Insiders on Wall St. have begun to ask serious questions about Bank of America’s planned takeover of trouble mortgage-lender Countrywide. Simply put, there are doubts that BofA intends to actually take on Countrywide’s debts versus put parts of the company into bankruptcy.
Institutional Risk Analytics, one of the first outfits to spot goofy lending trends back in 2005, has told clients that the deal is in doubt and that BofA may yet back away. Specifically IRA said:
Usually, when a company acquires another, the former assumes the debt of the latter and agrees to make timely payments of interest and principal as previously contracted. In the case of BAC’s purchase of CFC, however, BAC seems to view the transaction as an option.
Bankers who’ve been briefed by BAC officials tell The IRA that CEO Ken Lewis intends to keep the crippled thrift holding company “bankruptcy remote” by merging CFC with a new vehicle, called Red Oak Merger Corp in the merger plan, and that BAC does not intend to consolidate the entity or take full responsibility for the CFC debt.
That would come as a rude shock to Countrywide bond holders and anyone else who assumed BofA would stand behind all of Countrywide. BofA is evidently only interested in the deal to the extent it can strip out the FDIC insured portion of Countrywide — the actual bank portion of the bank — for itself while stuffing all the dicey junk in this new entity.
The key is whether federal regulators will permit this kind of approach. In effect, an FDIC insured institution will have been allowed to trade on that federal backing, grow into the wheeler-dealer phase, fail, and then walk away from a huge chunk of its debts. Something is not quite right with this picture.
Or maybe that is exactly the plan in place to digest the subprime mess — merge the banks, ashcan the rest.
Bonus Observation: I have no idea what the Federal Reserve is doing with a 75 basis point cut in both the fed funds rate and the discount rate. If I didn’t know better, I’d swear that the intent was to induce inflation so as to prop up real estate values. But I know better.
Right?
Special Bonus Observation: Although the fiscal stimulus package is correctly being slammed by conservatives, far too many appear eager to approve of the 70s style Stagflation reaction of the Fed.
