No pun intended in the title…
I, along with a few others, were screaming about the BofA/Countrywide deal. I never thought there was any way in hell they would assume all of the debt because it would mean BofA was actually paying $10s of billions for the troubled lender. (Please see Previous Stories)
Now, we know the truth. It seems that BofA never intended to make good on Countrywide’s debt. They were just going to take what they wanted, including the servicing, servicing platform and select retail locations in areas where they may not have had coverage.
It is questionable whether they will even want to keep the name ‘Countrywide’ alive, as the name itself is now one of the greatest symbols of the mortgage and housing implosion.
Obviously this is trouble for those holding Countrywide debt. I actually remember watching some young pup on bubblevision about four months ago brag about buying loads of Countrywide debt because ‘the yields are so high and all they have to do is make it until September and its a home run!’ Oops.
But, I think the most significant implication surrounding BofA’s bold remarks is what this means for the debt of other troubled banks trying to raise capital or rumored to be ‘take-over candidates.’ Knowing that BofA can say ‘we just may not pay it and deal with the consequences’ should make every investor salivating over ‘high yields’ shake in their Ferragamo’s.
Who knows how and where all of this will end. Who knows if this was really an ‘asset purchase’ or a company buyout or even perhaps the first government bank bailout as many have speculated. This story may be in the headlines for quite some time. -Best, Mr Mortgage <>
Reuters – Mon Jul 21, 2008 11:27am EDT
NEW YORK, July 21 (Reuters) – The cost to insure the debt of Countrywide Financial Corp’s home loan unit rose on Monday after Bank of America Corp’s chief financial officer said the bank doesn’t intend to guarantee Countrywide’s debt.
Joe Price said on a conference call that “all I can say at this point is we don’t intend to guarantee the public debt.” He added that he understands the ramifications of not paying at maturity.
Bank of America acquired Countrywide on July 1.
In a filing earlier this month Bank of America provided no guarantees on the debt, though analysts said a new organizational structure indicated the bank is likely to repay Countrywide bondholders at maturity.
The cost to insure the debt of Countrywide Home Loans rose to 235 basis points, or $235,000 per year for five years to insure $10 million in debt, from 220 basis points, according Phoenix Partners Group.
Bank of America’s credit default swaps are trading at 112 basis points, according to Phoenix. (Reporting by Karen Brettell)