Long-term rates are unchanged
this week, about the only things in finance that are. The 10-year T-note
is still in the 3.80s, mortgages 6.00%, 5.875%, 6.00%....
Two big speeches (Treasury Secretary Paulson and Chairman Bernanke) and
the demise of Countrywide overshadowed news of a steadily weakening
economy and credit trouble spreading outward from mortgages.
The newest consumer data
arrived in December retail results, uniformly lousy, and ATT described a
pullback in consumer spending on the most basic services. American Express
-- good, tough, old outfit -- is the newest to announce rising defaults.
Countrywide. Its borrowers in process, and sellers and Realtors nearby all
should feel relieved. Fundings are now secure.
However, BofA’s acquisition has all the fingerprints of a liquidation, one
in the interests of banking regulators to avoid the collateral scramble
and firesale inevitable upon the instant of bankruptcy. The idiot stock
market soared on the acquisition news on Thursday, and reality dawned
today: BofA’s stock is down, its credit-risk premium up, Moody’s
considering a downgrade.
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So, what’s the benefit of this
deal to BofA, good money after the bonehead $2byn infusion into
Countrywide last September? First, good will and blessings from the whole
regulatory apparatus. No other institution had the strength left to absorb
the Countrywide wreck, and good deeds beget future favors. BofA’s
September infusion may have bought it control, but system conditions have
deteriorated so badly since that it need not have paid a dime --
regulators would have come to call, hats in hands.
Deconstruct the deal. The
prize inside Countrywide is its loan servicing portfolio; right now a
migraine, but $1.4 trillion in mortgage customers is a huge base of
clients who instantly become BofA pigeons. Loan servicing has a common
market value in excess of 1.5%; even if this pool is discounted for bulk
and trouble to 1%, that’s $14 billion in value.
BofA is paying $4 billion for
the overall wreck, meaning Countrywide minus its servicing portfolio has a
negative value of at least minus $10 billion. Its dinky “bank” (really an
S&L, easier regulation) is leveraged to the eyeballs and probably has a
net-loss portfolio; and the insurance and securities and other tacked-on
businesses only have value if originations run hot (not).
© 2008 - Economic Notes is published weekly by the Economics Department of
Universal Lending Corporation. |
The massive origination arm
has negative value also. Absent the fee-rich subprime and option ARM game,
Countrywide is a low-margin, commodity Fannie-Freddie shop just like the
rest of us. BofA needs another brand name like a moose needs a hat rack,
and assumes future losses from litigation, portfolio, and downsizing. A
lot of branch landlords are going to have some re-leasing to do.
Thus an industry re-sizes
capacity from all-time-fantasy down to actual demand. Expect Washington
Mutual to follow the merge-out parade.
The speeches. Mr. Paulson offered nothing, and the no-show hurt the
markets. His gratuitous advice that firms re-capitalize ignored their
grave difficulty in doing so.
Mr. Bernanke looked haggard.
He has studied Class-A financial crises his whole life, but leading the
Western banking system out of one is a different matter. The speech is an
excellent read. He is under no illusions: “...The financial system remains
fragile” [!!]. Long sentence, third para from end, after many promises to
intervene to save the economy: [compressed] “However... unmoored inflation
or eroded Fed credibility could reduce the Fed’s ability to counter
shortfalls in economic growth.”
He is stuck: slash rates and
take the inflation risk? Or fight inflation and let the economy fend for
itself -- and become the most hated man in America?
If he cuts dramatically to
save the economy, look for mortgage rates to rise. That’s the largest
probability, now, political pressure on him too strong to withstand.
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