Greedy Bank of America Engineers "Fake Rescue" in Sub-Prime Fire Sale

rescue |_reskyo_|

verb ( -cues , -cued, -cuing ) [ trans. ]

-save (someone) from a dangerous or distressing situation

-an act of saving or being saved from danger or distress

New York, New York: Who doesn't love the idea of a dramatic rescue -- like saving a child who fell in a well, bringing miners out of danger from a hazardous hellhole, or the courage of that hero who jumped on the subway tracks to safeguard a passenger in the way of a speeding train?

We appreciate rescue helicopters, rescue squads in fire departments -- New York has a big fully equipped van called "Rescue One,"-- or the daily bravery of the Coast Guard plucking unskilled seafarers from turbulent waters. The more risky the rescue, the more we like it.

But now even a self-interested maneuver by America's biggest consumer bank (net work $175 Billion) is being cast in a heroic light as in the "rescue" of America's biggest mortgage company, Countrywide Financial by the Bank of America. (NY Times headline: "Bank is Seen as Rescuing Giant Lender.")

When the $4 billion deal was leaked to the media, the markets were ecstatic and the share price went up. The acquisition crazed BOA -- itself an aquisition of Nation's Bank-- which, thanks to new bank-friendly laws and deregulation, went from being a Western institution to a national one, was said to be acting to prevent the collapse of a company vital to saving the national economy.

"My hero?"

Actually, the Bank had invested two billion in Countrywide last August which was then seen as a great deal. They had paid only $18 dollars a share for 16% of the company. But the value of that investment fell by nearly half in just a few months.

As the housing market went into free fall, Countrywide did as well with 7.2 percent of the loans they were servicing in serious arrears. Foreclosures on their properties had doubled. Their $11.5 billion dollar credit line was just about gone. Wall Street turned off the money pump. The company had $15.5 billion in debt maturing this year.

The vultures were overhead. Lawsuits were flying and investigators were at the front door with subpoenas charging predatory and discriminatory practices. They were already laying off thousands of their 51,000 people. This was forcing the Bank of America to do the same.

What should BOA do? Write it off, or throw "good money after bad?" They had a better idea -- prey on their weakness, save their investment, and take over their business. They knew that if one of BOA's large investments got into deep trouble, BOA could also get into trouble. So, if Countrywide went down, as many feared and some predicted, that could dent the Bank's other ambitious and often avaricious strategies.

BOA smelled a firesale.

Countrywide was going down. The LA Times reported: " the market in the first three days of this week marked down the value of the business by an average of 15% a day. The stock reached an 11-year low of $4.43 at one point on Wednesday. You can't have too many 15% down days before a company's market value nears zero. That message had to be coming over loud and clear at Countrywide's Calabasas headquarters."

BOA lined their troops on the hill, swooping in to make an all-stock deal, offering less than $10 a share. They saw it as a chance to market more of their services to new customers. And just for making the offer, their own stock price went up 56 cents a share, thank you very much. The deal will close after the Federal Reserve Bank's next rounds of expected rate cuts so money will be even cheaper then. Brilliant. The bank also knew from one of its own studies that the housing slump will persist well into 2010. But when it ends, they will emerge as the king of the housing hill.

In fact, the SEIU union has opposed the deal arguing it leads to more economic concentration that is bad for consumers. And it could lead to more mergers says Jim O'Shaughnessy of O'Shaughnessy Asset Management.' "I would not be at all surprised to see another half-a-dozen (similar transactions), I would not be at all surprised to see more (subprime) write-down."