http://www.nakedcapitalism.com/2008/05/more-on-what-bank-of-america-might-do.htmlSaturday, May 3, 2008
More on What Bank of America Might Do With Countrywide Debt
The BofA/Countrywide follies continue. Earlier in the week, the Charlotte bank, in an SEC filing on the pending Countrywide acquisition, remained silent on the question of the fate of Countrywide bonds. As we had mentioned some time ago, BofA plans to use a deal structure that would leave the debt in a subsidiary so that creditors would have recourse only to Countrywide assets, and not BofA resources, for repayment (forgive me if I have oversimplified the structure). However, the Countrywide bonds had nearly doubled in price on the assumption that BofA would assume liability.
Reader Scott forwarded an article from the always-informative Institutional Risk Analytics. It tells us that BofA has agreed to take on Countrywide's $50 billion of Federal Home Loan Bank borrowings. IRA discusses some options for how BofA might proceed, which includes putting Countrywide into Chapter 11.
That begs the question: why didn't Countrywide go bankrupt in the first place? It would have been cleaner for Bank of America to stand aside, wait for Countrywide to crater, and cherry pick the assets it wanted, or buy the whole thing after negotiating a haircut with creditors. That clearly was the best course for shareholders. And Mozilo would not have fared very well in a bankruptcy. It will be harder for the big retail bank to defend its decision to rescue Countrywide if it promptly puts it into bankruptcy.
So despite the claims at the time the deal was announced (that BofA had been keen to buy Countrywide for some time), there was more here than meet the eye.