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As Lawsuits Mount Countrywide Bankruptcy Looms

Posted By admin || 1-Dec-2011

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.

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