Thursday, May 22, 2008

Roubini: Countrywide Deal Collapsing?

Things quieted down on Wall St. today. The market seems very cautious and unsure of itself right now. The end of the rally from the Bear Stearns save was pretty much confirmed this week. The bulls have lost all of their momentum as oil continues to rise, and housing continues to flounder.

Everyone knows the economy is in deep trouble with $130 oil. No one wants to talk about it. Denial is a powerful emotion. You get this ominous feeling that Wall St. is just waiting for a bomb to drop as inflation continues to pressure the economy.


Is Countrywide the next Time Bomb?

Economist Nouriel Roubini thinks so. Take a look at his blog:

"It looks increasingly likely that the deal of Bank of America (BAC) buying Countrywide (CFC) may collapse: according to many banking experts once BAC does its due diligence on this deal it will become obvious that Countrywide is effectively bankrupt (negative equity) and saddled with a mountain of litigation and potential liabilities whose size are likely to be extremely large and uncertain. The point that is becoming clear is that BAC will be better off paying the modest break-up fee and walk away from a deal that sucks in every dimension. So if CFC goes bankrupt (its bank subsidiary into a FDIC receivership and the holding company into Chapter 7 liquidation) what will be the systemic implication of the biggest banking bust in US history? Remember that CFC originated almost 20% of all mortgages in the US in the last few years. So the collapse of the biggest mortgage lender will have massive and systemic ripple effects in financial markets.
Let us consider in more detail why Countrywide will go bust and what will be the systemic consequences of such massive bankruptcy…"


My take:

For those of you who don't subscribe, Mr. Roubini's conclusion is that Bank of America will pay the $160 million breakup fee and walk away from the deal with Countrywide.

Roubini was laughed at when he called housing a bubble over 18 months ago. Now he is on CNBC as a respected economist. Nouriel has been very accurate with his calls on the housing market so this call deserves some attention.

As soon as Bank of America announced that they wanted to walk away from $300 billion of Countrywide's debt, you knew that CFC was toast. Bank of America has told Wall St. that the deal will close in the third quarter. Watch the reaction of Wall St. when it doesn't.

Bank of America doesn't even need to announce they are walking away from Countrywide in order for the market to react. The writing will be on the wall when the deal gets delayed.

This could cause a banking panic as Nouriel suggests. If/When Countrywide fails, it will be the largest bank failure in history. I know I will be hitting the bank the day this deal collapses.

The Fed could force everyone close up shop for a few days if there is a bank run.. Its been done before. Don't get caught with your pants down. Have some cash on hand for a rainy day!

Isn't it ironic that Bank of America might be "walking away" from Countrywide as many homeowners do the same?

Lets see what happens. Tomorrow will be an interesting day in the markets. I wouldn't be surprised to see a sell off heading into the long weekend. Who wants to hold stocks over the long weekend when the economy is teetering on the edge of a cliff?

5 comments:

Jeff said...

Wanted to get this on here tonight as well.

Was that the consumer that I just heard hit the floor?

WASHINGTON (Reuters) - Big U.S. banks should shore up reserves for growing losses from home equity loans, which were widely offered to help close mortgage deals, the head of the Office of the Comptroller of the Currency said on Thursday.

First-quarter losses from home equity loans at big U.S. banks amounted to $2.4 billion, compared with a loss of $273 million in the year-ago quarter, he said.

http://www.reuters.com
/article/bondsNews/idUSN2264034120080522

Avl Guy said...

Meredith Whitney @ Oppenheimer said the same thing and she names ‘names’. She expects banks to respond by deactivating about $12,000 in credit card lines per US household ($2 trillion).
But this is a chess game; expect the Feds, Congress & Admin to try to counter loss of credit cards by breaking more rules & precedents. The economy is still 70% dependent on consumer spending. Like I said, none of these guys want to go down in the history books as the 21st Century's Herbert Hoovers. But they must be pissed that the IRS can't get the stimulus checks to 60% of tax filers due to electronic snafus with 3rd party tax preparers.

Jeff said...

avl

Great stuff. I saw she ripped into the banks again this week.

I hadn't heard that about the stimulus checks. Ouch!

Its looks like Congress is going to to attempt to take out the speculators in commodities with new legislation.

Like thats going to work. Our markets are getting socialistic aren't they? Free capitalism...HA!

Anonymous said...

So what happens to all the homeowners who have notes with Countrywide?

I guess the notes all get pacakaged and sold to a new buyer/servicer for ten cents on the dollar. Sound about right?

Jeff said...

anon

Thats a very good question. The securitizations will be sold like you said for pennoes on the dollar.

You would have to assume the Fed would step in and hammer out the details of how the mortgages would be transeferred and to whom.

I would think they would want this to be orderly. The problem is the debt of these loans was sliced and diced onto AAA securities and sold all over the world.

Technically several banks own most of those Countrywide loans.

A court in Ohio has already ruled that abank had not legally proven they owned the loan because it was sercuritized and sold off.

This is a mess and I have no idea on how it will be resolved. I would assume there would be government intervention when it gets to this point.