrywide unit being pushed into bankruptcy court proceedings wouldn’t be out of the question.
The prospects of bankruptcy could then spur government regulators — namely the Federal Deposit Insurance Corp. — to intervene.
“This is exactly the situation that the FDIC wanted to avoid with the marriage of Bank of America and Countrywide,” said Joseph Ma-son, professor of finance at Louisiana State University’s E.J. Ourso College of Business. “The FDIC did not want to take possession of Countrywide.”
Mason notes that the FDIC wouldn’t want to see Countrywide head into bankruptcy because of the precedent it could set. But a federal takeover also would put additional pressure on the FDIC, which has $53 billion set aside to deal with all bank failures, and would force Countrywide’s losses to be absorbed by public finances.
Pay attention to what happens next. Your tax dollars could be on the line. (AP)
