Friday, January 16, 2009

Bank of America... Literally

Some clumsy and random thoughts on Bank of America...

  • Its been floated around that the government cut some sort of deal with BofA to buy Merrill Lynch. That makes zero sense. Why would the Treasury pledge money to bail out Merrill on the same day they were refusing to help Lehman?
  • What makes more sense is that the government offered BofA some help sometime in October or November to assure that the Merrill transaction was completed. In other words, once they saw how badly they had f'ed up by not bailing out Lehman. It might explain why Bank of America suddenly decided to fully guarantee Countrywide debt out of no where. That could have been part of the bargain.
  • Some of the speculation about a cloak-and-dagger government deal centers around the seemingly exorbitant price Ken Lewis decided to pay for Merrill. But didn't he do the same thing with Countrywide? Bought a company that, while potentially valuable, could have obviously been had for less?
  • I can't see how Ken Lewis keeps his job now. Bank of America would be in great shape had they simply not been so aggressive in acquiring CFC and MER. Compare his actions versus Jamie Dimon (Bear Stearns and WaMu) and John Stumpf (Wachovia). Both got valuable new pieces at rock-bottom prices, whereas Lewis seems to keep bidding against himself.


PNL4LYFE said...

Off topic, but I suppose it applies to every bank who owns them: I was reading a research report that said that for some RMBS securities, bankrputcy costs are allocated pro rata across the tranches (i.e. no subordination protection for the senior tranches). The article suggested that this may apply to principle reductions in the event of cramdowns by bankruptcy judges. Has anyone heard about this? It seems counterintuitive to me, but I'm not a lawyer.

Aaron said...


Do you have a link?

Keith said...

PNL: I've looked at a lot of Sub Prime and Alt-A CMOs and have never seen anything like that. Subordination of losses is pretty fundamental to the whole concept and the deals seem to define loss as simply the extent to which collateral principal is lower than your deal balance after you have scrounged up any dollar whether principal, interest, fee income that hasn't been applied to a higher purpose (typically bond interest and servicer fees).

The only problem I know that can effect senior and subordinate at the same time is an interest shortfall. Even in that case a deal-wide maximum coupon is calculated which the higher coupon bonds are more likely to bust through than the low coupon A bonds.

But my experience certainly doesn't cover the whole universe of products, maybe another deal structure has bigger problems with that.

PNL4LYFE said...

Here is the text. It's from a "not a product of research" note.

"To the extent that bankruptcy cramdowns would be a substitute to foreclosure and could also be more punitive (from investors standpoint) than servicer-controlled loan modifications they would have a negative impact on security valuations. This point is well understood. A relatively less known but highly undesirable effect of the bankruptcy cramdown legislation would be to directly expose senior tranches in the non-agency market to bankruptcy related losses. Legal documentation for several non-agency deals stipulates that bankruptcy related losses in excess of a certain de minimis amount (typically a few basis points) need to be allocated on a pro-rata basis across the capital structure. In other words, subordinate tranches do not provide credit enhancement against bankruptcy related losses after a specific carve-out. The implication is that losses that would normally be allocated to subordinates would get allocated to seniors and due to having a negligible amount of credit enhancement against this new significantly enhanced bankruptcy risk, rating downgrade on several senior tranches, including those which have been holding up well, would become imminent.

Another interesting observation is that this bankruptcy related loss allocation nuance is typically found in deals with a shifting interest structure. This makes the jumbo and good quality alt-A sectors, which have a very high percentage of deals based on a shifting interest structure, more vulnerable to this legislation. The upshot is that the cramdown legislation could deal a serious blow to the prime non-agency market, shake investor confidence, and lead to more bailouts."

Accrued Interest said...


That would be absolutely shocking.

Who published the piece you are reading?

Lockstep said...

I completely agree, AI. I give Ken Lewis at most another six months in his job.

You forgot to mention the $7B investment in the Chinese bank AFTER they received the first $25B of TARP money.