When something like the Countrywide to-do goes down, it creates a pretty large blip on the national radar screen.
Fair enough. But seriously people, let’s not get ourselves in too much of a tizzy here. Countrywide’s likely fall will not be discounted by me, but it’s simply not the harbinger of any perfect storm. Some, I think with tongue in cheek, have likened it to the Chrysler problem of long ago. That resulted in loan guarantees from the feds for bailout loans. This isn’t that big a deal. But then that’s only an opinion, isn’t it?
I’ve now had several conversations with people for whom I have enormous respect, but are in many cases able to see inside what actually is more than likely happening.
This morning Countrywide used their version of a homeowner’s HELOC — their line of credit. It just happened to be underwritten by about 40 banks, and for billions of dollars. ($11.5Bil) Remember this for later.
Bank of America has been trying to acquire Countrywide for quite awhile, but didn’t think they were worth the asking price. Do you think for a second a bank as experienced and just plain ginormous as B of A would be interested in an absolute loser? My money’s on NO, they wouldn’t.
There are enough lenders out there to take up the slack left by the potential failure of Countrywide. You could use the analogy, though a tad messy, of sponging up the blood from a serious, but non-fatal knife wound. It hurts like crazy, it’s not pretty to look at, and it puts you on the sidelines for awhile. The doctors and nurses in the emergency room quickly size up the situation. They see what must be done to minimize immediate threats, and also potential long term problems.
The patient, in this case the lending industry as a whole, walks out either the same day, or at most a week later with a bunch of stitches, a nasty scar developing, and prescriptions for the pain and possible infection. He’s probably at work in a matter of days, maybe a week.
Let me pause here to say it’s not my intention to imply or have you infer that this will all be fine and dandy in a few days or a week. It won’t. But it’s my guess that in the next 1-3 months or so, it will be handled. Countrywide will either be gone or a much smaller firm. They will, in my opinion, have new owners.
OK now, I asked you to remember what I mentioned about Countrywide drawing down on their line of credit. Who do you think is probably the lead lender, or at least one of the major lenders for that line of credit?
Drum roll here………………Right………Bank of America. When I heard that this morning, the light went on. Duh
Countrywide might, because of the ego of its leadership, at least rattle their swords about bankruptcy. This is where I think Bernanke, Fed Chairman, will quietly intervene and talk sense to Countrywide.
Bank of America will have acquired their target, everyone will see it’s a long trusted, and prudent bank, and the mainstream media will have to chase other ambulances.
This is just my guess at what could happen. That and my Starbuck’s card gets me a cup of coffee and an oatmeal raison cookie this afternoon. But it sure makes sense to me. The next 30-100 days will most likely tell.
The key, in this tale would be Bernanke whispering in Countrywide’s Chairman and Founder, Angelo Mozilo’s ear. 
There’s something about the Fed Chairman talking sense to you while you realize the power he wields. Mr. Mozilo will be hard pressed to eschew the bluff strategy of threatening bankruptcy. He would appear to be much better off taking his money and riding off into the sunset. His legacy will be mostly one of great success. He will have made what’s known as generational money. His great-great grandkids will be wealthy upon their birth.
When this is all over, and it turns out it wasn’t Chrysler? Remember it was the media — once again, who did their best to scare the crud out of us. They care not what fear they generate by their drive to sell newspapers, and radio & TV time.
I won’t list all the folks with whom I talked this morning. But I can’t take more than 20% of the credit (pardon the pun) for what I’ve put forth as a plausible scenario. Brian Brady, the most knowledgeable mortgage broker I’ve ever personally known, broke this down for me. Combined with the others’ takes, Brian’s made the most sense by orders of magnitude. The edge he has on some in his business is the six years he spent on Wall Street himself. He understands the inner workings.
By the way, Brian doesn’t believe any more than I do, (in my opinion) that there will be a federal bailout of Countrywide the way the feds stepped in for Chrysler. Given the above scenario, and the pieces of that particular puzzle that seem to be falling into place — a bailout would be like killing a spider with a sledgehammer.
No related posts.
About BawldGuy
Good article about the inner workings of capitalism.
BofA may get to acquisition and expand at discount rates. They are no dummy.
Any word on the rumor I heard that interest rates are going down 1/2 a point and that the stock market went up (and then down a little…not quite enough…lets lower it by another 1/2 point)
Cher – As you may already know, the rate drop is now not a rumor, but reality.
The difference between Fed Chairman Bernanke, and the most recent chairman, is his belief system as it relates to economics in general.
He’s very much more interested in money supply as a factor in our economy as compared to interest rates.
This is a sea change for the Fed. I think it’s a positive mindset change. Bernanke is a strong and loyal follower of Milton Friedman, the iconic economist who just recently passed away.
Friedman taught inflation was generated and/or controlled by virtue of the quantity of our money supply. Too much money = inflation. Interest rates were, of course, important. However, he considered them far less important than money supply.
He was a Nobel Prize winner for his work. His teachings have proven to be correct as one studies our own economic history.
Bernanke, and for that matter Europe, with the noted exception of England, have been significantly increasing money supply recently. It has been doing its job of adding much needed liquidity to the banking system.
The next 100 days or less will show us whether all this current turmoil is a bump in the road or a major roadblock. I think it’s a bump.
The real danger here is public perception. (Do you think the average guy knows France added billions into their banking systems?) As the public loses faith in their financial institutions they get scared and confused. With those as the primary emotions concerning their assets they stop and sort it out.
For what period of time will they sit on the sidelines before acting. Even Mega A paper people (my term, not lenders’) are calling me to see what I think.
My dad called me from Phoenix today to make sure I’m alright as far as my goals are concerned. Buyers under contract with loans locked are calling to see what I think of their bank.
Real or not, perception is that money has completely dried up. And therein lies the bigggest danger to the housing market.
Chris – You are of course, right. The problem is the public gets their opinions from the talking heads which apparently are filled with Captain Crunch.
The script usually goes something like this:
The public shows signs of growing fear and anxiety.
The Fed takes action. This time two. They’ve been adding massive liquidity and they cut the discount rate a half point today.
Weeks pass and folks begin to notice Taco Bell is still selling Burrito Supremes.
The market begins to calm down due to Fed moves.
The talking heads act like they predicted all this would happen the way it finally turned out.
I don’t know about you Chris, but I get at least an email a day from some lender telling me they’d love to get my business, and they’re peddling 100% loans. What’s wrong with this picture?
Yep, that public perception thing is a bear.
Well all these “bumps” sure get us all talking, don’t they.
I called Jeff today to check in about the goings on and he gave me some excellent physical fitness advice!
We should just all forget about it and go get healthy or go to Hawaii. Come back when it’s over.
A great retirement, two comma net worth, real estate investment advice, and now physical fitness. So where’s my Nobel Prize?
Thanks Jennifer – Readers, click on the link, Central Denver…. and read the Countrywide press release. They’re either about to pull of a huge upset, embarrassing mainstream media, (who must be used to that by now) or they’re whistling past the cemetery.
Was the run on countrywide branches by it’s depositors warranted? Do you feel keeping $ with them is a mistake at this point?
Hans – That is the best question yet.
Their depositors are insured. Still, if I had a big part of my cash there, I’d think like most folks would, and give serious thought to taking it elsewhere. That’s without my investment hat on.
I’m no different than everyone else Hans. It’s my opinion nobody with money deposited there, and following the rules required for them to be insured, will lose anything.
Still, if it’s my money, it’s a lot harder to say that so confidently. There’s nothing like the fear of even a remote chance you could lose a substantial amount of your savings. Rationally I know the money is safe. How often are folks in this set of circumstances totally rational?
You make a great point with your question.
Public confidence is such a large part of our economy, isn’t it?
Thanks again Hans.
I am guessing that CW will be acquired by a broadly-diversified bank ~ probably B of A or Wells Fargo.
CW’s currently-low stock price will help it happen.
Then, they will downsize the company and restructure it to be proportionate to market conditions.
Translation: Massive change and layoffs.
Though painful to many people, your scenario sounds very plausible Phil.
Well given your observations about B of A and this evenings events… I’d say you have gained a reader. I’ve already added your blog to my google reader account.
Thanks Hans – I’ll do my best to live up to your confidence.