Think Twice Finance

The Four Pillars and the Subprime Mortgage Crisis. Where Did Bank of America’s Offer for Countrywide Leave Us?

A week ago I was shocked, horrified and so on, about the Four Pillars decision to drop a billion dollar coin in that subprime mortgage pokie machine, Countrywide Financial. It sounded a discordant note in the general dirge of helplessness being played by the banks as the mortgage borrowers of Australia were stung by rate increases. The banks were innocent victims of circumstances beyond their control in the cockamamie US mortage market, they somewhat disingenuously claimed.

Thus I hunger for details of the Pillar’s new positions now that Bank of America has bought Countrywide outright. Are the four pillars off the hook with a senior position, or will they be players in the buyout syndicate?

If it’s the latter, my shock, horror and so on, have reached hitherto unplumbed depths. If it’s the former, I am deeply ashamed of my lack of faith in these four stalwarts.

There is a red herring in this fascinating acquisition story about which I have a strong opinion. The question is what, if any, was the role of federal bank regulators in this transaction.

There seem to be two central points of view. First there are those who buy Bank of America’s story that the bank was just so thrilled with the opportunity to buy Countrywide that the regulator’s opinion never came up. If you believe this, I have some great property to sell you in South Florida. Britney Spears slept there for an hour or so. Don’t miss this chance!

If on the other hand, if you think the BofA version of the story may perhaps be “nuanced” – you know nuanced: means a big fat lie – the journalists alterative seems to be that BofA got the kind of “put” on the Countrywide assets that the Fed offered it when BofA bailed out the Texas banks in years gone by. This was a deal whereby BofA looks at the loans, keeps the performing ones, and ships the failing ones to the Fed as problems arise. The first put transformed BofA (known as NationsBank at the time) into a profit-making fool for the next decade and fueled its rise to its current lofty heights.

I buy neither of these scenarios. First if you think that BofA would buy Countrywide without at least a conversation with the Fed and receipt of the kind of non-commital “you may proceed,” that is the best that can be hoped for from such conversation, you live in a parallel universe.

I will never forget receiving “you may proceed,” from the Bank of England over the use of LIBOR rates to settle futures contracts in prehistoric times. I took it to mean, “We won’t interfere until you screw up. Then we’ll find you a little temporary room of your own, steeped in history, in the Tower of London.”

On the other hand, if the Countrywide deal goes sour enough to kill BofA, some of BofA’s stake-holders will doubtless be protected. Let us hope that the Four Pillars have information that we don’t have that assures them they will be protected. If so, that information will become public with the disclosure of the terms of the deal. However, if it’s a handshake they are counting on, in a few years they will learn something unpleasant about Washington DC and handshakes. In Australia, the question would be, “Was it a core handshake, or just one of those handshakes that we do to oil the gears of the deal?”