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Wednesday, November 9, 2011

Why BofA Decided Against a Countrywide Bankruptcy For Now.

News - Bank Of America does not File Bankruptcy, Yet

By Deal Journal
Yes, we’ve heard you, Mike Mayo. But it seems a bankruptcy filing for Bank of America’s troubled Countrywide unit was measured, weighed and then voted down by the BofA board.

Deal Journal colleague Dan Fitzpatrick has exclusive details today about Bank of America’s consideration of a bankruptcy filing for Countrywide. Some investors and analysts, including the Credit Agricole Securities analyst (and author) Mayo, have said a bankruptcy filing could ring-fence BofA from the giant pile of soured mortgages Countrywide issued over the years. The same ring-fencing motivation is partly responsible for Ally Financial’s plan to potentially put its own residential-mortgage unit into bankruptcy. Countrywide, however, is significantly bigger and messier than Ally’s ResCap.

Here is what Fitzpatrick wrote in today’s story about the bankruptcy debate inside Bank of America:

“Chief Executive Brian Moynihan presented a potential Countrywide bankruptcy to directors in late June as an alternative to reaching an $8.5 billion settlement with a group of investors who had lost money on Countrywide mortgage bonds, said people familiar with the situation.

The bank laid some groundwork for a possible Countrywide bankruptcy filing when it purchased the mortgage company in mid-2008, designating Countrywide as a subsidiary with its own employees, board and officers, accounting systems and bank accounts.

But Mr. Moynihan recommended the board take the settlement instead. He was particularly concerned with how a Countrywide default might affect other subsidiaries, such as the firm’s Merrill Lynch securities unit, said people familiar with the discussions.

The fear was Merrill’s counterparties might demand guarantees that the bank would stand behind Merrill’s bonds. Another consideration: Some attorneys argue that even with the structural precautions in place, Bank of America could yet find itself liable for Countrywide’s debts following a bankruptcy filing, because of how assets were later transferred between the two firms.”

During two investor sessions in August and September, Moynihan was asked point-blank about the possibility of a Countrywide bankruptcy. Each time, he punted.

“We’ve thought of every possibility,” Moynihan said in the August conference call. In the same session, Moynihan also admitted he doesn’t have fond feelings about the 2008 Countrywide takeover, which was championed by his predecessor, Ken Lewis.

“Obviously there aren’t many days when I get up and think positively about the Countrywide transaction,” Moynihan said.

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