Money Sage (archive)

Well folks, the big news this morning is that Bank of America is actually ACQUIRING Countrywide. This forces us to repeat the question we posed at the time of BofA's original $2 billion investment in Countrywide a few months ago: Now that Bank of America has rescued Countrywide, who will rescue Bank of America?

We find this deal very, very interesting. On the surface, it would seem that BofA does not care to take its $2 billion lump entailed in the virtual devaluation to next to nothing of its $2 billion investment. The forthcoming action is most assuredly NOT throwing good money after bad, according to BofA's PR. Not at all. Countrywide is a great franchise, a great buy, the #1 mortgage company in America, etc etc. Of course, these assertions rather neatly skirt the obvious question: if Countrywide is such hot stuff, how come the stock has lost nearly 90% of its value and is poised to sink to ZERO, with bankruptcy but a hairsbreath away? Since Bank of America remains a profit-seeking institution as far as we know, and has not joined the world of philanthropy, we view what is clearly an ultra-risky move in an industry which has suffered grievous losses by taking too much risk in the extremely recent past, as being a tad fishy.

No, we think there is a lot more here than meets the eye. BofA is performing a great public service, and we mean that seriously. What public service? It is precluding the looming insolvency of the largest mortgage lender in the United States. Such insolvency would have more than minor ripple effects, we would opine. There is the small matter of the many billions in OUTSTANDING loans TO Countrywide, for example. The loans of depositors under the FDIC-limit would be covered, although a Countrywide bankruptcy would cost the FDIC many, many billions, which perhaps, just perhaps, the FDIC does NOT currently possess. As for those imprudent or gullible or greedy enough to have purchased the many billions of Countrywide debt securities and commercial paper, why, whey would be OUT OF LUCK. And OUT THEIR MONEY. There is no federal insurance, no bailout, for investors in corporate debt securities or commercial paper. Such immense losses would contract sharply the availability of investor capital to purchase new bank debt, as well as shatter the confidence of would-be investors in bank debt securities and commercial paper. This, in turn, would move the entire banking system a giant step closer to insolvency and collapse. Certainly it would further contract -- and very significantly -- the lendable capital of the banking system, with a multiplier effect on the economy.

Bank of America has saved us from the severe contractionary and deflationary implications of a Countrywide bankruptcy. It has prevented a Countrywide collapse from intensifying the ongoing panic in the credit markets, which might have been increased by orders of magnitude. (Of course, there are other lenders whose failure would pose a similar risk. These firms require a DURABLE RESCUE -- as does Countrywide, whose "rescue" remains quite provisional, in our jaundiced view). We must, in our present parlous circumstances, be grateful for small favors. Countrywide will NOT be giving us an additional shove onto the high speed train which has the potential to transport us to the Japanese destination of prolonged economic stagnation and general deflation.

Being of inquiring mind and skeptical disposition, we must of necessity ask the obvious question. WHY has BofA rescued us, if only temporarily?

Let us take a stab in the dark. We are not wholly free of the lurking suspicion that Uncle Sam, in one or more of his institutional guises, has encouraged BofA to rescue Countrywide with MORE than a nod and a wink.

We regard the BofA action as another move in what we have called "Bailout by Bits and Pieces." We do not mean to be party poopers, but it should now be clear to the gentlemen at the great white palace on Consitution Avenue, and at the impressive structures at both ends of Pennsylvania Avenue, that there is ONE and ONLY ONE white knight who can retrieve the situation. Whatever disguises this white knight wears, whatever pretenses and rationalizations and complex facades he employs, the one and only secular savior remains: UNCLE SAM. Uncle needs to do more, much more, and FAST. That, at least, is our view.