The Breakdown | Explaining Southern California's economy

Is Bank of America about to put Countrywide into bankruptcy?

Bank of America's stock price is drifiting down again today, edging precariously close to $7. There's really no convenient way to phrase it: the bank continues to suffer a hangover from its pre-financial crisis acqusition of Countrywide. So how do you solve a problem from Mozilo? Possibly...bankruptcy? This is from Bloomberg:

The option of seeking court protection exists because the Charlotte, North Carolina-based bank maintained a separate legal identity for the subprime lender after the 2008 acquisition, said the people, who declined to be identified because the plans are private. A filing isn’t imminent and executives recognize the danger that it could backfire by casting doubt on the financial strength of the largest U.S. bank, the people said.

The threat of a Countrywide bankruptcy is a “nuclear” option that Chief Executive Officer Brian T. Moynihan could use as leverage against plaintiffs seeking refunds on bad mortgages, said analyst Mike Mayo of Credit Agricole Securities USA. Moynihan has booked at least $30 billion of costs for faulty home loans, most sold by Countrywide during the housing boom, and analysts estimate the total could double in coming years.

I've bloged about this before, as BofA has pitched up and down in the past few weeks. A Countrywide bankruptcy wouldn't be trivial in Southern California. BofA is already rolling up Countrywide's correspondent loan business. The bankruptcy gambit has been discussed, with two scenarios. First, BofA management has proposed that it would be limited to Countrywide — the former mortgage lender has remained a distinct entity and could be moved to Chapter 11 without BofA getting sucked in.

Second, a Countrywide bankruptcy would be a signal that BofA is in pretty bad shape and possibly close to collapse. Federal regulators would then step in and assume control of the Countrywide action — and then take control of BofA. For folks in SoCal, this could be highly disruptive, given that BofA has around $200 billion in deposits in the Southland.

Now that the Countrywide bankruptcy meme has re-emerged — it spiked early this morning — does that mean we're getting some signals from Brian Moynihan & Co. that a decision in imminent? Countrywide is, after all, BofA's "subprime mortgage albatross," as the NYTimes memorably put it earlier this month. Given the news yesterday that the pace of foreclosures is picking up, it appears that banks want to get the subprime debacle in the rear-view mirror and start prepping themselves for a housing recovery. Continuing to deal with the billions that Countrywide is still costing BofA isn't going to position the bank very well to take advantage of a normalized mortgage market in the future.

Photo: Wikimedia Commons