Major event - BofA says no legal or moral obligation to contracts

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Submitted by equalizer on July 27, 2008 - 9:19pm

Not talking about those who are walking away from their mortgage contracts today, talking about corporate bonds.

BofA refuses to back any of the bonds of its new subsidiary, Countrywide. The stockholders got $5/share and the bondholders are getting zero. Note that Bill Gross was recommending Countrywide stock a few months ago, since he stated that certainty that BofA would go through with purchase in July.
BofA keep all assets and just ignore all the debts. This is contrary to all past actions in bond markets.

I'm not a bond, stock manager or a hedge fund manager, but it appears that experts at RISK magazine share same concerns.

I guess Ken Lewis is a lot smarter than I thought and knows that he can roll over all bond managers and pension fund managers in this country with complete impunity and those shmucks won't even bother to give a damn. Oh, well.

Been looking at bonds and preferred shares at banks but after this event, STAY AWAY from this toxic dump.

http://blog.risk.net/2008/07/countrywide...

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Hard to find fault if these
Submitted by bsrsharma on July 27, 2008 - 9:29pm.

Hard to find fault if these were the terms of the buyout. BTW, I suspect this was a shotgun marriage to prevent an Indymac times ten catastrophe.

As an approximate precedent, when BS collapsed, JPM agreed to takeover only when Fed agreed to swallow losses. I guess Countrywide doesn't pose systemic failure risk so Fed/Treasury is not backstopping.

I agree with BSR...This is
Submitted by SD Realtor on July 27, 2008 - 10:10pm.

I agree with BSR...This is something we did all discuss when it was announced... that BofA would take the assets and in the end chuck all of the debt...Did anyone ever think for a minute BofA would have gone through with this deal assuming any of that debt?

If anything, the taxpayers will somehow be put on the hook to throw the bondholders a small bone.

SDR, But why pay for common
Submitted by equalizer on July 27, 2008 - 11:13pm.

SDR,

But why pay for common stock? Why not let stock fall to $1 and scoop in before FDIC takeover for bankside. Banks are not permitted to go into BK.

I think is a seminal event for bond managers. How can a bond manager trust bonds???

It is crazy that equity
Submitted by gdcox on July 28, 2008 - 2:20am.

It is crazy that equity ranks ahead of bonds in such situaions.

This has been a common problem with buy-outs, though I am unsure if it has been for takeovers. The fault line here is in the bond's conditions which should have had re-payments options in the case of certain corporate events such as takeover.

There's a question to ask one's broker before buying a bond.

Thanks Ken :) Interesting
Submitted by flu on July 28, 2008 - 6:58am.

Thanks Ken :)

Interesting times, isnt' it? The funny thing is I don't know if you folks also noticed, that I read somewhere BofA formation of a Red Oak(it think that was the name). Didn't they say they were going to put a lot of the toxic stuff under that new company, and not guarentee anything wrto that toxicity? This was well publicized for some time now.

Karma is a b!tch. By
Submitted by Bugs on July 28, 2008 - 8:56am.

Karma is a b!tch. By trivilizing moral obligations in favor of letter-of-the-law contractual language, they may be setting an example they will come to regret.

Equalizer I agree with you...
Submitted by SD Realtor on July 28, 2008 - 9:51am.

Equalizer I agree with you... The whole deal stunk to me and I... I hate to think about these sorts of deals in a bad light but I cannot help but picture Paulson, Bernanke and the head of BofA in a back room somewhere with Mozillo on a conference call working the whole thing out.

I am sure it did NOT play out like that but at the time of the deal it just seemed like there was absolutely no compelling reason for BofA to go for this deal. Not with the waste that Countrywide had... no way... Just my paranoid delusional opinion... I still think a taxpayer suppied bone is in the future...

I mean why not, we are bailing everyone else out right?

I am sure it did NOT play out
Submitted by bsrsharma on July 28, 2008 - 11:27am.

I am sure it did NOT play out like that

I feel it did play out like that.

Read the blow by blow story of the other merger:
http://online.wsj.com/article/SB12118452...

http://online.wsj.com/article/SB12119329...

http://online.wsj.com/article/SB12120205...