California Sues Countrywide Too

California joins Illinois in deciding to go after subprime lender Countrywide for less than savory lending practices. Note both suits were filed the day shareholdeers are to approve the increasingly dubious deal (although Bloomberg tells us that tax breaks resulting from Countrywide losses will pay for the purchase price. Yes, but will the also be enough to cover damages from successful litigation?). The suit also names Angelo Mozilo and president David Sambol as defendants.

From the Wall Street Journal:

California’s attorney general has filed a civil lawsuit alleging that Countrywide Financial Corp. engaged in deceptive advertising and unfair competition by pushing borrowers into risky loans. The 46-page complaint also names Countrywide chairman Angelo Mozilo and the company’s president David Sambol.

“Countrywide exploited the American dream of homeownership and then sold its mortgages for huge profits on the secondary market,” California attorney general Edmund G. Brown said in a statement.

The lawsuit alleges that Countrywide “viewed borrowers as nothing more than the means for producing more loans” and originated loans “with little or no regard to borrowers’ long-term ability to afford them and to sustain homeownership.” These practices “were created and maintained with the knowledge, approval and ratification of” Mr. Mozilo and Mr. Sambol, it alleges.

Here is the text of the complaint.

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  1. Anonymous

    Yes, but will the also be enough to cover damages from successful litigation?

    Why would B of A care? Isn’t its own liability shielded by the corporate veil? Its not a straight merger… but a drop-down.

    B of A has nothing to lose.

  2. Yves Smith

    I will have to check with my corporate general counsel buddy, but I would imagine these policies have an exemption for fraud. And since Mozilo is being sued personally in both the Illinois and California cases, the AGs are alleging that these practices started at the top, rather than were the result of inadequate supervision of lower-level employees.

    If the AGs are successful and I were the insurer, I’d be looking at ways to not pay any claims related to Countrywide.

    A possibly more serious move is outlined at Institutional Risk Analytics, that Bank of American could put the Countrywide merger sub into bankruptcy. But they consider this to be damaging for the entire banking industry:

    But perhaps more troubling, a deliberate strategy to use a “bankruptcy remote” vehicle like Red Oak [the CFC merger sub] to insulate BAC from the ongoing value destruction of the subprime meltdown could adversely affect the entire market for bank debt. What investor in their right mind would want to hold the debt of any bank holding company were BAC to elect the nuclear option and place Red Oak into a bankruptcy?

    I think you also underestimate the impact that continued legal problems will have on Bank of America. This will be a distraction to management, and associate the bank’s brand with bad practices and continuing litigation. Investors are not always a rational bunch. I think Bank of America has discounted the possibility that continued bad press could lead them to have a lower earnings multiple than their peers.

  3. Yves Smith

    Whoops the binary comment came from mxq.

    macndub, if you look at the Verlegger testimony, he makes it very clear he is talking about corporations, not governments. He specifically talks about the investment options they have, and keeping oil inventories is one of them. Another comment from the testimony:

    The data demonstrate that companies accumulate incremental stocks oil only if it is profitable to do so. Since May, it has not been profitable. Since May, companies have been dumping stocks.

  4. Anonymous

    Factual correction: BofA shareholders don’t vote on this one, though Countrywide shareholders did approve the deal earlier today.

  5. Yves Smith

    Oof, will fix immediately. I swear I read that on Bloomberg, but maybe the sentence was written in passive voice.

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