Actually in receivership the FHLB gets paid off by FDIC to obtain release of the collateral (same with the Fed). FHLB’s over-collateralization runs about 20%. FDIC made noises a while back about the up-front cost to the insurance fund of settling with FHLB to marshall the receivership’s assets.

In the case of Countrywide, FHLB borrowings exceed the balance in the deposit insurance fund, so FDIC would have to tap its line with Treasury if a purchase & assumption variant couldn’t be arranged to dispose of the bank.

I expect BoA will get some form of open bank assistance from FDIC for its Countrywide `sub’. As in, honking huge open bank assistance.

Frankly, if BAC shareholders have to choose to eat $2B now or eat $2B plus some large multi-billion number later I think those optics are fairly easy.

Of course, there will be many a comment about what idiot cut the deal to begin with but people are already saying that anyway…

Maybe I am being too clinical about this, but if you believe that CFC is worth zero, and worse, would represent a negative NPV to BofA, that lovely little $2 billion preferred is also worth zero. Yes, preferred is senior to common, CFC is still trading and therefore technically not worth zero (a price versus value issue).

But even if you work back from the common price, that $2 billion preferred is not worth anywhere within hailing distance of $2 billion. But the issue is optics: most BofA shareholders won’t see it that way. Most people have trouble with the idea of sunk cost. And that creates a nasty problem for Lewis.

And the real issue may still be that everyone wants to avoid a bankruptcy due to 1. impact on Federal Home Loan Banks and 2. what liquidation price for Countrywide assets might mean for other banks’ pricing for valuation purposes of similar paper.

I’m surprised that Institutional Risk Analystics got the deal terms wrong. It’s usually reliable. I’ll have to be more careful about it in the future.

But the absence of a cost to BofA makes it even more viable for them to walk.

Agreed with the general comments, this is probably the Street and/or BofA fishing for Fed support. And I suspected from the get-go that the regulators had a hand in the deal in the first place, although by all accounts, it was only a wee nudge. There’s a proud tradition of that sort of thing (Bankers Trust-Deutschebank, for instance).

Merely pushing CFC to prepare a bankruptcy flling would lead to a serious renegotiation of terms. But given the Fed’s history, it is unlikely to stand up to serious game of chicken.

CFC sold virtually all of its loans to the GSEs under a “special servicing” MBS option. This means that CFC will be reimbursed for virtually all of its outlays (PITI advances, foreclosure costs, etc.) by the GSE.

Also, to correct the record, the $160 million break-up fee (if it can be collected!) would be paid by CFC to BAC, NOT the other way around.

Lots of creditors, including the GSEs, are probably restraining their aggressive collection efforts against CFC as they pray for the merger to happen. If the merger looks doomed, these creditors will swoop in and the ensuing feeding frenzy could precipitate CFC’s bankruptcy filing.

Only idiots are playing this game and as a result, we will all pay, as morons like Bernanke look for mechanisms to link taxpayer bailiouts to fraud!!!