Bank of America's Surprising Revelation

At this point, there are few things that would shock an informed investor about Bank of America's (NYSE: BAC  ) lamentable decision to purchase Countrywide Financial. It's for this reason many people were taken by surprise earlier this week with news that the bank had sought and received approval from its primary regulator to put the mortgage unit into bankruptcy if the latter's liabilities threatened the bank's solvency. If true, as Reuters' Alison Frankel noted, it would be the "first tangible indication that Bank of America ever did more than hypothesize bankruptcy for Countrywide."

The issue came up in the ongoing hearing over whether an $8.5 billion settlement that Bank of America entered into with the Bank of New York Mellon (NYSE: BK  ) and 22 institutional investors in 2011 should be approved by a judge or not. The parties to the agreement -- including, among others, Blackrock (NYSE: BLK  ) , Pimco, and MetLife (NYSE: MET  ) -- claim that it should be because it was an arms-length transaction and represented the best estimate of what the claimants could have reasonably expected to collect from the bank given the facts at the time. The parties in opposition to the agreement, spearheaded by insurance giant AIG (NYSE: AIG  ) , claim the deal was replete with conflicts of interest between the parties and equates to a "pennies-on-the-dollar" windfall for Bank of America.

Up until now, Bank of America has always theoretically reserved the option of putting Countrywide into bankruptcy in the event that the latter's losses become unsustainable -- by means of context, the bank has already incurred more than $50 billion in charges related largely to the defective manner in which Countrywide underwrote mortgages and marketed them to investors prior to the financial crisis. Referred to as the "nuclear option" by insiders, however, few people seriously entertained the thought the bank was actually serious about doing so. The potential damage to the bank's reputation, not to mention its counterparties, was simply too large. Consequently, it was always assumed that the threat was only being used to gain leverage in negotiations with investors who had sustained damages from Countrywide's malfeasance.

In legalese, the doctrine at issue here is known as "successor liability." As a general rule, when one company buys another company, the acquirer does not assume liability for the acquiree's preexisting legal claims. Say, for example, that Company A decides to buy Company B, but before the transaction is consummated, Company B is sued for discrimination. Just because Company A subsequently acquires Company B doesn't mean its coffers are available to satisfy the resulting judgment. The proceeds for that must still come from Company B -- assuming, of course, that its assets remained meaningfully segregated in order to do so.

To bring it full circle, in turn, this is the reason that Bank of America claims to have been so careful about the way in which it commingled the two operation's assets. As a spokesman for the bank noted previously to Bloomberg News, it "took great pains to preserve the separate identity of Countrywide."

These purported pains aside, the opposing parties argue that Bank of America should nevertheless be on the hook for Countrywide's liabilities. Their position is based on a number of exceptions to the doctrine of successor liability. And while I won't get into them at this point, at least one of the arguments had made significant headway in a parallel case between Bank of America and mortgage-bond insurer MBIA before the parties settled the dispute last month. Suffice it to say, had these arguments succeeded, the issue of Countrywide's bankruptcy would have been rendered irrelevant. But as I write today, it's still one of the most powerful cards that Bank of America has at its disposal.

Want to learn more about Bank of America?
Bank of America's stock doubled in 2012. Is there more yet to come? With significant challenges still ahead, it's critical to have a solid understanding of this megabank before adding it to your portfolio. In The Motley Fool's premium research report on B of A, analysts Anand Chokkavelu, CFA, and Matt Koppenheffer, Financials bureau chief, lift the veil on the bank's operations, including detailing three reasons to buy and three reasons to sell. Click here now to claim your copy.


Read/Post Comments (32) | Recommend This Article (36)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 08, 2013, at 12:41 PM, sgraham005 wrote:

    How on earth is it that Countrywide Financial's CEO just walked away with millions? How does that even compute?

  • Report this Comment On June 08, 2013, at 1:02 PM, Mikala12345 wrote:

    Bank of America just recently 4-1-2013 sol my Countrywide mortgage.. so it might appear they did it to avoid any liability. B/a needs to remain liable in my opinion.

  • Report this Comment On June 08, 2013, at 1:47 PM, VRSEFgold wrote:

    Bank of America may be the least corrupt of all the banks?

  • Report this Comment On June 08, 2013, at 2:20 PM, Wasatcher wrote:

    This bank is responsible for stealing the life's work of millions of people and, for having done so, its stock value has doubled and its CEOs have been personally enriched by crimes against the American people whose homes were stolen and then practically given away to rich people!

    This institution is a disgrace to America and run by thieves who personally profit from destroying lives.

  • Report this Comment On June 08, 2013, at 2:51 PM, daverhall wrote:

    The federal government, Congress, and banks all failed to do their proper jobs regarding the financial industry. There should have been a complete removal of those who participated in these actions. The bush administration started it and Obama has simply allowed it to go on. This has caused major problems with our economy and our trust in government. It will take several more years to self correct this environment and it will kill many families to go through this.

  • Report this Comment On June 08, 2013, at 3:52 PM, 4justiceever wrote:

    IndyMac Bank was started by Countrywide CEO Angelo Mozilo, (according to Time Magazine, was one of the "25 people to blame for the financial crisis") and bought by a group of investors: George Soros, Michael Dell, Steven Mnuchin (former goldman sachs partner and active hedgefund manager), and made a sweetheart deal with the FDIC and is why they all made out like "Bandits".

    These are the people who make lots and lots of money off of the suffering of many many people. Greed is their breath. Will we ever see Justice?

  • Report this Comment On June 08, 2013, at 4:19 PM, 4justiceever wrote:

    IndyMac Bank was bought by investors Steven Mnuchin, George Soros, Michael Dell,John Paulson and J. Christopher Flowers and is now know as One West Bank.

  • Report this Comment On June 08, 2013, at 4:41 PM, Alericc wrote:

    B of A took over Country Wide when Ken Lewis thought he was buying a great company at a low price and failed to look at the real books. The Housing bubble hit and they were stuck with one of the most toxic lenders in the country. Merrill Lynch was basically forced on them by the Feds and now they are trying to screw them over for Henry Paulson black mailing the banks into helping the corrupt politicians who allowed subprime mortgages to be given to people that CANT pay their bills. Now the Feds are covering their mistakes by making banks who had NOTHING to do with the housing bubble to be held responsible for something the Democrats on the banking board trying to give everyone a free house even when they couldn't afford it.

    Not that B of A hasn't made a ton of mistakes on their own, their incompetence over the last 5 years has become legendary. But to tout that their stock has doubled when it was at rock bottom for the last 4 years is not something I would dump my money into. More failure is coming and Moynahan is just the man to make it happen.

  • Report this Comment On June 08, 2013, at 5:56 PM, ceh4702 wrote:

    I would like to politely say that to blame politicians for bad banking decisions is delusional. Financial institutions have only themselves to blame if they make bad banking and business decisions. My wife worked for Bank of America and after many years they just fired her because they could not manage their own money. I guess this is how the Banking business goes. First it was Boatmens, then some other company and then later Bank of America. This shows you that bigger is not always better.

  • Report this Comment On June 08, 2013, at 6:13 PM, marliisa wrote:

    Aliricc - I agree. Why is this some "new revelation"??

    The actions of Paulsson/FED have been analyzed and written about ad nauseum.

    Paulsson was deciding who lives and who dies in 2007/2008 and practically forced BofA to swallow CountryWide and Merrill Lynch.

    No surprise that baked into these dealings were some "protections" for BofA.

    And AIG of all talking about conflicts of interest!!! AIG was in the center of some shady dealings and was saved by Paulsson/FED the roundabout way to save Goldman's investments in AIG.

  • Report this Comment On June 08, 2013, at 6:38 PM, Chito49 wrote:

    The persons that have lost the most are the people that had mortgage loans with Country Wide and later acquired by Bank of America. If Bank of America decides to declare BK with their mortgages from Country Wide whats going to happen to the people hold Pre-CountryWide loans and the ones acquired by BoA?

  • Report this Comment On June 08, 2013, at 6:49 PM, Nationwide51wdc wrote:

    We took out a mortage with BOA in 2006 a fixed rate have contract to show now in 2013 we have a adjustable rate? Now we have adjustable rate that I never signed for.

  • Report this Comment On June 08, 2013, at 7:35 PM, thinkseriously wrote:

    B of A infiltrated Countrywide prior to 2004 Countrywide’s Management was being replaced

    By BofA;

    I was a manager at Countrywide at this time and saw the down fall of what was to come

    And did. BofA had an agenda to cut, slash, hack up, and provide programs that were outrageous

    It made me sick to my stomach to work for them!!!

  • Report this Comment On June 08, 2013, at 7:38 PM, dlb7 wrote:

    Never seen a bank that would drag on with a person for over a year for a loan modification, and kept asking for the same paper work over and over. Then go threw several customer service managers. And still can't found out anything. Is this type business you would want deal with on a daily basic. And they say they are best in there field. Then they put you into forecloser statis. Someone needs to investgate them and all banks. Because you are destroying this country. That myself and millions of veterans fought so hard for. God Bless American

  • Report this Comment On June 08, 2013, at 8:31 PM, prfssr wrote:

    The people who took out ill-advised mortgages with BofA and wound up being foreclosed upon are NOT the losers here. They probably had a lower housing cost while they lived in their foreclosed home than if they had rented. No, the real losers are the people like me who bought BofA stock as a conservative, dividend-paying investment BEFORE the bubble burst, BEFORE BofA bought Countrywide, when it was selling for 16 times earnings, and paying a 6 percent dividend. I was not speculating, I was saving for the down payment on a house I could AFFORD. Even after the 100% run-up this past year, BofA stock is still only 40% of what I bought in at, and pays only 4 cents per share dividend, compared to the 2 dollars per share it paid when I bought in. I'd be so happy just to break even!

  • Report this Comment On June 08, 2013, at 8:40 PM, Cheapgass wrote:

    Bank of America may have not known yet Angelo Mozilo knew well in advance which direction the home market was going. You think the IRS is the only one that data mines. Angelo still left with $600 million plus. Now is he a business man or snake oil salesman. In my book he's one heck of a shrewd salesman. Made a killing and got out. Bank of America needs to let Countrywide go BK to save them angst. It was a $2 buck stock and may again.

  • Report this Comment On June 08, 2013, at 9:11 PM, StoptheCrooks wrote:

    These are the biggest crooks every and the government should have let them fail! But know they keep them going so they can continue to steal and take peoples money and homes while they look at them and laugh!! All I have to say is, anyone who let these crooks take there homes right from under them and put them out on the street...illegally! Should be slapped!! If you sit there and let these people pay you a measly 300-125,000 for a home im sure was well worth $200,000 at the time...you deserve everything you get!!! These crooks should be in jail and its sickening how people just let other mess over them, steal and take from them and they do absolutely nothing about it!! Its sad people and this is why the crooks run the world!! You can fight back!! Stand up and fight....you have that right!

  • Report this Comment On June 08, 2013, at 9:21 PM, grannyrobbed2 wrote:

    Well, dlb7, don't think BofA is the only bank/lender to pull this kind of thing! Ask anyone who has had to deal with Flagstar Bank and the way they operate and you'll hear the same stories over and over. To me, it's legalized theft. I won't go into all the details, but they did the same to me...and they won. They got my house and left me, at 69 years of age, without anything. You call them and if you're lucky, you'll eventually get through, although no matter who you talk to, it's never the "right" person and they transfer you to another person that is not the right person. After several transfers, and waiting forever, it simply disconnects you! No one seems to know anything about how your loan is going; they say they didn't get paperwork that you mailed numerous times, even when you have a certified receipt that they did receive it! After they have played this game long enough, they swoop in and take your house, locking you out...all before even doing any paperwork for "foreclosing" on you! I never liked BofA, but compared to Flagstar Bank, they are angels, yet I've never seen their name mentioned as being investigated for their shady business practices. At my age and income, I can't start over, so I just exist now. For those of you who may comment that I brought more than I could afford, please hold your comments. Mine is a long and complicated story, but it had nothing to do with anything I did wrong. In my opinion, Flagstar, along with many others, figured out a way to confiscate all the real estate they could, with the aid of more shady government officials. Is this deliberate or sloppy business? I believe it is deliberate! Just sayin...

  • Report this Comment On June 08, 2013, at 10:08 PM, Dadw5boys wrote:

    I tried to use Country Wide to bargain with my banks for better interest rates.

    What I discovered was Country Wide hired it's own inhouse Property Appraisers and I got one that just love to run her mouth. She talked about moving up from the Fort Myers area and how they were going to make a lot of money.

    I dropped by to pick up the appraisial I paid for and they did not want that leaving the office. I had to remind them loudly I paid for this and I wanted it in my hand.

    The Appraisal was 35% higher than it should have been there is no way it the property was worth $350,000. $280,000 would be pushing it.

    So the Country Wide scam came to light when thier office sent me a loan package to consider that would give me 95 % of the $350,000 appraisal. Which would have put me 30% under water from the moment I signed the papers.

    The loan officer at my bank choked back laughter when reading the appraisal.

    I went with a higher interest rate than Country Wide offered and much smaller loan package to buy my son and his wife thier first home.

    To bust Country Wide find documents connecting the Overvalued Appraisals with a Bonus paid for them ! There you have Collusion and the Fraud using the false appraisal .

  • Report this Comment On June 08, 2013, at 10:09 PM, 4justiceever wrote:

    This is the Biggest Land Grab in History. The only people to blame here are the People who intentionally fooled consumers and investors knowing that this Ponzi scheme would eventually come to an end.....Angelo Mozilo and many wall street bankers are now very wealthy and at what expense? Americans were forced from their homes when all they wanted to do was pay their mortgage. Investors lost as well. Who are the winners here with money stolen from the American Public? There are many who have fought to stay in their homes...many, and after all the lawyers fees, corrupt courts and The common Fraud which Banks and Servicers so brazenly use in everyday business, regular good people with families are being illegally foreclosed upon and this government is allowing it to continue with absolutely no accountability. William K. Black, former bank regulator and central figure in exposing congressional corruption during the saving & loan crises wrote " The Best Way to Rob a Bank is to Own One." He writes: In 2004 the FBI warned of an epidemic of mortgage fraud and if allowed to continue would produce a crises as bad as the savings & Loan debacle. Who Knew?

  • Report this Comment On June 08, 2013, at 10:22 PM, funfundvierzig wrote:

    And now Bilk of America is headed up by Chad O. Holliday Jr., Chairman of the Board of Directors of Bank of America Corp, and erstwhile Chairman and CEO of the DuPont Company, the most unethical and corrupt chemical conglomerate on the globe!

    Imprelis, Tell Us! ...funfun..

  • Report this Comment On June 08, 2013, at 10:36 PM, 4justiceever wrote:

    In the U.S. District Court in San Francisco, a class action lawsuit was filed in 2009 under RICO (Racketeering Influenced and corrupt practices act) against Wells Fargo and Rels Valuation, an appraisal management service. These two businesses pressured and intimidated appraisers to deliver artificially inflated home appraisal values to help close loans and increase profits. This was the norm and was a major part of the ongoing fraud by the banks.

  • Report this Comment On June 08, 2013, at 10:44 PM, airjackie wrote:

    BOA will try anything to get out of the crimes they committed over the years. knowing the Congress and Senate will change with the election and new honest lawmakers that don't work for the Banks it's time to make a plan. BOA is still illegally foreclosing on soldiers homes and seniors.

  • Report this Comment On June 08, 2013, at 11:41 PM, screwthebanks wrote:

    Bottom line...if you do business with Bank of America close your account. They are rife with fraudulent practices and are run by a bunch of crooks! Screw all the banks and find a nice credit union...you'll be glad you did.

  • Report this Comment On June 08, 2013, at 11:48 PM, ksumner2004 wrote:

    Renting the house I am supposed to be buying. House has been under contract since August. When BOA bought out Countrywide, the title somehow fell through the cracks. We can't close without the title. The homeowner lives out of state and is furious at this situation. Closing attorney trying to get the bank to sign a power of attorney so we can close. They refused. Owner said, he bets if he quits paying his mortgage, they will be quick to find a title in order to foreclose. How long does this need to go on?

  • Report this Comment On June 08, 2013, at 11:50 PM, garcesM wrote:

    I suspected when they began to steal my money( the first day Bank of America bought my mortgage from Countrywide). That 's why a picked a different bank and, and so far no problems.

  • Report this Comment On June 09, 2013, at 12:16 AM, 4justiceever wrote:

    @ksumner2004

    Because of the securitization of mortgages and because they were bundled and sold, most "notes" got lost in the insanity of the crazed Ponzi money making scheme. When they have no note they cannot foreclose legally. So what they did is make "assignments" which were recorded in the County Recorders Office and the courts seem to honor now. When in court and the bank needs the "note" to "prove" they own the loan they come up with one (photo shopped). Have you checked the County Recorders Office to find documents on this property? This is why there are so many Companies (Blackstone Properties) are buying up all these properties and renting them out, as this clears up all the fraudulent paperwork. Good Luck

  • Report this Comment On June 09, 2013, at 1:57 AM, DeeSpelling wrote:

    I figured something was up this week when I received the page of "fine print" fees they plan to charge.

  • Report this Comment On June 09, 2013, at 4:01 AM, VintageV12 wrote:

    This entire mess could have been avoided if there was less regulation.

  • Report this Comment On June 09, 2013, at 10:43 AM, Tedmenquinn wrote:

    The decision by B of a A to acquire Countrywide may indeed have been a mistake, however, many of the problems afflicting the bank are purely internal and point to chronic mismanagement. Having worked for them temporarily, I observed how overwhelmed they were as they struggled to integrate Countrywide's policies with their own. They were administrating their real estate division using one policy for all mortgages originating under B of A and a second set of policies for all mortgages financed by the now defunct Countrywide. To facilitate rewriting of all Countrywide mortgage policies, the bank hired a large number of underwriters, paying each $75 per hour. The pay was wonderful though exceeding the market average and indicating that the bank's processes aren't always cost-effective.

  • Report this Comment On June 09, 2013, at 11:17 AM, yardomd wrote:

    Good information. When I checked BoA to refinance, the body language told me to run as fast as possible.

    The cheapest way to buy a house is with cash. Just buy what you need and what you can afford. Or build your own. Then add more later, when able.

  • Report this Comment On June 09, 2013, at 2:58 PM, GeigerR wrote:

    FannieMae, Freddie Mac, Ginnie Mae. Led by foolish politicians, these agencies distorted the market by structuring loans so that those who cannot afford houses could get them anyway. The private sector companies would have to do the same in order to maintain market shares. From there, they all jockeyed to outdo each other on who could be the most foolish.

    But do you know who's fundamentally responsible for the financial crisis? Back up a step. It's the voters who elected fiscal liberal politicians. The governement is not meant to "provide," they are meant to govern a small portion of what we provide through hard work.

    Don't promote voting. Promote educated & informed voting.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2477781, ~/Articles/ArticleHandler.aspx, 11/20/2014 9:31:51 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement