naked capitalism

Richard Kline says:

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.

bobo7874 says:

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.

Anonymous says:

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?

bobo7874 says:

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.

Enginerd says:

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.