Big Picture has a "You say first! and you are banned polcy", It's a solid plan.
Back on topic. 55% Countrywide.. they can hoot and holler all they want about getting money back but you won't get a penny from CFC when the BofA deal closes.
"42.95 percent of 2/28 hybrid ARMs were in some stage of default at the end of the first quarter."
I'd be interested to know why/how ANYONE who took out one of those loans over the last 2 years is hanging on to them. It's pretty much guaranteed that such loans were made on properties which are way underwater now, probably very low or no down payment
"material financial compensation"? From where? The aren't going to get any money out of Countrywide et al.
A more likely scenario is they just claim that they don't have to pay out on certain mortgage backed securities, then go fight it out in court with investors. No way in hell do they actually receive monetary compensation.
I did a little research in regard to the Brentwood situation to see what types of impact the deteriorating real estate situation could have on municipal revenue bonds. Here's what I found.
Contra Costa County has passed two revenue bond issues in the last six years totalling half a billion dollars for maintenance and renovation of its community college system.
This is for a system with less than 13,000 full-time equivalent students where enrollments have been flat or declining for several years.
"The Contra Costa Community College District has been very, very poorly managed financially for a long, long time," said Ken Hambrick, chairman of the Alliance of Contra Costa Taxpayers. "They have never bothered to put money aside in the operating budget for maintaining the facilities they have."
The 2000 Measure K bond ($236 million) passed with 63.4% of the vote. (55% required to pass.) The 2006 Measure ($287 million) passed with 57.2% of the vote.
The bonds are backed by ad valorem special assessment. These two bond issues together added about $100 a year to local property taxes per home.
According to 2006 bond opponents, per person federal, state and local taxes in the county consume more money than food, clothing and shelter combined.
In summary, muni bond issues that passed in 2000 and 2006 (barely) would not fly now. There are going to be fewer students to educate and far less ad valorem taxes to repay these bonds. They will eventually default.
The expectation was that homeowner's would continue to pay through the nose forever for maintenance and repairs that should have been funded from operating budgets 20-30 years ago.
Borrowing from the future house of cards. Now falling down.
I actually suspect that marking to model is about all you can do for a big portion of the guaranteed bonds/loans. Before the bond insurers have to pay, default rates and recoveries have to be bad enough to go through the worst stress case the bonds were designed for. In many cases, they only guaranteed the higher priority tranches, and some unguaranteed tranches are being burned through first.
In order to project what they will pay in a year or two, they have to make a lot of assumptions. Some of the unknowns are huge. How much more will housing prices fall in each area? Will any federal legislation which might have an actual effect be passed? Where will interest rates be? That last one not only affects housing prices, many of the "AAA" CDOs themselves contained short term leverage, so short term interest rates matter.
However, I do have a criticism of mark to model. In many cases, different companies are marking the same CDO, asset backed security, etc. to their models. If there isn't a compliance or conflict of interest problem, I would like to see valuations shared on individual securities. Then, mark to model could at least move towards mark to consensus model. Or, each firm could look at its models and try to see when and why they are the outlier on valuing the security.
Because CFC is being acquired through a shell corporation which is designed to shield BofA from the liability. They will leave the bad stuff with CFC (as part of the shell) and take the good stuff in house.
Can someone unpack this a little? What is MBIA trying to accomplish here? Are they saying that they don't have to insure particular loans that shouldn't have qualified for a pool? Or entire pools? Or are they trying to get damages? Or what?
MBIA and ABK wanted to split off the underwater derivatives business from the money making muni business. The problem was that the derivatives would blow up leaving bondholders that bought insurance from MBIA without recourse to the assets from the muni business to cover their claims.
By the same token, BAC wants to hive off the money making parts of CFC and leave the dross (mortgages) to go under. However, there are plenty of lenders to CFC with billions in exposure (FHLB in Atlanta for example.) These groups would sue to prevent such an outcome. Apparently, the likelihood of prevailing was great enough in the MBIA/ABK cases that they didn't split the business lines in two.
Obviously, BAC doesn't want to be left holding $40B in potential liabilities -- or whatever the number is. Consequently, many argue the transaction is unlikely to go through without modification -- i.e. a Fed Guarantee a la BS. The question is "Is CFC too big to fail."
If it isn't clear, the point I was making is that the two situations are analogous -- not that MBIA is involved in BAC's decision making process. However, they do for example insure CFC HELOC's so that's not entirely accurate either. It's quite the tangle and the argument that if one goes the market might go gets some traction from the opacity of the situation.
Back on topic. 55% Countrywide.. they can hoot and holler all they want about getting money back but you won't get a penny from CFC when the BofA deal closes.
Cal | 05.12.08 - 4:27 pm
If BAC buys CFC then they will assume that risk and MBIA can go after BAC.
Most recently the same thing happens to JPM when it buy BSC. Read a JPM press release on the BSC deal and it says they have Billions in reserves for it.
Suppose the forensic experts hired by MBIA find evidence of criminal wrongdoing. Could MBIA decide it does not want to make that information public or share it with the appropriate enforcemnt agency? Could MBIA make a deal with somebody that insured with them to drop the insurance payoff in exchange for silence from MBIA?
BSC and CFC are just apples and oranges JPM couldn't acquire BSC so quickly and remove itself from the risk. That is why the Fed had to backstop the deal. JPM had to assume the counterparty risk, that was the whole point of the excercise.
BofA can and has publicly been mum on $38 billion in debt guarantees that CFC has and BofA doesn't want.
Normally a buyout is structured as an asset purchase and the assumption of specified liabilities. You leave the old corporation in place but it's just a shell. That's what anyone who wants to sue CFC will have to go after-a shell. Assuming of course that B of A is stupid enough to go through with this thing.
You missed the point in my comment about the assumption of certain liabilities. You're right, you can't strip the company without compensating the bondholders and other legitimate creditors. You can engineer it in such a way as to prevent future claims from litigants.
Bank of America Corp., the second- biggest U.S. bank, said it may not guarantee $38.1 billion of Countrywide Financial Corp.'s debt after taking over the mortgage lender, increasing the likelihood of a default.
``There is no assurance that any such debt would be redeemed, assumed or guaranteed,'' the bank said in an April 30 regulatory filing, adding that no decision has been reached.
I guess in the lessons learned section should be:
If you are an insurance company you should have lawyers, risk analysts and underwriters (aka "forensic experts")investigating before you insure things, not after they blow up in your face.
I'm just saying it might be a good idea to avoid the word malfeasance being being thrown around.
Is MBIA crazy? I can see the defense: MBIA was wilfully blind to the loan problems. MBIA was a co-conspirator with the loan originators. Now after the fact, it claims to be a wounded party. I don't buy this MBIA nonsense for a minute. I hope MBIA gets "hoist on its own petard".
I've seen the Bloomberg article. Playing coy about the debt is one thing. Actually closing a transaction where the bondholders get left holding the bag and BAC walks with the assets is another.
You'd think covenants regarding use of proceeds from any substantial asset sales or accelerated payment for a change in control would be standard -- it's always been for any deal I've been involved in.
Of course, as Tom points out, if those I's were dotted than BAC could immunize itself against further litigation by stripping the acquisition shell or simply forming an agreement that leaves the debt behind to begin with. I'm just dubious about how they get to that point without paying off the bondholders.
As the Bloomberg article noted, it would turn the idea of debt on its head. On a tangential note, there was an interesting article in Dealbook regarding whether or not BAC could even get out of the deal at this point -- the conclusion was not easily.
Are these the same "experts" who managed to lose more money than the companies are worth over the past year, or are they the same "experts" who "confused" yesterday's numbers to make them now into a gain vs. an actual loss thanks to "new accounting methods" - just curious!
I think MBIA could do a lot via remediation. This is solely a function on how much subordination the insured tranches have. They can accelerate provisions that cut payments to lower tranches.
Secondly, if they find inappropriate mortgages in the pool, then they could try to get those out of their tranche -- i.e. not pay until losses in their tranche (if its the top layer) exceeded the ineligible loans.
I dunno if it would work, but I'm sure they aren't opposed to litigating for as long as they can.
Back on topic. 55% Countrywide.. they can hoot and holler all they want about getting money back but you won't get a penny from CFC when the BofA deal closes.<
They don't need to get their money BACK. They have the money. The issue is if/when they will pay up.
I don't know if BofA can get away w/ leaving 38 billion in debt with the shell. Not if the "good assets" are secured by that debt. If that is all unsecured debt then they might be able to get away with it.
Although, in my view, that is still fraud on the debtors and any consideration that the CFC shareholders get (stock in BofA) should end up in the lenders'/bondholders' hands. They should also attempt to hold BofA liable on some other theories that I happen to know still exist in CA.
My understanding is that alot of that debt is from the home loan bank? It would be scandalous in my view to have lent that much money to an insolvent company without getting a cross-colateral security interest, making any attempt at an asset sale very difficult without the consent of the secured lender.
First!
How about the PMI results reported by Housing Wire: "42.95 percent of 2/28 hybrid ARMs were in some stage of default at the end of the first quarter."
That'll hurt a bit.
geez, isn't this blog a bit too serious for that 'first' crap? Leave it to Eschaton, please.
Big Picture has a "You say first! and you are banned polcy", It's a solid plan.
Back on topic. 55% Countrywide.. they can hoot and holler all they want about getting money back but you won't get a penny from CFC when the BofA deal closes.
"42.95 percent of 2/28 hybrid ARMs were in some stage of default at the end of the first quarter."
I'd be interested to know why/how ANYONE who took out one of those loans over the last 2 years is hanging on to them. It's pretty much guaranteed that such loans were made on properties which are way underwater now, probably very low or no down payment
That addendum about Vallejo (my home town) just about put me on the floor. What else are they convering? Redevelopment bonds for downtown Beirut?
Im guessing they froze the interest rates on the other 57.05 percent
"material financial compensation"? From where? The aren't going to get any money out of Countrywide et al.
A more likely scenario is they just claim that they don't have to pay out on certain mortgage backed securities, then go fight it out in court with investors. No way in hell do they actually receive monetary compensation.
MBIA has forensic experts reviewing individual loans, and they believe they have a "case for material financial compensation".
Be careful what you wish for. What if your stockholders and lenders did the same?
"Forensic experts reviewing loans"
Yay. It's about time somebody started investigating the crime of the century.
I found one of the questions at the end to be most interesting. Apparently, MBIA is marking 96% of its book to model and not market.
That should say it all...
Cal writes:
Big Picture has a "You say first! and you are banned polcy", It's a solid plan.
So you are saying that "first" is a calculated risk?
55% Countrywide + "material financial compensation" = 1 unhappy Bank of America
Remember, BOA was advised to walk away and jingle mail CFC... addressed to MBIA?
I'm usually a lurker here, but this just made my jaw drop:
SS - "I found one of the questions at the end to be most interesting. Apparently, MBIA is marking 96% of its book to model and not market.
That should say it all..."
I'm guessing that their Vallejo exposure is on water revenue bonds or sewer revs, not city GO debt. I'm pretty sure water/sewer system is money good.
The one safe conclusion is that the legal actions have only begun. Yet another set of shoes ready to drop on this market . . .
SS - "I found one of the questions at the end to be most interesting. Apparently, MBIA is marking 96% of its book to model and not market."
Ok. The smoke and mirros live on.
Now, who's gonna stop them from doing this?
Buller? Buller?
Somewhat OT.
I did a little research in regard to the Brentwood situation to see what types of impact the deteriorating real estate situation could have on municipal revenue bonds. Here's what I found.
Contra Costa County has passed two revenue bond issues in the last six years totalling half a billion dollars for maintenance and renovation of its community college system.
This is for a system with less than 13,000 full-time equivalent students where enrollments have been flat or declining for several years.
"The Contra Costa Community College District has been very, very poorly managed financially for a long, long time," said Ken Hambrick, chairman of the Alliance of Contra Costa Taxpayers. "They have never bothered to put money aside in the operating budget for maintaining the facilities they have."
Contra Costa to vote on college bond measure | Oakland Tribune Newspaper | Find Articles at BNET
The 2000 Measure K bond ($236 million) passed with 63.4% of the vote. (55% required to pass.) The 2006 Measure ($287 million) passed with 57.2% of the vote.
The bonds are backed by ad valorem special assessment. These two bond issues together added about $100 a year to local property taxes per home.
According to 2006 bond opponents, per person federal, state and local taxes in the county consume more money than food, clothing and shelter combined.
Measure A: Bond - Contra Costa County, CA
Measure K: Bond - Contra Costa County, CA
Meanwhile, right next door to Brentwood, in the town of Pittsburgh, there is a Vallejo possibly in the making...
Pittsburg continues bond restructuring measures - ContraCostaTimes.com
In summary, muni bond issues that passed in 2000 and 2006 (barely) would not fly now. There are going to be fewer students to educate and far less ad valorem taxes to repay these bonds. They will eventually default.
The expectation was that homeowner's would continue to pay through the nose forever for maintenance and repairs that should have been funded from operating budgets 20-30 years ago.
Borrowing from the future house of cards. Now falling down.
I actually suspect that marking to model is about all you can do for a big portion of the guaranteed bonds/loans. Before the bond insurers have to pay, default rates and recoveries have to be bad enough to go through the worst stress case the bonds were designed for. In many cases, they only guaranteed the higher priority tranches, and some unguaranteed tranches are being burned through first.
In order to project what they will pay in a year or two, they have to make a lot of assumptions. Some of the unknowns are huge. How much more will housing prices fall in each area? Will any federal legislation which might have an actual effect be passed? Where will interest rates be? That last one not only affects housing prices, many of the "AAA" CDOs themselves contained short term leverage, so short term interest rates matter.
However, I do have a criticism of mark to model. In many cases, different companies are marking the same CDO, asset backed security, etc. to their models. If there isn't a compliance or conflict of interest problem, I would like to see valuations shared on individual securities. Then, mark to model could at least move towards mark to consensus model. Or, each firm could look at its models and try to see when and why they are the outlier on valuing the security.
Cal, why do you think that BofA will be able to complete the CFC acquisition and not have to assume any of the related liability's?
Loan Reviewer.
Because CFC is being acquired through a shell corporation which is designed to shield BofA from the liability. They will leave the bad stuff with CFC (as part of the shell) and take the good stuff in house.
Going to be huge lawsuits about that idea... MBIA and ABK wanted to try it and it didn't fly.
Can someone unpack this a little? What is MBIA trying to accomplish here? Are they saying that they don't have to insure particular loans that shouldn't have qualified for a pool? Or entire pools? Or are they trying to get damages? Or what?
MBIA and ABK wanted to split off the underwater derivatives business from the money making muni business. The problem was that the derivatives would blow up leaving bondholders that bought insurance from MBIA without recourse to the assets from the muni business to cover their claims.
By the same token, BAC wants to hive off the money making parts of CFC and leave the dross (mortgages) to go under. However, there are plenty of lenders to CFC with billions in exposure (FHLB in Atlanta for example.) These groups would sue to prevent such an outcome. Apparently, the likelihood of prevailing was great enough in the MBIA/ABK cases that they didn't split the business lines in two.
Obviously, BAC doesn't want to be left holding $40B in potential liabilities -- or whatever the number is. Consequently, many argue the transaction is unlikely to go through without modification -- i.e. a Fed Guarantee a la BS. The question is "Is CFC too big to fail."
If it isn't clear, the point I was making is that the two situations are analogous -- not that MBIA is involved in BAC's decision making process. However, they do for example insure CFC HELOC's so that's not entirely accurate either. It's quite the tangle and the argument that if one goes the market might go gets some traction from the opacity of the situation.
For those of you aware of our remediation history, we intend to remediate the deals as vigorously [as we have in the past]
That is clearly in the best interest of the managers who get to keep their job while that plays out.
Back on topic. 55% Countrywide.. they can hoot and holler all they want about getting money back but you won't get a penny from CFC when the BofA deal closes.
Cal | 05.12.08 - 4:27 pm
If BAC buys CFC then they will assume that risk and MBIA can go after BAC.
Most recently the same thing happens to JPM when it buy BSC. Read a JPM press release on the BSC deal and it says they have Billions in reserves for it.
Suppose the forensic experts hired by MBIA find evidence of criminal wrongdoing. Could MBIA decide it does not want to make that information public or share it with the appropriate enforcemnt agency? Could MBIA make a deal with somebody that insured with them to drop the insurance payoff in exchange for silence from MBIA?
OE,
BSC and CFC are just apples and oranges JPM couldn't acquire BSC so quickly and remove itself from the risk. That is why the Fed had to backstop the deal. JPM had to assume the counterparty risk, that was the whole point of the excercise.
BofA can and has publicly been mum on $38 billion in debt guarantees that CFC has and BofA doesn't want.
Normally a buyout is structured as an asset purchase and the assumption of specified liabilities. You leave the old corporation in place but it's just a shell. That's what anyone who wants to sue CFC will have to go after-a shell. Assuming of course that B of A is stupid enough to go through with this thing.
No matter who goes after what, Mozillo retires rich and you bears retire poor.
S.
....and grumpy.
S.
If it were done as an asset purchase the bondholders would be all over it as a fraudulent conveyance in the event of a default.
Different mechanism same problem as far as I can see.
Anonymous,
You missed the point in my comment about the assumption of certain liabilities. You're right, you can't strip the company without compensating the bondholders and other legitimate creditors. You can engineer it in such a way as to prevent future claims from litigants.
I think the questionable bonds, the $38 billion (if not more) will just stay with the shell. BofA won't touch them.
Here is a Bloomberg article regarding this issue:
Bank of America May Not Guarantee Countrywide's Debt (Update6) - Bloomberg.com
Bank of America Corp., the second- biggest U.S. bank, said it may not guarantee $38.1 billion of Countrywide Financial Corp.'s debt after taking over the mortgage lender, increasing the likelihood of a default.
``There is no assurance that any such debt would be redeemed, assumed or guaranteed,'' the bank said in an April 30 regulatory filing, adding that no decision has been reached.
I guess in the lessons learned section should be:
If you are an insurance company you should have lawyers, risk analysts and underwriters (aka "forensic experts")investigating before you insure things, not after they blow up in your face.
I'm just saying it might be a good idea to avoid the word malfeasance being being thrown around.
Is MBIA crazy? I can see the defense: MBIA was wilfully blind to the loan problems. MBIA was a co-conspirator with the loan originators. Now after the fact, it claims to be a wounded party. I don't buy this MBIA nonsense for a minute. I hope MBIA gets "hoist on its own petard".
In a nutshell, yes. Why have forensic experts looking at loans after they were insured?
I've seen the Bloomberg article. Playing coy about the debt is one thing. Actually closing a transaction where the bondholders get left holding the bag and BAC walks with the assets is another.
You'd think covenants regarding use of proceeds from any substantial asset sales or accelerated payment for a change in control would be standard -- it's always been for any deal I've been involved in.
Of course, as Tom points out, if those I's were dotted than BAC could immunize itself against further litigation by stripping the acquisition shell or simply forming an agreement that leaves the debt behind to begin with. I'm just dubious about how they get to that point without paying off the bondholders.
As the Bloomberg article noted, it would turn the idea of debt on its head. On a tangential note, there was an interesting article in Dealbook regarding whether or not BAC could even get out of the deal at this point -- the conclusion was not easily.
Are these the same "experts" who managed to lose more money than the companies are worth over the past year, or are they the same "experts" who "confused" yesterday's numbers to make them now into a gain vs. an actual loss thanks to "new accounting methods" - just curious!
I think MBIA could do a lot via remediation. This is solely a function on how much subordination the insured tranches have. They can accelerate provisions that cut payments to lower tranches.
Secondly, if they find inappropriate mortgages in the pool, then they could try to get those out of their tranche -- i.e. not pay until losses in their tranche (if its the top layer) exceeded the ineligible loans.
I dunno if it would work, but I'm sure they aren't opposed to litigating for as long as they can.
They don't need to get their money BACK. They have the money. The issue is if/when they will pay up.
I don't know if BofA can get away w/ leaving 38 billion in debt with the shell. Not if the "good assets" are secured by that debt. If that is all unsecured debt then they might be able to get away with it.
Although, in my view, that is still fraud on the debtors and any consideration that the CFC shareholders get (stock in BofA) should end up in the lenders'/bondholders' hands. They should also attempt to hold BofA liable on some other theories that I happen to know still exist in CA.
My understanding is that alot of that debt is from the home loan bank? It would be scandalous in my view to have lent that much money to an insolvent company without getting a cross-colateral security interest, making any attempt at an asset sale very difficult without the consent of the secured lender.
Many people prefer to choose the house loan. Base on other blogs. And if I have given the chance to have some loans i'd rather choose house loan.