The Breakdown | Explaining Southern California's economy

Our little corner of the Bank of America sell-off

Bank of America, the country's second-largest bank (or first, depending on if you go by assets rather than market cap), is in a heap of trouble. Its CEO, Brian Moynihan, is presiding over a restructuring that's supposed to refocus the mega-bank on its core consumer business. This means massive layoffs — 30,000, according to various published reports. There's also been speculation that BofA will try to sell Merrill Lynch, the investment back it acquired after the financial crisis. But there's also speculation that Merrill would be absorbed into BofA and become something far less than the top-level i-bank it was back in the day. That's speculation for you! Heads one day, tails the next!

Countrywide is also a major factor. The subprime mortgage lender was picked up by BofA just before the financial crisis and its portfolio of bad loans is often pointed to as the biggest drag on BofA's performance. There's a nightmare scenario in which BofA puts Countrywide into bankruptcy and then witnesses federal regulators take control of the bankruptcy proceeding — and BofA. 

While we wait for all this to shake out, BofA is trying to get rid of Countrywide's correspondence mortgage-loan business. As the LATimes already reported, this could "[jeopardize] 1,400 jobs, including 700 in Westlake Village and Thousand Oaks." What are correspondence loans? Part of the leading edge of the now-disgraced subprime lending industry. BofA got majorly into correspondence loans by buying Countrywide. The loans are high-risk, originated by smaller lenders but backstopped by BofA's capital. The little guys need BofA's capital to originate the loans, something Countrywide (and now BofA) enabled by providing what's called a warehouse line of credit. After these loans are originated, they're sold to BofA and then packaged into mortgaged-backed securities. These in turn wind up in the dreaded collateralized debt obligations (CDOs) — tradable financial derivatives — that we all know so well from the subprime mortgage meltdown and the financial crisis.

It goes without saying that correspondence mortgage loans do not wind up in the high-quality slice of a CDO. But although they may be risky, they "accounted for more than half of BofA's mortgage volume," according to the LATimes. That doesn't seem to matter, as BofA already got rid of wholesale mortgage lending and the reverse-mortgage business. The message is clear: we're not in the high-risk banking game anymore. Regional banks or credit unions aren't happy that this cuts them off from the secondary loan market (they don't want to keep risky loans on their books), but other lenders may come into the correspondence space — although they may operate on much less friendly terms than BofA.

Moynihan is trying to clean up an unholy mess on this front and BofA's flagging share price, down significantly since the beginning of the year, reflects investor confidence in his ability to pull it off. The core problem, of course, is that Countrywide exploited the secondary market's voracious appetite for loans and screwed up what was otherwise a useful if not exactly glamorous service. The word on the street is that nobody wants to take the correspondence business off BofA's hands, and that means job losses when the bank shutters the operation.

If it's any consolation to the members of the correspondence group, once-might Merrill Lynch is pretty much unwanted now, as well. Moynihan fired Sallie Krawcheck last week, who was running the highly profitable division of which Merrill was a big part. 

Photo: Wikimedia Commons