Links and Quick Takes 1/11/08

Mathematician proposes another way of divvying up the US House Nature. While gerrymandering is a proud US tradition, mathematician Paul Edelman argues that current districting is so far out of line with the “one person, one vote” standard as to invite lawsuits.

Bank May Buy Troubled Giant in Home Loans. New York Times. There’s plenty of chatter about the pending acquisition of Countrywide by Bank of America. Why would anyone with an operating brain cell want to take on a liability like this in a deteriorating banking market? While BofA isn’t taking the capital markets hits that banks like Citigroup are, it does have a big credit card business which will soon show signs of stress. A bank’s equity base is its most important commodity in a down cycle, and throwing away $4 billion plus God only knows how much in litigation costs to acquire Countrywide will come to be seen as a bad move. Note that the Financial Times coverage says BofA is trying to structure a deal to leave the legal risk behind. I’d be curious as to how they can possibly achieve that. They’d need to leave a legal entity and some assets behind (or put Countrywide in bankruptcy and then acquire assets out of the BK, but I thought the point of this exercise was to avoid bankruptcy).

Why sterling is the next dollar Martin Wolf, Financial Times. Expect the pound to continue to fall.

Moody’s says spending threatens US rating Financial Times. Oof, if this isn’t politically influenced, I don’t know what is. Moody’s says the US risks a downgrade on its debt rating unless it does something about its “social security and healthcare” spending.

First, everyone who has looked at the data says Social Security is not the problem. And even if it gets worse, some very minor fixes (raising the ceiling on payroll tax liability) will take care of it. The big problem is Medicare, and that in turn results not from demographic change, but from out of control health care costs. In other words, the answer is health care reform, not cutting entitlements. But you’d believe the reverse if you read Moody’s.

And why does the report not mention the fiscal sinkhole called Iraq?

China imposes price freeze to curb inflation Asia Times. Mind you, these are additional price controls.

Credit Card Debt Soars, No One Notices Dean Baker. Scary stuff. Retail sales growth appears to be the result of spending future earnings. Senator Lloyd Bentsen once said, “It’s easy enough to create the illusion of prosperity. All you have to do is write hot checks for $200 billion a year.” He was referring to deficit spending, but even though the numbers are now bigger, the same principle applies.

Everybody Knows… Cassandra Does Tokyo. This seemed fitting today.

The Comeback Continent Paul Krugman, New York Times. Claims that Europe has an underperforming economy are incorrect.

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  1. Anonymous

    Hi Yves,

    When I follow your link to the FT article on BoA/Countrywide, I didn’t find anything about leaving the legal risk behind. The text of the article as I read it follows.

    BofA buys Countrywide for $4bn
    By Ben White and James Politi in New York

    Published: January 10 2008 19:55 | Last updated: January 11 2008 16:54

    Bank of America confirmed on Friday it is buying Countrywide Financial in an all share deal that values the struggling home mortgage lender at $4bn.

    ”Countrywide presents a rare opportunity for Bank of America to add what we believe is the best domestic mortgage platform at an attractive price and to affirm our position as the nation’s premier lender to consumers,” Bank of America chairman and chief executive officer Kenneth D. Lewis said.

    ”We are aware of the issues within the housing and mortgage industries,” Mr Lewis added. ”The transaction reflects those challenges. Mortgages will continue to be an important relationship product, and we now will have an opportunity to better serve our customers and to enhance future profitability.”

    Under the terms of the agreement, shareholders of Countrywide would receive 0.1822 of a share of Bank of America stock in exchange for each share of Countrywide. The transaction values Countrywide at $7.16 per share, a 7.6 percent discount to the Thursday closing price.

    Countrywide shares plunged nearly 15 per cent to $6.69 after soaring more than 50 per cent on Thursday. Bank of America shares fell nearly 1 per cent to $38.98.

    Bank of America said it expected to make $670 million in after-tax cost savings from the transaction, or 11 per cent of the expense base of the two companies’ mortgage operations. About one third of those savings would come in 2009, two thirds would be realised in 2010 and savings would be fully realised in 2011, the bank said.

    Countrywide, which has been hit hard by the crisis in loans to high-risk house buyers, has a mortgage business worth $1,500bn and despite its difficulties agreed $408bn worth of new mortgage business in 2007.

    Talks between BofA and Countrywide, first reported by the Financial Times last year, have been sporadic and first led to a $2bn equity investment in Countrywide by BofA in August.

    The acquisition will allow BofA to expand its mortgage business to match its breadth in credit cards.

    Earlier this week, Countrywide, the largest US mortgage lender, was forced to deny rumours that it was close to filing for bankruptcy protection. The lender has been a popular target of shortselling hedge funds and has been subject to repeated rumours that it was about to fail.

    Countrywide did appear to teeter on the brink of bankruptcy over the summer when it lost access to the short-term debt markets, its traditional source of funding for mortgage loans.

    It recovered somewhat after receiving the $2bn equity investment from BofA and $12bn in new financing from its banks.

    BofA took its $2bn stake in Countrywide in the form of preferred shares that could be converted into common stock at $18 per share. At the time, the stake represented about 16 per cent of Countrywide’s market value.

    The purchase of Countrywide by BofA is likely to come as a relief to regulators who feared the impact of a Countrywide collapse.

    Copyright The Financial Times Limited 2008

  2. Yves Smith

    Anon of 12:15 PM,

    Note the time of my post versus the update on the article. This is a revised version of the story (for example, it says the story has been confirmed)/

    As noted earlier, with a stock deal for the entire company, you can’t shed liability.

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