The Wall Street Journal-20080112-A Private Fix for Countrywide
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A Private Fix for Countrywide
For some observers, the first good thing to emerge from Bank of America's intention to buy Countrywide Financial is that they probably won't have Angelo Mozilo to kick around anymore. The Countrywide chief executive's future with the new entity hasn't been announced, but with his retirement already scheduled for next year, the odds are that Mr. Mozilo eventually will take the severance gold and head for the sun.
The more substantial good news in this announcement is that it's another significant sign that private capital markets are starting to do what is necessary to rationalize the subprime mortgage mess. As well, it may signal the Bernanke Fed that it doesn't have to rescue the economy all on its lonesome because the main players on this field have disappeared into the tall weeds.
Bank of America's purchase of Countrywide is a $4 billion all-stock transaction. That is, private capital is assuming the responsibility, and need, to clean up its own problems. We think this is more in the long-term interests of the markets than the recent trend of troubled banks such as Merrill Lynch, UBS, Morgan Stanley and Citigroup finding capital infusions from investment funds controlled by foreign governments, with Citi and Merrill rumored to be seeking more of the same. To be sure their capital needs are large to shore up damaged balance sheets. But BofA's $4 billion Countrywide deal shows that private markets can commit capital to this problem and in a way that puts needed space between taxpayers and bailouts.
BofA had already invested $2 billion in Countrywide in August. Still, Countrywide was tottering toward bankruptcy, which would have shifted much current market risk in the direction of Fannie Mae and Freddie Mac. That surely would have caused fingers to twitch in Congress. The BofA infusion likely diminishes the chances of that happening. As to Countrywide's shareholders who've been heading for a wipeout, it is true they'll now hold paper in a first-rate financial institution. But they'll be getting a lot less for their shares than they would have two months ago. And again, their "bailout" is private capital.
Bank of America admits it may not see light from this deal for several years. As of now, however, the market is starting to function as it should.
