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Transcript for the video impaired:

Bloomberg TV video, September 20, 2011: Is Countrywide Headed for Bankruptcy?

ERIK SCHATZKER, Inside Track anchor: It’s being called the nuclear option, the possibility that Bank of America would put its Countrywide mortgage unit into bankruptcy protection as a way to curtail mounting losses from litigation. B of A CEO Brian Moynihan was quizzed about it last week at a conference; he wouldn’t rule it out. And people familiar with the bank’s plans say B of A considers it an option. But as we learned from Lehman Brothers, bankruptcy for a financial firm can be very messy. So who better to discuss B of A’s nuclear option than the lawyer who put Lehman into bankruptcy? He’s known as the dean of the bankruptcy bar, Harvey Miller, a partner at Weil Gotshal & Manges. Harvey, good to see you back here on the Inside Track.

HARVEY MILLER, Former Managing Director, Greenhill & Co./JD, Columbia School of Law: Good morning.

ERIK SCHATZKER: There are many ways to break down the possibility of a bankruptcy for Countrywide, but let’s talk first about its viability as an option mechanically. How easy would it be for B of A to put Countrywide into bankruptcy?

HARVEY MILLER: It’s very easy to put a company into bankruptcy. It’s hard to get it out of bankruptcy.

ERIK SCHATZKER: Okay. Very easy because all that’s required is a filing?

HARVEY MILLER: Because all that’s required is filing a petition under the bankruptcy code. But you have to consider all of the options. Bankruptcy generally is the last option.

ERIK SCHATZKER: Okay. And we have to assume that that’s exactly the way Bank of America is treating it. Is there any precedent for a bank or a financial firm for doing this kind of thing, voluntarily as it were, taking a unit, perhaps of Countrywide’s size and importance, and bankrupting it?

HARVEY MILLER: I don’t think there’s an exact parallel, but years ago some foreign banks actually put U.S. subsidiaries into bankruptcy, or they were put in involuntarily. I think you have to look at the situation where you had asbestos-tainted companies, where you had a parent company which was trying to divest itself of that kind of liability. It was a very difficult thing to do. The relationship between the two entities is always a subject of great concern, and in our litigation-prone society it’s going to generate a lot of litigation.

ERIK SCHATZKER: Before we get down to your opinion, I want to talk about the practicality of it, because as we found out from Lehman Brothers, and you know better than anybody else, a bankruptcy for a financial firm with so many counterparties and interconnected units can have many unintended consequences. So how viable is this, practically speaking?

HARVEY MILLER: Well again, to put it in the context that it’s the last option: Financial firms are dependent upon confidence. Once that confidence evaporates, there is no possibility of reorganization. So what you’re really talking about is a liquidation. Liquidation means litigation, where you have all these different parties fighting with each other.

ERIK SCHATZKER: Here is a question: Okay, if you have a bunch of parties fighting with each other, even when it is the last resort, as it were, what happens if B of A says, “We’re no longer going to stand behind the commitments we made to Countrywide’s obligations”? Does anybody believe that B of A is going to stand behind the obligations that other units may have made to creditors?

HARVEY MILLER: I think that’s one of the major considerations that the board of directors of B of A would have to consider. What is the potential impact on the Bank of America? Will confidence in Bank of America evaporate? Will –

ERIK SCHATZKER: And that would threaten its very survival.

HARVEY MILLER: Exactly.

ERIK SCHATZKER: It’s a bank. It’s a confidence game.

HARVEY MILLER: Absolutely. Financial institutions do not do well in bankruptcy.

ERIK SCHATZKER: What about the rest of the financial system? Again, drawing on your experience, if we saw all kinds of fractures develop in the financial system as a result of Lehman’s bankruptcy – many of them not directly as a result, only indirectly – might it lead, in your opinion, to a loss of confidence in other debtors?

HARVEY MILLER: It could. Fear is a terrible thing in the financial community and the investing community, so fear leads to panic and you get a run on the bank.

ERIK SCHATZKER: So if, and this is a big if, if you were advising Brian Moynihan, the CEO, and Bank of America’s board, what would you be telling them right now when it comes to Countrywide? Acknowledging of course that you’re not an insider and intimately familiar with Countrywide’s balance sheet.

HARVEY MILLER: Since I know none of the facts, I can be absolutely certain, it’s a difficult problem. As I said, it would be the last resort. You’d have to analyze all the relationships between the parent and the subsidiary and evaluate the potential consequences. It’s a major step forward, or backwards, depending on your perspective.

ERIK SCHATZKER: Do you think regulators might be able to resolve this problem? Do they have the power under Dodd-Frank to effectively head B of A off at the pass and maybe use some kind of a resolution mechanism to prevent Countrywide from being put into bankruptcy with all of the potential nasty consequences that we’ve discussed?

HARVEY MILLER: I’m not quite certain in my own mind whether Countrywide itself is subject to Dodd-Frank. It may not be a systemically important financial institution, so it may be outside of Dodd-Frank. But I would think that the regulators would be all over this situation in trying to help Bank of America solve it.

ERIK SCHATZKER: Well, and that brings up the last point: Is B of A bluffing? Countrywide seems to have been raised as a possibility at the same time – maybe not even seemed, it has been raised at the same time that B of A is negotiating with the states’ attorneys general, with the federal government, over mortgage liabilities, many of them stemming from Countrywide’s deals.

HARVEY MILLER: The brooding presence of the possibility of a Chapter 11 or a bankruptcy is always used as a threat to get parties to agree to some solution. So it’s there. And it’s a threat. And there’s more and more talk about it.

ERIK SCHATZKER: Harvey, great to see you here. Thank you for coming.

HARVEY MILLER: Good to see you.