The threat of a Countrywide Financial bankruptcy filing looms larger than
ever as the number of lawsuits against the company mounts. The subprime
mortgage lender, which was acquired in 2008 by Bank of America continues
to suffer losses as the foreclosure crisis fails to loosen its stranglehold
on housing industry stakeholders.
The FHFA sued Bank of America and 16 other banks this month to recover
losses on about $200 billion in mortgage-backed securities sold to Fannie
Mae and Freddie Mae, the government- backed mortgage firms. Bank of America
and its subsidiaries created more than a quarter of those bonds.
A recent lawsuit by American International Group Inc. to recoup more than
$10 billion in losses on Countrywide mortgage bonds presented the argument
that Bank of America is effectively the successor and the responsible
party for those debts. But Bank of America has taken great pains to make
sure that Countrywide was maintained as a separate entity from the parent
company. If the subprime lender is placed in bankruptcy and the bankruptcy
court agrees with Bank of America's stance that it's a separate
entity, then only Countrywide's assets would be used to repay creditors.
If that's the case, Countrywide's $11 billion in assets could
be exhausted quickly, leaving most creditors with no recourse and no access
to Bank of America's assets.
Some analysts worry that if Countrywide is placed in bankruptcy, the move
could make credit markets lose faith in Bank of America's willingness
to back up its subsidiaries. But there is another possible outcome, investors
and lenders may show increased interest in Bank of America because its
savvy move in protecting its profitable parent company from a ailing subsidiary
it tried (and arguably failed) to rescue from the foreclosure crisis.