Explaining Southern California's economy

Countrywide settlement solves at least one Bank of America problem

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Mark Wilson/Getty Images

File photo: Angelo Mozilo, founder and former CEO, Countrywide Financial Corporation, testifies during a House Oversight and Government Reform hearing on Capitol Hill March 7, 2008 in Washington, DC.

So Bank of America will shell out $335 million to settle legal claims that Countrywide Financial "systematically discriminated" (according to the LA Times) against minority borrowers. Here's the thing, though: The subprime loans in question were generated before BofA bought Countrywide in early 2008. So BofA inherited this problem, along with the rest of the long nightmare that has been Countrywide — and the bank has been at pains to point that out, stressing that it doesn't do this kind of thing.

This raises the obvious question of whether, as part of the acquisition process, BofA realized that Countrywide was pushing minority borrowers into subprime loans. The federal government was certainly on the case. The Fed alerted the Justice Department to it in 2007.

You can now see how Countrywide was operating, opportunistically urging borrowers to go subprime — especially if those borrowers would have qualified for a conventional prime loan. Countrywide was invested in generating subprime loans — that was its business model. It certainly couldn't make as much money on prime loans, nor could it presumably garner as much interest from firms that wanted to package higher-risk, higher-return loans into securities that could then be given the general thumbs up by the credit ratings agencies.

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Why Warren Buffett can't lose on Bank of America

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Justin Sullivan/Getty Images

Bank of America customers use an ATM on January 21, 2011 in San Francisco, California. Bank of America reported today that it has reached an agreement for an $8.5 billion settlement with a group of investors who lost money buying mortgage-backed securities from Countrywide Financial.

Recall, if you will, this past summer when Warren Buffett put a floor under Bank of America's then-plummeting stock, serving up a $5 billion "Buffett bailout." Now, as one of the worst years for bank stock ever winds down, Bank of America has been headed South again. Yesterday, it dropped through the symbolically important $5 per share level (it's back up over $5 today). As the Wall Street Journal reports, Buffett is now like a lot of people who hold BofA mortgages: $1.5 billion underwater.

Is Buffett concerned? Probably not:

Don’t worry about Buffett, though. He is guaranteed a profit on his BofA investment. The banking giant must repay Buffett’s $5 billion, plus a 5% premium, at any time. Plus, the world’s third-richest man will rake in dividends of $300 million a year from BofA, and he won’t give up those payouts no matter what sub-basement BofA shares tumble into.

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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. 

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