Bank of America Buys a Big Chunk of the Shitpile
There are several things that concern me about the news that Bank of America has agreed to buy a big chunk of the shitpile. First, there’s this bit, which sounds to my non-expert ears like it could become a real problem.
By purchasing Countrywide, Bank of America would combine its 5,800 branches with the mortgage lender’s coast-to-coast network, helping Mr. Lewis achieve his goal of becoming the biggest player in every major consumer finance category.
Bank of America would brush up against a federal cap that prevents a bank holding company from controlling more than 10 percent of the nation’s deposits. Because Countrywide Bank is a federally insured savings and loan, the rule does not apply.
Seeking to ease any regulatory concerns, representatives for the companies were in Washington on Thursday to brief regulators.
Given the financial situation of this country, I’m not sure it’s a good idea for anyone to hold 10% of the nation’s deposits. Now match that detail with this speculation from Herb Greenburg, via Calculated Risk.
We’ll know it soon enough, but with the leak that Bank of America is near acquiring Countrywide, several things would appear apparent (at least while we’re playing the guessing game):
1. The Fed is behind the deal.
2. The Fed is behind the deal because the rumors yesterday of a near bankruptcy were probably true.
3. As part of the deal, the government likely agrees to guarantee BofA against Countrywide-related losses.
4. Lost in the in the noise yesterday was that Moody’s downgraded the ratings on 30 (count ‘em — THIRTY!) tranches of Countrywide’s mortgage debt by more than a few notches. They did something similar before American Home Mortgage filed for bankruptcy.
[snip]
8. BofA gets a free bank and a put to the government.
By Bank of America, do they mean that America owns the risk but the Bank owns the upside?
And, as always seems to happen with these things, the guy who built the shitpile floats away in a golden parachute.
Mr. Mozilo is expected to remain as chief executive of Countrywide until the deal closes, probably in the third quarter, people briefed on the transaction said. After that, he would serve on a transition team and would remain with the combined company on an interim basis.
He could be entitled to an exit package of roughly $72 million. That would be on top of the $410 million in pay, including $285 million in option gains, that Mr. Mozilo has taken home since he became Countrywide’s chief executive in 1999.
I really wish the Federal Government would instead help out people who are in foreclosure–like the people who owned the two houses on my street that foreclosed and brought the value of my own house down by 20%–rather then prop up an apparently rickety structure while those who built that structure get rich in the process.
Boy do you sound pissed this AM as you should be of course. Mornin’ EW.
This seems like a short term solution to a long term problem and does, as you say, bugger all to solve the underlying problems. In fact it seems as though this is just some fu**ery tying to delay the inevitable.
I know of someone who is in foreclosure now. A good, hard working, decent family could afford even the outrageous mortgage but are up shit’s creek because of the heavy burden of property taxes. Property taxes that have increased exponentially during the last 6 plus years of declining federal revenues. It is a farkin mess.
EW – BOA’s pursuit and now purchase of Countrywide suggests several things that I think have gone unnoticed:
1) Due diligence. I suspect that BOA has identified a method for sorting out the good loans from the bad, or in other words, identifying the risk. Do they believe that the junk debt has been fully written down and what’s left represents all the good debt? Or is there some agreement to have the feds insure the bad, while BOA takes the good?
2) Within the past year, Countrywide had a market cap of some 23 billion dollars. It’s now shrunk some 84% to 4.6 billion dollars. Let’s assume that Countrywide is now fairly valued. Does this massive decline in valuation indicate that 84% of Countrywide’s former market valuation was simply crap?
3) Fanny Mae and Freddy Mac bought many of Countrywide’s loans. Is it proper to believe that the 84% of what these government sponsored enterprises bought from Countrywide is also crap? If so, oh, we are so in for a rough time.
AT
All great points.
BoA has said the newly purchased Countrywide won’t do any sub-prime. That’s not necessarily a good thing; a well-managed subprime is an importnat way to get people into houses. But it seems like it will write off a ton of CW, and then make sure it doesn’t take on any new risky loans. But I’m not sure that’s enough.
As for the 84% number–that’s a very good question, isn’t it?
Now that I am a creditor in the AHM bankruptcy, seeing how the players are bailing out Countrywide strikes me a mixed blessing. Greenburg’s point 4 about Moody’s is very eerily dejavue for me.
I took out a 30 year fixed mortgage for my house and have lived within my means. The suckers/people who have borrowed with exotic mortgage products are looking to bake and eat their cake too. Its bad policy to let this meltdown occur, but I am very mixed about the bailout part. There are to many people in houses they cannot afford. This kind of correction was obvious, especially to anyone who watched it happen in the late 80’s.
Funny how it was under a president named Bush then too. As in the current administration, the Reagan/Bush I had criminal organizations being run out of the Vice Presidents office.
I’d hate to see people facing foreclosure get relief instead of the kids getting out of college and grad school with a hundred thousand dollars in student loans.
ApacheTrout–BofA bought a $2B position in Countrywide several months ago. Even at the time, many people thought it was likely solely to have a few months to poke around the books from the inside. The 84% of lost market cap is (ostensibly) in lost expectation of future earnings, and does not mean that the conforming loans it sold are worthless.
I don’t know of any mechanism by which the Fed can directly achieve #3 (backstopping BofA losses). Indirectly, I suppose they can agree to take junk a the discount window.
I do think that waiving the 10% rule is one of the things the Fed can do (and likely will.)
Calculated Risk has been rife with good discussion of all this (especially in the comments); one thing that has come up is that there’s a lot of preferred stock–namely, about $4B of it. Does this get paid first, leaving essentially nothing for the common stock?
Your point regarding backstopping losses is an important one. A story to illustrate:
Years ago, in my banking days, my division handled a 40% loan participation in a very large loan originated by another major bank. The loan was 90% guaranteed by the EDA, so once the debtor ran into trouble, and was paying only interest (after at least one renogiated start date for principal repayment), it took several months before the lead bank determined that a meeting in D.C. with the EDA was in order. Although I had not worked on the loan, the responsible officer was unable to attend the meeting and asked me to attend in his stead. I was accompanied by a senior lawyer in the prestigious outside law firm that handled the drafting of our loan agreements, so at least I only had to familiarize myself with the financials. I was attending basically as spectator and reporter since it wasn’t my deal.
The lead bank began the meeting by reviewing the financials in order to persuade the EDA representatives that in spite of everyone’s original hopes for the enterprise, it didn’t appear that the company was viable. Therefore, it seemed an appropriate moment had arrived for the EDA to live up to their part of the bargain. It was clear from the questions and answers coming from the EDA reps that they were hemming and hawing about something. Finally, they let the cat out of the bag: 1)EDA, like other government agencies, relied on annual funding from Congress, and even if they used all of their funding to backstop our loan, it would only amount to one quarter of what was owed, and, even worse, 2) the agency would never be allowed to use all their annual funding to support just one loan. I’ll never forget the look on my attorney’s face at that moment as he turned absolutely purple with rage.
Bottom line: unless you are looking at the full faith and credit of the U.S. govt, be very wary of how a transaction is supported.
Just another gripe here re BoA: They purchased MBNA’s credit cards. And promptly shortened the time you have to pay your bill. Strangely, I have 2 credit cards with them (and they have different lead times re payment!. But it’s my American Psychological Association card that has the shortest time from bill reception to due date… literally about 2 weeks. I phoned them about that, because while I pay my bill each month, it’s nerve-wracking that there’s so little time to get that bill in the mail! Very annoying. I told them, I’ll use another credit card instead.
These guys, who will have a corner on the market of consumer lending are clearly creating conditions where the consumer could easily get a payment in late – and surely collect a huge fee. Makes me really angry. And I’m betting they’ll do the same with everything else. Make it hard for the consumer so they can slap big fees on things. Right now I’m very irritated with Bank of America!
Ok. Got that off my chest.
Also, regarding credit card companies and the “cute little tricks” that generate more add-on fees: Check the closing date on your next statement against the date you receive it. For two different cards last month, the closing date was TEN days prior to my receiving the bill, and the payments on both were due less than two weeks from the date received. I called and complained; customer service at both institutions assured me the bills are always mailed out a day, maybe two, after the closing date; definitely not later. “It all depends on the Post Office” they say. And, of course, they mail bulk presorted first class, no postmark, no way to prove what date they sent the bills out. Verrry interesting to note, my payment checks clear my bank about 5 days after I send MY mail out. The credit card companies want me to believe the USPS only has backlogs in one direction…? Hmph.
Senator Clinton is said to be considering a plan with $40 billion to help bail out people in foreclosure and a $30 billion tax rebate which “would be enacted later if economic conditions worsen”. It’s not clear who would get these rebates, yet, but she is scheduled to talk about this later today.
http://news.yahoo.com/s/nm/200…..LFzQKs0NUE
Has anyone put out what a responsible bail-out program would look like? Are some of the people facing foreclosure financially able to turn things around if they are switched into loans that have “reasonable” interest rates?
Is Clinton really going to buy into the voodoo of tax cuts to stimulate the economy? Give me a break. I was just starting to think she was returning to reality.
BTW aside from selling conforming loans to Fannie and Freddie (loans, which due to their being conforming are likely to actually pay), CFC got a boatload of cash recently from FHLB (~$50B IIRC) collateralized by their home loans. Chuck Schumer has been poking into that. That’s the stuff that is pretty likely to end up worthless.
I’ve been wondering about that 50 billion also.
just the beginning of nationalizing the banks (and controlling the assets of the “little people”) watch for more. and then a japan-style real estate scene.
Either that – or the banks will be “nationalized” alright, but owned by the national funds of wealthy nations!
For those interested, the folks here http://calculatedrisk.blogspot.com/ are to housing and banking as EW is to politics. Marcy, you’ll love Tanta, she has great snark also
oh, and take a look at evolving land-use regulation, too. the current mumbo-jumbo for rezoning is the all-purpose zone (mixed use) that allows ANYTHING. the free-for-all zoning. why? because retail/industry/commercial is going south faster than anyone could imaging. all the REITs holding the bag are desperate to lease to anyone for anything! stay tuned.
EW,
were those two houses owner-occupied?
I was looking at big media matt’s map in the dead tree version of the Atlantic. (http://matthewyglesias.theatlantic.com/archives/2008/01/the_housing_issue.php)
Much more readable in print.
IAC, it looks to me like a lot of the hottest spots are places where you’d expect a large second home/rental market, like south FL or Denver area. And , of course Southern California, the land of something for nothing and crazy real estate flippers.
I’m beginning to think the issue is not so much sub-prime as deeply leveraged speculators using their “gains” on a sale to make another purchase, and so on.
And just outright thievery. See Floyd Norris today.
http://www.nytimes.com/2008/01…..ref=slogin
Yes, in this case. One foreclosure was medical bills related. The other likely a subprime ARM.
But we’re in MI, where we lead the country in foreclosure rates, UHauls on one way out, and the like. We’re depopulating pretty seriously, but when global warming gets really bad, you’ll all want in…
So we should start a REIT right now that buys distressed properties along shoreline, yes?
Dunno. I just took McC for a walk by the Huron, which is as high as I’ve ever seen it (and I have walked there at least once a week for five years). Maybe on a hill overlooking the lakes and rivers.
You’ll all want in.”
Not me. I’ll head back to maine, where it will finally make sense that the Quebecois come south for vacation.
LOL! I assumed the Qubecois wanted the warm waters of Orchard Beach and the like and the carnival atmosphere that reigns along southern Maine coast.
And you KNOW your neighbors? What’s up with that, I thought you lived in America.
I don’t live in the ‘burbs. I live in a genuine neighborhood, where people of different classes and ethnicities and ages watch out for one another and chat to each other as we bring our recycling to the curb. Where neighbors mow the lawn of the senior woman across the street and folks with snowblowers snowblow one whole side of the street if the snow is particularly deep.
I love being able to deliver the financial news to Mr. Gnome before he finds it out from his sources. He loved Herb Greenberg’s #8. I am adding Calculated Risk to my bookmarks.
Now to my rant: That big sucking sound you hear is Bank of America slurping up everything in my wallet and elsewhere. B of A has my checking accounts; most of my credit cards have turned in B of A cards and now my teeny little mortgage is owned by B of A. I don’t like it one bit.
375 more days.
Gnome, can you get to a credit union?
Yes I can, but its not like I have a whole lot of cash to worry about right now. Our cash flows differently than most people’s. When our next ship comes in, Mr. Gnome says we will move our money, but right now there is nothing worth going to the trouble to move. Our net worth fortunately does not rely on B of A. But thanks for worrying about me, LooHoo.
Looks like the Shock Doctrine play is to go after Social Security and Medicare
One thing we know, they never quit trying.
Marcy
From Calculated Risk:
Tom, I have been in awe of Emptywheel for a long time. I try to do for mortgages what she does for law and politics.
Tanta | Homepage | 01.11.08 – 11:18 am | #
Oh, Tanta and I had a mutual love fest about a month back. Trust me, we’re onto each other.
We’re watching Our store get Robbed in Broad Daylight, and not doing anything about it.
The Goopers Know that the Republican Party is about to go the way of the Whig Party and disappear from Our political landscape. None of them, that I know, think the GOP and RNC has any viable future – they see a fracturing into interest groups – Fundies, Money Lovers, Racists, Hawks, Low Information TV/Talk Radio Sheep, etc.
So, they’re Looting US before they go – And They Don’t Care about the long-term viability of Our Country, either. It’s never been about Our Country with them – It’s always been about Just Them.
Party Over Country when they were in Power. Scorched Earth and Spiteful Obstructionism now that they are Losing Power. And “Fuck Everybody – I’m Getting Mine” – All the Time.
This is another Cost of Not Impeaching – The Goopers have No Political Future and nothing to lose – They are going to Steal US Blind, and if they can, they’ll cripple any Social Service Programs, like Medicare and Social Security, on the way out the door. All We have to do, is just watch them do it to US.
There never was a Noble Cause in Iraq. Those American Brothers and Sisters of Ours died Fighting for Lies, Greed and Hate.
How do you think They look at the Rest of US?
ahem.
That’s Old Orchard Beach.
There’s also amusement park stuff there. The Xcountry boys and I (I was the sprinting team–small school) used to go there and try to, um, meet nubile Quebecoisettes of a weekend evening. Never really worked out,sadly.
Oops. Sorry she says as she is now ROTFL.
I like Ogunquit Beach better.
Unregulated lending practices allowed people to spend money they did not have thus propping up the failing economy for Bush’s entire presidency. His popularity should be even lower, but he bought himself some time by ignoring and encouraging problems.
I might be mistaken here as I am not the detail queen, but isn’t bank of America owned in part by Saudi folks??
Also I still do not hear anyone discussing with any realism the truth about why so many folks are in foreclosure. I keep saying it, and people think my case is different, but if they googled “predatory lenders and fraud” they would get a slew of stories just like mine. These banks are violating Federal laws in such a way as to “force” foreclosures. Why?? Because there is a secondary business called “foreclosure repair” that is one more way to get money out of poor people. These banks stop taking your calls, stop responding to your faxes as soon as you are 60 days late on a payment. Then they refuse all further payments, offer you a plan that increases your payment by a third, with all kinds of illegal and unjustifiable fees, and hold on for the next 6 months. They send you a monthly payment inviting you to “work it out” and then they pass your calls after you enter your social or home phone number to a voice messaging system…and never return a call.
Same thing happens if you call the lawyer holding the foreclosure…they don’t return your call either. And the date of the sale will not be listed publicly until 60 days before the sale. I waited 3 months before I anyone would tell me what the date of foreclosure was. (when it became public record and my state had the info.)It took 6 months. I had the money to repay the 60 days late one month later when my ex was forced to pay his back child support in a large sum. I had enough to solve the case completely, but they wouldn’t return my calls, take my checks or give me a payoff. By the time of my foreclosure date, the amount owed had tripled from my normal house payments. There was 2500 in legal fees, 1000 in property inspection, 800 “miscellaneous”. Of course, I didn’t have THAT much saved up, and no way to know they were going to sock me with a payoff that looked like that.
Then, the week before you are to lose your house, they send you a refinance package that says that you can repay the loan by increasing your payment by 30% for the next year. If you don’t agree, they sell your house and you still owe the mortgage company because they pack on so many fees that your equity cannot bail you out completely. If you take the agreement, you are not allowed to be more than one day late. If you are they start foreclosure, again, which means the addition of several thousands in fees, again.
This is a racket. Their behaviors are illegal. At some point these banks are going to owe the people they ripped off some big bucks. But right now it is too labor intensive for local lawyers in bankruptcy courts to go through the payment history and ferret out the fees. Also many people do not know that it’s not legal for the bank to not take your calls, AND its easy for the banks to say “well, why didn’t you do this.” In my case, I sent certified letters, sent faxes, and kept a log of every call I made. The bank that has my mortgage is still not recording my payments, they keep saying I am 6 months behind and have added thousands in fees. I can prove I made my payments. I have to sue them for an accurate accounting. My lawyers don’t want to do the work because they often drop it at the last minute and do a work out. My laywer can’t make money if he can’t get punitive damages. But they aren’t handing those out too easily either.
They want to keep this part undercover, so that the banks will be sold. They want to keep passing the buck for as long as they can until the crap hits the fan. It’s not just the ARM’s. It’s illegal banking practices that violate the federal statutes…and most predatory lenders were breaking those laws with no regard.
I don’t like Lou Dobbs much but he is the only one who has accurately reported on the illegal behavior and illegal fees. It’s one thing if you were stupid and took out a bad ARM but knew the consequences, it’s another thing if they are violating federal law. And they are. I have wondered if the Saudi influence was part of it, because in Saudi they don’t charge interest to make money, they charge fees.
At any rate, I am reminding who ever will listen, this is going to affect our economy for many reasons, but I don’t think they will be able to protect the banks when the american people finally realize what has been going on. For now, they just blame the victims, and this is helping to hush the truth. They focus on the ARM’s because the ‘victims’ aren’t as sympathetic as would be in my case, where I can prove illegal behavior.
There is not going to be a way around this, when the truth comes out.
Is it possible this acquisition might require CFIUS review, then?
I have done some contract software/admin work here (ABQ) as part of a multi-bank data center, the purpose of which is to trace VRM paper/bonds (etc.) downstream so as to give these guys definitive information needed to determine who owns what, who holds paper (in many cases, they don’t know), locate liabilities etc. etc. All the national banks w/local presence are involved (save BofA), as are many large local & state.
My work involved pulling downstream data from many locations, designing database to mange it all, and pull it all together. My work for only one of ‘em (14 involved AFAIK), the others had either in house or contract techies doing the same. I also ended up implementing middle-ware (MW) that tied it all together.
This thing 1st went online last week of Aug., ‘07. It has been torn down twice since then and re-started from scratch because each iteration has fallen far short of fulfilling intended goal. I’m out of it (they didn’t pay me), but I’ve heard through grapevine it’s still unworkable.
I’ve watched closely… very closely. This thing is far more insidious than the coverage it’s received IMO, even from “respected” financial rags. It looks to me like Enron all over again:
a) create “entities” to “guarantee” (insurance) paper, backed only by other WS “investment” banks similar worthless paper.
b) move bad debt of the books (voila… it doesn’t exist!) into a)
c) and like Enron, pretend it’s manageable until every last $$ is sucked out’a there and moved out of US banking system. “Ooops, so sorry, can’t imagine how that happened.”
it is a great neighborhood and I am bummed about having to leave because of foreclosure and EW sorry about that making your value 20 percent less
Your house hasn’t sold yet–though it’s finally on the market.
I don’t regard this is as good news. Corporate vultures buy carcasses only when they know how to make them “live again”. Methods vary and are rarely what they seem to average Americans. Assets are bought for a fraction of book value. Multiple additional fees are built into every step of their recovery. Credit costs are already virtually impossible to calculate for the average consumer.
This purchase gives BofA enormous clout in lobbying Congress for subsidies and immunities – and increases their power to prevent badly needed improvements in the No Credit Card Company Left Behind bankruptcy “reform” legislation Bush passed in 2005.
BofA is no longer Mr. Gianinni’s bank; he would no more recognize what it’s become than Eisenhower would recognize the Republican Party. Dr. Frankensteen had better ask Eyegore just whose brain he put into that seven foot tall, 300 pound monster.
I should add that it also increases BofA’s clout with state legislatures, who control most debtor/creditor laws, debt collection rights and practices, and the remedies for their abuse.
There’s a saying in banking circles; If you borrow a little, you’re still just a borrower but if you borrow a LOT, then you’re a partner.
BofA just realized that Countrywide was a partner and they just decided to terminate their partner and take over.
Actually, it should be if you borrow a lot, then you have a partner. There’d be a lot less kitty-kat grinning in the world if people saw it that way, and if those executive parachutes that unfurl when the senior partner steps in were of more uncertain fabric.
On the story, I just got here and have nothing to say that wasn’t said very well by Prof. Foland and grayslady in particular. Iow, there’s a lot of risk to other big institutions, including some of the gov. rescuers like FHLB, that goes into being “too big to fail.”
Other small thing is that loans that Fannie and Freddie bought from CFC (and everyone else) met the normal old credit standards that generally ensure a bunch of loans will perform well at a high rate. The ugly stuff either stayed on CFC’s own books or was sold into the various mortgage-backed securities that are causing other investment companies so much agita, so as long as the rules for what F&F can buy stay the same, they are not at increased risk.
yes, Rayne, it does. But amazingly the servicer is not complying with the request for records. It has worked just like the bush administration. Stall. Refuse. Make me and my lawyers fight for every inch. The judge has been exasperated. It reminds me all too much of the way our gov’t is behaving.
It parallels to a T.
I don’t mean to rant, but I just don’t think the whole story is out yet.
EW:
PD: Grrrrrrrrr!!!!
Or “if you owe the bank $100, the bank owns you; if you owe it $100m, you own the bank.”
I think it’s fair to say here that Countrywide ‘owned the bank’, albeit indirectly. If it went tits-up, the autopsy would show that the plague was running rampant.
No, it still owns you, i.e. it gets to pull the plug. It might not like it —but it was still your plug. The only reason this is not clear is that Mozilo is not being made to walk the main drag in Calabasas with his pockets turned out.
Rick Winter has a wonderfully schizophrenic article up. The first part was evidently written before today’s announcement. It is a cool discussion of the whys and wherefores of a possible BoA/CFC deal, some of the ramifications for FHLB, etc. Then there’s an “Oh no, not really!” sequel written in the harsh light of reality. (Not that the evaluation is at all different in the two halves.)
The summary that follows describes $135 billion of sketchy sounding “assets” that would belong to BoA if this thing goes through, including over $30b of mortgages that Fannie & Freddie, the agencies, won’t touch under present rules. It’s still something of a mystery why this deal is happening in a big lump and not in a sort of staged breakup.