Our Economy is in Trouble

Posted by jerry as finance

In the past 24 hours, Bank of America has announced that it entered into an agreement to acquire Countrywide Financial. That’s an amazing thing. Countrywide holds north of 20% of mortgages in the US. As the housing market continues to unwind, they are seeing an increasing number of delinquent payments. Despite this, Countrywide has to continue to pay the investors who funded a given mortgage until a disposition has been reached on that mortgage - either a new payment plan can be established, the borrower pays up, or the mortgage goes into default. Normally, a company like Countrywide would tap a line of credit to help cover any difficulties. These days, though, extremely few investors want to buy debt. So, Countrywide sits in a position where it is exposed to the point where it may have to file for bankruptcy protection, which will cause a further unwinding as it’s credit rating deteriorates. BoA can be seen as a white knight coming in to provide a stable foundation for Countrywide to continue operations. For it’s part, BoA needs to protect the $2B investment is previously made in Countrywide.

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