This morning, something happened many had a pretty good idea was in the works, the attorney generals for three states (California, Washington and Illinois) formally filed lawsuits against Countrywide for fraudulent or discrimatory lending practices. The filing of these lawsuit happened soon after Countrywide shareholders approved the planned acquisition by Bank of America, the timing without doubt not coindicental.
These lawsuits have some very far reaching impacts, for example the Illinois one could Countrywide to take back tens of billions in bad loans which they securitized and sold. The WA lawsuit was followed up with a call for ask regulators to withdraw its state license to do business in Washington. In the past once one state pulls a lenders license usually all the others will pile on and do the same thing.
So what does this mean for the planned acquisition by Bank of America?
I've been saying since it was announced I would be abolutely shocked if it closed, Bank of America would have to be smoking crack to take on the liabilities on Countrywide's balance sheet. They are potentially large enough that they would take all of Bank of America down.
About a month ago it was divulged that Bank of America planned to keep all of the bad assets in a shell LLC, pick off the good parts and let the LLC go BK. Of course the legality of this is very questionable and bond holders would get screwed instantly and be lining up to file lawsuits. Several large firms tried this tactic in the past to get out from under billion in asbestos lawsuit liabilities and were slapped down by the bancruptcy courts. With the state AG's filing these lawsuits Bank of America can no longer claim the liabilities are unknown and will turn any remaining chance of this working into road kill. Now I think Bank of America's management has not to be just smoking crack but also mainlineingheroine to move forward with this deal.
6/30 Update: Florida has now thrown itself onto the Countrywide pig pile. Tomorrow is the moment of truth as the Bank of America acquisition is supposed to close.
7/1 Update: It looks like the Bank of America acquisition did actually close, Ken Lewis decided to swallow the puffer fish whole, good luck with that...
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I thought I'd append a comment from a very informative poster on one of the forums I regularly read about this...
"Even federally chartered banks must have lending licenses in each state to operate. In almost every state, one must also have a lending license to service.
This WA lending license thing is a huge problem as are the IL and CA AG suits -- the past has shown the next natural step for a lender after AG involvement is the lending license in the state is in jeopardy.
CFC is the pariah of lending and the pariahs of lending in the past have one by one lost each and every license they needed to operate.
The way these things have gone in the past is after a company gets so many nation wide complaints, one state steps up first to pull the lending license and then they all pile on very fast. The complaints come so fast that the legal of the company can't keep up. Once one license goes, it is boom, boom, boom.
One of the primary reasons BAC was so interested in CFC was the lending platform. IMHO if the licenses start to be threatened, (and it appears it could be starting to occur) it will leave a huge distaste in BAC's mouth. Then you think about how lending licenses are frequently also tied to servicing licenses -- EEK.
CFC is scared of this -- very scared of this.
Emails are already flying within CFC that very highly suggest that BAC is not at all happy with what it sees in the origination model. BAC is said to have given a very short timeline to have it "cleaned" up. It is a mandate to "clean it up" or else ...
Many know the "or else" means mass instant termination ALL THE WAY UP and close downs of entire divisions that were orginally to remain post take over. They also know this "clean up" is not possible.
A lot of birds are very worried the BAC "or else" could be the big "or else" --- If CFC all of the sudden failed, BAC would be the likely candidtate at this point to fly in to rescue servicing and they are already for the most part in place...
Also people wrongly assume BAC has to pay a break up fee --that is not correct, it is CFC on the hook for a break up fee
Once again, the big thing about this lending license issue is that they are frequently tied to servicing licenses in that the most basic license is lending and servicing is an extra senior to that license -- ie no lending, no servicing. So if CFC lending licenses go and it usually will affect the right to service -- if lending licesnes go, that portofolio thus has a HUGE right now problem.
Perhaps they (the states) waited until they knew that things were in place for servicing the portfolio should it be needed --"