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Rewriting the History of BAC, Bailouts, and Busts


Countrywide deal is paying off big, BofA exec says — The Charlotte Observer, 2/19/09

The deal that cost Bank of America $50 billion – and counting — The Charlotte Observer, 8/16/14

Retroactive schadenfreude with perfect hindsight is not the goal here, especially when Bank of America’s dalliance with Countrywide raised red flags in real time as far back as those fateful days of August 2007. But when the bank’s hometown newspaper produces a lengthy retrospective on BAC’s involvement with Countrywide that somehow never mentions the Federal Reserve, someone needs to fire up the way back machine heedless of the easy face palms ahead.

The bank’s looming multi-billion dollar settlement with the Justice Department is the news peg for this stroll down memory lane, which should be your first clue that there is much ass-covering to be found on all sides. Sure enough, the first and biggest fiction served up by Observer reporter Rick Rothacker is the notion that the federal government did not materially encourage the marriage of BAC and CFC:

Unlike the Merrill Lynch purchase forged later in 2008, the government doesn’t appear to have played a major role in the Countrywide acquisition.

In 2010, Lewis told the Financial Crisis Inquiry Commission that regulators were “interested” in the bank’s possible purchase of Countrywide “but no one asked us to do the deal.”

In January 2008, a Treasury spokeswoman, facing an inquiry from a reporter, emailed a colleague that she was going to “kill the idea” that Treasury encouraged the purchase.

“We were aware but that doesn’t mean we were picking up the phone asking for bids,” the spokeswoman wrote, according to emails obtained through a Freedom of Information Act request.

And despite going to the extraordinary length of granting anonymity to sources discussing public transactions undertaken seven years ago, the closest Rothacker gets to the actual lay of the land in 2007 is this telling quote:

“I felt like we had done the country a big favor,” said another former Bank of America banker. “If we hadn’t bought Countrywide what would have happened if one of the worst actors went bankrupt?”

What indeed? And who would’ve had to pick up the pieces? The Federal Reserve, specifically the New York Fed. In fact, the Fed was already moving to put Humpty Dumpty back together in August 2007, just as BAC purchased its initial 16 percent stake in CFC.

Responding to what was described as “dislocations in money and credit markets,” on August 17th, 2007 the Fed cut the discount rate 50 basis points to 5.75 percent. BAC (along with crosstown rival Wachovia) immediately borrowed $500m. from the Fed and the banks announced they were doing so to counter the stigma associated with borrowing from the Fed. This was part of a larger Fed orchestrated effort to deal with what was still being termed a “credit crunch,” but what was in reality a systemic meltdown.

It is worth noting that the Fed-centric nature of these moves was not a secret, as Forbes reported at the time:

In a joint statement, JPMorgan, Wachovia and Bank of America characterized the move as intended to “display the effectiveness” of the Fed’s discount window–in other words to prove there’s no stigma to borrowing from it as opposed to raising cash elsewhere, or in each of their cases, just pulling it out of a drawer.

The Fed has been urging banks to come to the discount window to add cash to the banking system and ease the credit crunch that has gripped global stock and bond markets.

And it was even understood that CFC’s shaky status was contributing to the unease in financial markets in mid-2007:

The crisis came to a head last week when the possibility that a huge finance company, Countrywide Financial , was about to falter sent markets into a tailspin. Countrywide has had to curtail some mortgage lending and tapped all of an $11.5 billion credit line because it could not raise cash to fund its operations in the short-term debt markets. There weren’t any buyers willing to take on its collateral.

Ratings agency Moody’s Investor Service downgraded Countrywide’s senior debt ratings to one notch above junk grade on Thursday, citing its difficulty raising short-term cash.

And within a week BAC had announced its $2b. buy-in of CFC. But that is just what was known at the time. What was unknown until 2011 — and would’ve remained secret had Bloomberg not taken the Fed to court — is that BAC went to the discount window twice more, on Aug. 23 and Aug. 24 for another billion dollars while the Fed was quietly pumping billions more into banks around the world. Also, note the cynical nature of these two-track discount window ops — one public and supposedly stigma free and the other hush-hush and down-lo. The Fed gnomes were getting nervous — and devious.

To recap, the Fed loans BAC $1.5b. and BAC simultaneously spends $2b. on CFC. No major role for government?

In this environment it simply defies belief that Tim Geithner at the NY Fed was not eager for BAC to step in and throw a lifeline to CFC. Was a memo drafted and meetings held to that end? Was sleepy Ken Lewis ordered to buy some Countrywide? That is not how the Fed likes to work, but again those paying attention in 2007 saw the Fed take some interesting steps to loosen regulatory controls on BAC. Steps that certainly look like a quid pro quo for dealing with the mess that was CFC.

Just days prior to the BAC-CFC deal and the discount window moves, the Fed granted BAC’s request to be given an exemption to Section 23A of the Federal Reserve Act. The language is dense and the financial jargon thick, but the upshot was to allow BAC the use of bank capital to backstop non-bank functions, like trading in soon-to-be infamous collateralized debt obligations. Bundled up in hundreds of billions of CDOs was subprime mortgage debt of the kind generated by — CFC.

It is also important to understand that CFC’s books carried very little in terms of FDIC-backed bank assets as compared to BAC. This is why no one wanted to touch CFC’s collateral — it was all in non-bank, parent company assets which meant they were subject to bankruptcy. Bankruptcy for your counterparty means you do not get paid. In contrast, do your deal inside the federally-guaranteed bank, the FDIC steps in to save you from yourself. It was perfectly clear what was going on — BAC’s billions in federal guarantees were being deployed to backstop CFC. If we give all parties involved the benefit of the doubt, this may well have been regarded as a temporary need, that once BAC heft was understood to be behind CFC, CFC would right itself. But the dissembling that followed in the next few months suggests that is far too charitable.

Despite additional rate cuts during the fall of 2007 and non-stop tinkering by Fed and Treasury officials things did not get better. Treasury Secretary Hank Paulson in October first tried to come up with a “super bundle” of the worst assets that Treasury would essentially mop up to the tune of $80–100b. That plan morphed a few weeks later into the stunningly bad idea to simply pretend all the subprime dreck really was not dreck, but could be “serviced” if introductory “teaser” mortgage rates were extended until the crisis passed. Or something. It was never really clear as things kept crashing faster than trial balloons could be inflated.

Two weeks into December the Fed signaled its growing alarm with the Term Auction Facility program, essentially billions in short-term loans to banks who could pledge their dreck in exchange for a few weeks operating cash. By January the Fed was offering $30b. every two weeks (up from $20b. the month before) in such TAF funds. In that rapidly shit-storming environment, BAC announced its purchase of CFC. All of it.

What was supposed to be a neat all-stock deal of $4b. netted BAC the restof CFC. But in reality, thanks to CFC cratering, all BAC ever paid was that initial $2b. In return, BAC got an entity with almost 16,000 properties valued at $3.2b. in foreclosure. Again, that much was known at the time of deal — as well as the certainty that more non-performers were on the way as the bottom fell out of the subprime market.

What was really fascinating is that almost immediately after the deal was made public, you heard whispers that BAC Had A Plan. The billions in CFC toxic waste was bad, yes, but it could be handled. And sure enough BAC did have a plan. And it was a doozy. Just blatant asset stripping — BAC took anything of value, stuffed the liabilities in a shell, and declared victory. Again a key factor was keeping the dreck walled-off from the federally guaranteed bank parts of BAC. This plan makes two things clear — BAC knew in early 2008 it was taking on a mess and it was going to have to fight multiple legal battles to come out on the other side.

This brings us to another important Rothacker misdirect, that BAC somehow stumbled into the CFC deal. To wit:

But some former executives at the bank now say there were doubts internally about the acquisition.

Only a small group of people from Bank of America’s smaller mortgage business were involved in the deal’s “due diligence,” the review of Countrywide’s books and operations, said a former mortgage executive familiar with the situation. Disappointed they had little say in the deal, Bank of America mortgage executives were concerned about the strategic fit and the reputational risk of joining with Countrywide.

In 2001, Bank of America, under Lewis, had exited the business of making subprime mortgages, higher-priced loans to borrowers with riskier credit profiles. And in the fall of 2007, the bank had stopped selling mortgages through brokers, a major business for Countrywide but one that Lewis had criticized for producing loans he called “toxic waste.”

“It was like, ‘What are they thinking?’ ” said the former mortgage executive, who like other colleagues agreed to speak only on condition of anonymity to protect business relationships. “We are two totally different companies.”

Elsewhere in the bank, other executives were familiar with Countrywide because the bank bought loans from the lender for its own investment portfolio. Some worried about diminishing loan quality and the possibility that investors who had bought securities backed by Countrywide mortgages could some day demand the bank repurchase the loans if they went bad, said a former Bank of America executive. That’s the exact scenario that played out in coming years.

“The people who understood the mortgage business were clearly providing candid and factual feedback to the diligence team,” the executive said. “What they did with that information, there is no way I could answer that question.” …

Lewis, who retired in 2009 and still has a home in Charlotte, declined to comment for this story.

To be sure, few inside or outside the bank envisioned the tens of billions of losses that were to come, and the peak of the financial crisis was still months away. Over its history, Bank of America had often profited by buying down-and-out companies at bargain prices.

No. Just no. The record shows that BAC execs knew exactly what they were doing — within days of the deal closing in July 2008 BAC was on its way to walking away from tens of billions in CFC debt. And within weeks of that the Fed stepped up the clean-up effort with yet another “liquidity” enhancer, this time helping security dealers to handfuls of Treasury notes, essentially a discount window for all of Wall St.

It was not that BAC was unaware of massive problems with CFC, it is that BAC thought that as a deputized member of the Fed’s Wall St. clean up crew the bank could overcome those problems and book a healthy marginat the same time. To have unnamed BAC execs here in the light of day of 2014 sit and tsk-tsk and I-told-em-so is a gross distortion of reality and a tremendous public disservice. Again, go to the public record.

Even in the fall of 2008, as the meltdown was spreading and would soon claim Wachovia and hand BAC Merrill Lynch, the bank was still calmly dealing with the CFC hangover. Deals were being made to retire CFC toxic debt and no BAC execs had to be talked off ledges. The bank’s execs clearly thought they had a handle on CFC — what was missed was the extent to which the entire financial sector was hanging by a thread. And that is an important distinction to recover and underline. The financial meltdown happened to BAC and the money center banks; BAC walked into CFC eyes wide open.

Now we come to the salt-in-wound portion of the tale, that as late as February 2009 BAC was crowing about the CFC deal. The breathtakinglyinane story published by TCO is worth quoting at length:

Mortgages have taken a lot of blame for the nation’s banking meltdown, but right now, they’re one of the bright spots at Bank of America Corp.

The Charlotte bank’s purchase of Countrywide Financial Corp., a California lender that came to be emblematic of the mortgage crisis, met plenty of skeptics when it was completed last year. Analysts have raised concerns about Countrywide’s troubled assets and the difficulties inherent in big mergers.

But Barbara Desoer, the Bank of America executive in charge of cleaning up and integrating Countrywide, said Wednesday that Countrywide has given the bank a huge leg up to take advantage of a refinancing boom that started in November.

That may have been the first, last, and only time the full-on financial crisis of 2008 was called a refi boom. But it is important to remember that in the early days of the Obama administration every morning was a false dawn. Timmy Geithner had failed his way to the top and as Obama’s Treasury Secretary was ready to double-down on bailouts. The Fed had thrown all caution to the wind and was buying hundreds of billions in mortgage backed securities. By March 2009 that number would hit $1.75 trillion on its way to a peak of $2.1 trillion in June 2010.

But back to the sunshine and rainbows parade BAC was throwing for itself in early 2009, with the considerable help of reporter Christina Rexrode, who parlayed her CLT gig into a New York City posting, where she mannedAP’s banking desk before moving to MarketWatch a year ago and now, of course, covers BAC and Citigroup for WSJ:

Q. Your chief executive (Ken Lewis) recently said that Countrywide is “on fire, in a positive sense.” Can you tell us more about what that means?

We’re seeing the lowest rates that we’ve had in a long, long time, so we’re the beneficiary of that, with a tremendous amount of volume in both refinancing and purchasing. The capacity that Countrywide brought is enabling us to take advantage of it, so this is reinforcement of “Thank goodness we did the transaction.”

Traditionally, fourth quarter takes a meaningful dip in volume, but we’ve really seen a lot of activity from Nov. 25 forward. That’s when the Fed committed to buy up to $500 billion in mortgage-backed securities, in an attempt to bring rates lower. And psychologically, for the consumer, being able to get a rate below 5 percent — that’s where the markets are hottest.

Both brands are being very aggressive in marketing. We’re paying overtime, extending hours, hiring contractors, hiring full-time employees, taking them from parts of our business that are slower and bringing them into first mortgage.

Thank goodness we did the transaction. We can assume that Barbara Desoer was not among the second-guessing banking execs Rothacker spoke to, primarily because Desoer, in a wonderfully illustrative twist of America’s banking sector, was named CEO of Citibank in April. Desoer was restructured out of a direct report to BAC CEO Brian Moynihan in September 2011 and in February 2012 she announced her retirement. BAC did not fill the position.

The balance of 2009 featured BAC and the financial system lurching from one crisis to the next. The FDIC announced plans to hike deposit insurance premiums to cover expected bank failures and the Fed’s TAF program hit $150b. In March the Fed announced plans to add hundreds of billions more to its balance sheet noting, “the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending.”

However, the billions in Fed-created stimulus could not save Ken Lewis and by October he was gone. Countrywide stayed, the gift that keeps on giving. ##

Originally published at The Free Lance.

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36 Comments for “Rewriting the History of BAC, Bailouts, and Busts”

  1. Pthhhh! A billion dollars for BAC was last week. All banks use the discount window because it makes sense. I have no love loss for BoA, but this article is hogwash.

    Like or Dislike: Thumb up 0 Thumb down 6

    • Uh, you understand we are talking about Aug. 2007, right? If ALL banks were using the discount window, why did the Fed need a two-pronged effort to get banks to use the discount window? Also, why did the Fed switch from overnight to 30 days as a term with that Aug. 17 action if everything was just business as usual? While you’re at it, explain why the exemption to Section 23A was likewise no big deal for BAC and the money center banks.

      Well-loved. Like or Dislike: Thumb up 7 Thumb down 0

      • Because the economy was collapsing and the Fed was trying to keep currency markets liquid. That’s why. Try your rhetoric on someone that does not understand capital and currency markets.

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        • watching the mentally feeble Zon debate JAT is like me trying to cover Steve Smith 1 on 1. Not pretty.

          Like or Dislike: Thumb up 4 Thumb down 0

          • I notice you have nothing of meaning to say, fat boy. If this is all this wing nut has it’s not hard to prove that statement wrong. At least not among the rational and reasoned people. You wing nuts drool at anything uninformed and pompous libertarians say, especially if there are no facts to back them up.

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        • The banking system was collapsing, not the economy. And while the fall of the banking system would have caused problems, if it had been allowed to fail and those who made errors suffer for their errors, the rest of the economy would have quickly recovered and we would be rid of those who made the mistakes.

          The only reason for keeping a system like that going is to maintain the system for those in positions of power. It certainly has nothing to do with the average person.

          Like or Dislike: Thumb up 4 Thumb down 0

          • Skyler the Weird

            Had the banks been allowed to fail, the economy would have fallen with them. Charlotte would not exist as we know it now. Still there would have been no Golden parachutes for Ken Lewis and Kennedy Thompson. Maybe a room with Nice Drapes in the Glamour Slammer where Chuck Colson and Company vacationed after Watergate for some of the folks packaging the crap.

            The economy would have reached bottom and we would be climbing back now. The Fed and the People’s Bank have just postponed things hoping inflation will help create a recovery.

            Like or Dislike: Thumb up 1 Thumb down 1

          • Are you stoned or really that stupid? Ask an economist with credentials what this country would look like if the banking system collapsed. We would still have 50% unemployment. Housing and commercial real estate markets would have collapsed with the banks. No GM, No Chrysler, no GE, no banks, no Amazon, no Walmart.

            Seriously, take a class or something. That is really an asinine comment.

            Like or Dislike: Thumb up 0 Thumb down 4

          • Zon, if anyone is stupid here, it is you. If the financial system failed we would clean the fiscal mess up in short order. Many people would lose fortunes but all the material wealth we have would still exist. The loss would be paper.

            Most of us realize you can’t see beyond the end of your leash and believe the banking system is the origin of all wealth.

            That is wrong. The banks and associated institutions, live off the producers in the world, not the reverse. Banks are no different in function than government, which is why they seem to be one and the same.

            Like or Dislike: Thumb up 3 Thumb down 0

          • Skyler the Weird

            So you’re saying China is not playing a shell game to hide the enormous debt they have created by loaning out trillions of yuan to Party Insiders to finance Ghost Cities and roads to nowhere? China created ‘bad debt’ banks that took their Non Performing Loans off the books of the big banks and wrote them down using accounting tricks that would make Motion Picture Production Companies green with envy?

            Like or Dislike: Thumb up 0 Thumb down 0

  2. Zon what makes you think I am fat (5’11″ 202)? and if I was, would that disqualify me from discourse, Michelle Obama has an ass like a borax mule, and we are supposed to take her advice on nutrition, and we are supposed to take her advice on nutrition.

    Like or Dislike: Thumb up 2 Thumb down 0

    • Zon I typed the last line twice on purpose, as to help you understand,

      Like or Dislike: Thumb up 0 Thumb down 0

      • Rick,

        Mentally Zon is still in his late pre-teens. You can tell, because he hasn’t gotten past name-calling. The ability to discuss ideas is way beyond his mental years.

        Like or Dislike: Thumb up 3 Thumb down 0

        • Pthhhh. Let me ask you something, genius. All the wealth in this country is in financial institutions, either in deposits or invested out. You know how banking works, don’t you? I’m thinking not. If financial institutions collapse, all those deposits are wiped out because no one can pay the banks back. This is not some fantasy land where the Working Capital Fairy swoops in saves us all. Companies that don’t have access to lending fail and lay off their employees. Employees that have no income don’t buy.

          This is not some 19th century fairy tale land like you seem to dream of. When banks fail the economy goes with them. That’s why the FED injects stimulus and why banks are heavily regulated. Try reading a history book about the 1930′s for once. What? Have you wing nuts re-written that history in your blathering echo-chambers too?

          Like or Dislike: Thumb up 0 Thumb down 2

          • What a stupid statement. The only thing in banks is deposits of mediums of exchange. There is no wealth there except paper wealth. Buildings, construction equipment, land and produce, among thousands of other types of WEALTH exist outside of banks. The only thing banks have are liens against such. If there is no loan, they don’t even have that. If anyone needs an education, it is you.

            Like or Dislike: Thumb up 1 Thumb down 0

          • Skyler the Weird

            The only thing on deposit at banks are electrons and pieces of paper.

            Like or Dislike: Thumb up 0 Thumb down 0

    • I’ve seen you in public, Rick. If you’re 202 the moon is made of cheese.

      Like or Dislike: Thumb up 0 Thumb down 2

      • Zon if you saw me in public I wished you would have introduced yourself. How did you know it was me?

        Like or Dislike: Thumb up 1 Thumb down 0

  3. @ Lewis, confirmed you know absolutely nothing about banking. What do you think happens when banks collapse? All the value behind the mediums of exchange disappears. When that happens there’s no place to borrow and then business collapses because A) there’s no one to borrow from and B) no one to buy there products because all their buyers are now bankrupt because of the aforementioned bank collapse! Sorry that does not support your wing nut fantasy-land narrative but that’s how it all works.

    After you’ve spent 30 years running banks you can lecture me on how it all works. Until then you sound like you’re dumber than a box of rocks on the subject.

    Like or Dislike: Thumb up 0 Thumb down 2

    • Zon,

      One would expect you to toe the company line. What happens when banks collapse? Many things. Why don’t you, being the expert you are, delineate them. Tell us how the assets disappear, never to be seen again. No, dear Zon, it is you who are wrong, as usual.

      Banks and banking are a method to accumulate wealth at the expense of the people; those who deposit and those who borrow. Banks, besides being legal methods of thievery, are only a go medium between those who deposit and those who borrow.

      So get over yourself.

      Like or Dislike: Thumb up 0 Thumb down 0

      • lewis,
        Zon believes in the notion that banks exist for the good of the public. He sure is a hoot to have around. My experience with Bankrupt of America is that it is a corporation that exists to make money any way it can .Legal and illegal.

        Like or Dislike: Thumb up 2 Thumb down 0

      • Um, Doofus, I already told you what happens when banks collapse. Now you’re talking about how evil they are. Just what a communist would say. Try selling one of those trucks making someone pay cash. Banks aren’t so bad then, huh?

        Like or Dislike: Thumb up 0 Thumb down 1

        • Credit would still exist without a central bank. Banks themselves aren’t the problem, Zon. The Federal Reserve is.

          Like or Dislike: Thumb up 1 Thumb down 0

          • How is having a central bank, just like every industrialized country in the world, to set monetary policy and oversee financial institutions a problem?

            It was a weak FED in the 1920′s that allowed banks to do whatever they wanted that led to the Great Depression. And a weakened FED from the 1990′s into this century that contributed to this century’s Great Recession, that we are just now recovering from.

            So I’m struggling to appreciate your comment.

            Like or Dislike: Thumb up 0 Thumb down 4

          • Anyone who disagrees with zon on any subject incurs the wrath of his vicious tongue. If he had the power he would shut down Pundit House and put everyone who posts in reeducation camps.. Good old Zon . A hater if there ever was one.

            Like or Dislike: Thumb up 3 Thumb down 0

          • Bruce,
            I will have to disagree with you. Zon does not have a vicious tongue: that would require ability and intelligence. He has the verbal repertoire of a 10 year old. Hardly vicious; JUST mean.

            Like or Dislike: Thumb up 1 Thumb down 0

    • Zon,

      What bank do you run?

      Like or Dislike: Thumb up 0 Thumb down 0

      • Anonymity is like a warm blanket, Max. I prefer to stay warm and cozy.

        Like or Dislike: Thumb up 0 Thumb down 1

        • Anonymity is what allows people to ignore the morals and ethics of society if they have not internalized them.

          Like or Dislike: Thumb up 0 Thumb down 0

          • Lack of anonymity has not stopped you from ignoring society’s morals, Lewis. Apparently you’ve never had any.

            Like or Dislike: Thumb up 0 Thumb down 0

          • Skyler the Weird

            We do miss your trollery on the Observer forums since they went to facebook login. Sigh. They don’t believe I’m an illegal alien from Canceron and delete most of my facebook wisdom.

            Like or Dislike: Thumb up 0 Thumb down 0

          • Well, if I signed on the Observer and was identified, it might cause me problems at work. The bosses really don’t like people who are so blatantly rude to others, much preferring the subtle ways of taking from the poor to give to the rich. And indeed, I am actually embarrassed to be identified with the persona I present here. So I must remain anonymous.

            Like or Dislike: Thumb up 1 Thumb down 2

          • Yes I believe Anonymity is a virtue also and that PH should probably to the the FB verification model too.

            Like or Dislike: Thumb up 0 Thumb down 0

      • Skyler the Weird

        The Left Bank of Course Max

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  4. @ Bruce. That’s not true, Bruce. At least not with you. See, to be disagreed with you have to actually say something. And you never do that.

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