Bank Of Countrywide Asbestos

Tyler Durden's picture

Ten days ago Zero Hedge presented the idea of applying an Asbestos-type settlement to the neverending lawsuits against Bank of America which if continue at the current rate will result in the swift and brutal end of the massively undercapitalized bank by a thousand Rep and Warranty litigation cuts. Yesterday, we were happy to see that the idea has received far broader billing, and is being taken up by non other than Reuters: "When some look at all of the litigation arising from Bank of America's big role in the U.S. mortgage mess, they start thinking of asbestos and how thousands of lawsuits arising from that cancer-causing product brought down many manufacturers more than a decade ago. The solution back then to dealing with claims filed by more than 750,000 workers exposed to asbestos was the creation of dozens of "asbestos settlement trusts," which have paid out tens of billions dollars in damages. Some of them are still going strong today. The asbestos trusts were seen as an innovative approach to deal with seemingly endless litigation and provide a measure of compensation to sick workers and their families. The system for dealing with claims also allowed some of the hobbled manufacturers to emerge from bankruptcy largely free of the crushing weight of lawsuits." In other words, the choices for Bank of America are now two: either it prepares for a slow, painful, insolvency as all of its cash is bled out in litigation fees and "one-time" lawsuit charges, or, almost just as bad, it funds a massive trust, ringfencing all past, current, and future claims, and which is nearly all of Bank of America's equity. Yes, the end result will be a near wipe out of the existing Bank of America stock, but it will not be bankruptcy! In essence, what BAC will do is a bankruptcy remote "prepackaged bankruptcy" in which it spins off its contingent liabilities, with an equity buffer of whatever the litigants choose (most likely up to about 95% of the firm's current equity value), and proceeds to grow as a simple bank (with or without Merrill) and fund itself through retained earnings, in the process shedding off the "cancer" that are $1.2 trillion in toxic mortgages. The result of this would be a BAC share price of under $1 but that is inevitable. The alternative: freefall chapter 11 and technically 7 (which will never be allowed by the administration, sorry Chris Whalen), means BAC trades to $0.00, and the status quo system of crony communism is finished.

As a reminder, from Zero Hedge:

And some more from Reuters on the theoretical underpinnings of this idea..

"We've suggested an asbestos-style settlement as a solution. It makes the most sense," says Vincent Fiorillo, a portfolio manager with DoubleLine Capital, a $15 billion bond shop that has its own pending claims against the Charlotte, North Carolina-based lender. "It is better than where we are right now."


The idea of using the asbestos litigation wars as a model for dealing with the fallout from the financial crisis is more talk than anything else. There's no indication an asbestos-style litigation trust is something Bank of America is actively considering at the moment.


But efforts to find a creative solution to Bank of America's multi-pronged exposure to Countrywide's ailing mortgage portfolio become more urgent with each downward tick in the bank's already depressed share price.

And practical...

This is not the first time that some have talked about a litigation trust as a mechanism to deal with some of Wall Street's liability arising from the collapse of the U.S. housing market. In the early days of the financial crisis, regulators discussed the merits of using an asbestos-style trust to resolve potential litigation claims against the biggest U.S. banks. But regulators ultimately rejected the trust concept along with other novel ideas that were deemed either unworkable or politically untenable.


One appeal to a trust solution, according to proponents, is that it would be a way for a bank to essentially hive off its litigation liability and establish a mechanism for dealing with claims and litigation. The advocates suggest it would be a way for Bank of America to get a "fresh start" without involving a bankruptcy or a Federal Deposit Insurance Corporation-imposed receivership.

To be sure, an Asbestos resolution is not a magic bullet, and will still cost existing equity (and Buffett) virtually their entire investment:

The insurance industry continues to be plagued with new asbestos-related claims years after the trusts were created. Credit rating agency Moody's Investors Service recently said after asbestos being a "back burner" issues for years, the U.S. insurance industry is recently seeing an uptick in new asbestos claims.


And the problem with any trust is that it must be adequately capitalized. The amount of money the bank would have to commit would no doubt be contentious and costly to shareholders and potentially bondholders as well.


The easiest way to fund a litigation trust would be for Bank of America to issue new shares, something that would severely reduce the value of its existing stock. That's not the kind of plan that will sit well with stockholders, whose shares are already trading well below the bank's stated book value of $20 a share.


"You'd have to go to the market and raise capital for this and that would dilute shares," says Australian hedge fund manager John Hempton, whose Bronte Capital owns a sizable stake in the bank. "That is the last thing BofA wants to do right now."

Alas, Buffett's idiotic investment betting on yet another taxpayer funded bailout has derailed the train for the time being:

But if some momentum was building for a radical solution, Buffett's $5 billion investment changed that. Now even some early advocates of an asbestos-style litigation trust are having second thoughts.


"The dynamics have changed dramatically since Buffett entered the picture," says Sean Egan, a principal of Egan-Jones Ratings Company, an independent rating shop which has eased up on its once bearish view of Bank of America. "It's a kiss of approval," he added, even though the bank is paying a rich 6 percent dividend on the preferred stock it sold to Buffett's Berkshire Hathaway.


Egan says an asbestos-style trust seemed like a plausible solution during the summer when Bank of America seemed to have few friends in the equity markets. But now, Egan says, to set up a litigation trust would "create a total mess" and "be patently unfair to existing shareholders."


Just a few months ago, Egan discussed the merits of such a trust with several mortgage-backed securities investors now sparring with Bank of America. Those investors claim the bank is obligated to buy back the underlying home loans in those now soured bonds because the mortgages were issued to homebuyers who either obviously lacked the income to keep making monthly payments, or were duped into taking out greater loans than they could afford.

So for the time being the litigation push is delayed. Although likely not for long: BAC will soon need to access the capital markets very aggressively, which means its stock will plunge even more on daily headline risk:

Skeptics also point out that in the coming years, Bank of America will need to boost capital by $50 billion in order to comply with new international banking regulations designed to make sure banks are not taking on too much risk.


And next year, Bank of America will need to refinance at least $40 billion in corporate debt that is coming due. In a worst case scenario, the bank has more than $400 billion in liquid assets to pay off any maturing debt.


It's a lot of capital raising and skeptics worry that could hamper Bank of America's ability to generate new commercial and residential loans for the next several years. That's one reason people like Black, who want to break Bank of America apart, say something needs to be done to change the narrative because it's not healthy for one of the nation's biggest banks to exist in stasis for years to come.

One thing is certain: anyone calling for a prompt return of BAC to a $20/30/share price is certainly insane (we refer to Dick Bove's appearance on Fox News yesterday), and should never get media exposure again (just as a media desperate Dick Bove had promised months ago only to have not one but two daily showing on the ponzi channels in an attempt to get more gullible Americans to follow Buffett in throwing their money down the black hole). Also certain is that no matter what one believes, the Bank of America matter is one of cash flows: not enough (A) coming in, and more than enough (B) leaving. Regardless of how one spins it, as long as B>A, the stock price will drop ever more until bankruptcy eventually becomes an inevitability. As such any attempts to stop the bleeding should be enforced. However, pathetic attempts such as the $8.5 billion settlement only provoke and infuriate the plaintiff class (at least those who are not desperate in imposing a Res Judicata) and make any real cash retention options next to impossible.

In the meantime, two things are certain: all else equal (and with Bernanke around, they never are), the stock will continue dropping, and the CDS will continue widening until it is too late.

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papaswamp's picture

Don't help these fuckers out...they screwed people...they made bad decisions...time for them to pay up. 

OpenEyes's picture

Within the scope of ethics, rule of law and constitutionality, I agree wholeheartedly with you.  They should not only NOT be bailed out or helped by the public trust in any way they should also be thoroghly investigated (and probably prosecuted) for any number of offenses.

However, from a practical point of view, why would BAC's management or stockholders have any incentive to create a superfund that would payoff claimants while leaving them high and dry?  They were bailed out before because they were TBTF why wouldn't they just roll the dice again and count on the Gov't to blink?  I'd say their odds on that would be better than 50-50.  Since the choice would be to lose all of your equity (and probably a fair amount of self-management power too - e.g. a loss of those big bonuses they award themselves) what do they really have to lose?  I guess the other choice would be for massive, and rapid, insider selling of BAC equity before TSHTF, get yours while you can.

I think BAC are evil and destructive.  I think they should be forced to live with the consequences of their actions.  But I suspect they'll drive the ship toward the rocks forcing the Government's hand to step in with yet another rescue/bailout plan.

Careless Whisper's picture

@ papaswamp

I'm more inclined to give BofA a pass. The people running that Bank are really really stupid. I mean, come on, buying Countrywide in 2008? They are fuckin' idiots. Meanwhile Goldman was packaging Timberwolf and selling it to clients as AAA natural cleavage, while at the same time shorting it. So I'm not ready to put them all in the same boat.


ZeroPower's picture

The people running that Bank are really really stupid. I mean, come on, buying Countrywide in 2008? 

Lewis is a chump, but his hand was forced. They bought CFC cause BAC was their largest counterparty on just about every single sort of liability you can think of. Its all well documented in several books about the crisis and probably has been posted here as well, but basically in short form: CFC bought and sold all kinds of shit from BAC. Tranche upon tranche of "shitty deal" mortgages, index swaps, ABS swaps on those indices, etc etc, and seeing as how BAC preferred CFC stay alive to eventually pay out those obligations to BAC, they decided to take em in under the new umbrella of BAC so that they have full control over their finances and what they choose to disclose and bring in versus the other shit still on SPVs which won't be seeing light of day any time soon.

snowball777's picture

Forced my ass; a voluntary looting of a corpse's pockets at best and yet another reason these stupid motherfuckers should be both bankrupt and in ass-pounding jail.

DCFusor's picture

They were forced to buy Countrywide, and caught a lot of shit for revealing that "secret" phone call -- buy them or no bailout.  Paulson.  Go check before spouting.

Now, since Ken Lewis is the spawn of Satan, couldn't have happened to a more appropirate guy -- but that doesn't mean he wasn't forced.

Manthong's picture

Didn't Merrill Lynch, with a boatload of crap, get foisted on them , too?

snowball777's picture

And how, pray tell, did they end up with their ass in the aforementioned sling? They weren't "forced" any more than any other criminal is "forced" into a life of crime.


Anonymouse's picture

Spot on, on all accounts.  As I recall, ultimately Lewis went ahead to protect his job.  Paulson had threatened to have him fired somehow (don't recall the mechanism).

An honorable man would have resigned and announced why.  Lewis did not.  He gets what's coming to him.

Unfortunately, he drug down a lot of good people with him

ZeroPower's picture

How can you argue with fact? CFC nbv was < 0

ToNYC's picture


Worse than negative only numbers; it was being forced to drink Socrates' frickin' hemlock.

Papasmurf's picture

Someone forgot to sent that memo to John Paulson. 

New_Meat's picture


"I mean, come on, buying Countrywide in 2008? They are fuckin' idiots."

Or not.  'Cuz Ol' Hank had just taken delivery of his brand new White-stock Ithaca Pump and said, "Boy, u gonna marry this bitch."  So after less than 2,000 minutes of "Due Dilligence" the deal was "consumated."

Of course it was stupid, but the alternative was worse.  Hobson's Choice.

- Ned

{The wedding was a formal one/her Daddy brought his white shotgun.}

agrotera's picture

I kind of agree Careless Whisper, but on the other hand, BAC looks like a dumping ground for toxicity, since yes, they purchased Countrywide, but also, allowed their own shareholders to get ripped off again with the "paulson" imposed merger of MER for 0.66 BAC share for every bankrupt share of MER.  Think of the JPM deal to get Bear Stearns and then look at the BAC rip off to buy MER and it all looks like musical shares to quarantine crap at BAC and abscond with as much value from the BAC shareholder as possible.

Bananamerican's picture

"Yes, the end result will be a near wipe out of the existing Bank of America stock, but it will not be bankruptcy!"

"so, uh...does this mean we still know....BONUSES? You uh, retain our TALENT?"

sun tzu's picture

BAC looks like a dumping ground for toxicity

How very appropriate of TPTB to use Bank of America as the dumping ground for their toxic debt. 

ToNYC's picture


Old Maid; musical chairs. It's all fun and games 'till the cops show up.

Landrew's picture

Now that was funny Whisper ha! People some times forget the sarcasm here is the best! Give the a pass because who could be that stupid to by counrywide ha!

Papasmurf's picture

We need criminal prosecutions and civil litigation of those responsible for conducting the fraud.  All levels should be tried for their specific participation and responsibility in the financial crisis.  From the CEO down to the college age robo-signer, they should all face criminal and civil redress for their roll.  The stolen money needs to be recovered from those who took it and those who now have it.  

A huge reason the economy is not recovering is because those culpible have not been punished and their profits have not been disgourged.  This is the root cause for the "crisis of confidence".  How can there be confidence in a system that rewards thievery?  Recover the assets and jail the crooks.  Jail the politicians who facilitated the plundering.  Recover the assets from where they are instead of looking for money from a hollowed out corporation.  There is no reason to prop up what remains of the corporation.  Instead of creating a settlement trust from what remains, create a trust from assets recovered from the crooks so the compensation is maximized to victums and the taxpayer.     

monoloco's picture

Don't count on the DOJ, they're too busy interpreting Indian law and busting real criminals like Gibson Guitar.

New_Meat's picture

Don't forget the tremendous effort that they have to put in, day-by-day-by-day, to ignore all of those peksy "laws" that they swore to uphold.

- Ned

onthesquare's picture

I remember owning shares of Owens Corning.  They began to build this trust and take all their profits and send them into the fund.  Filed Chapter 11, with the help of the government, and became their own receiver. WOW!

There stock went to the basement.  Hit less than a dollar, fell off the exchange and just vanished much to the bewilderment of the common share holder.

$6b a year profit gone to poor asbestos sick folks and their dependants.  They deserved the money for their untimely deaths and poor health but what stinks was that OW had not produced asbestos products since 1968 so just how was their involvement being owned upto when claims came in.

The path that Philip Morse took may be a better one.


ToNYC's picture


Phiilp Morris paid the right cops; Owens Corning? Not so much.

Ex Poker Stars's picture

Some seem to be forgetting: We want perp wa;lks

Ms. Erable's picture

Only if the perp walks end with walls, cigarettes, blindfolds, and the sound of thunder.

ToNYC's picture


Perp walks cost lunch money. Perps aplenty pay far better. Just good, efficient government keeping the obvious crooks at bay. It's a great country, America.

narnia's picture

an above board settlement on a massive scale is a great idea, as long as the homeowner, credit customer & taxpayer are parties to that settlement. 

snowball777's picture

You're right on 1/3 counts.

TwelfthVulture's picture

BAC packaged some junk mortgages, marketed and sold them to legitimate investors as prime mortgages.  Taxpayers bailed out BAC via TARP, TALF, etc... back in 2008/9 which monies remain unpaid.  I fail to see how homeowners and credit card holders of BAC would, or should, benefit from a settlement to cure the defrauded investors.  Perhaps we should also extend settlement to people born on Wednesday.

narnia's picture

the FDIC is the true economic owner of these TBTF banks, which are all upside down on a mark-to-market basis.

the homeowner got into a bad deal and was negligent.  that said, the underwriters, the ratings agencies, the aggregators, MERS, the people providing credit, the government providing enhancements, the regulators incentivizing home ownership & the Fed were all negligent as well.  there are no saints in this group.

in a system of justice, you try apportion contributive negligence.  in my opinion, every single party should take a hit- some bigger than others.  that translates to homeowners having to live with their principal balances at a lower interest rate or a principal reduction at new rates, creditors receiving less of a return (which is all the foreclosure process is anyway- interest rates), and the parties in between paying damages to the creditors to mitigate that spread.

dbTX's picture

They didn't just "make bad decisions" they plotted the whole sorted afair. As far as I'm concerned the ratings agencies that aided them have blood on their hands as well.

Akrunner907's picture

Aww the memories. Just three short years ago it was a dream made in heaven, or so Ken Lewis thought.  What was his bonus?

adrin's picture

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RobotTrader's picture

The Fed will nationalize the entire mortgage industry prior to letting BAC shares fall below $5.

It will be deemed a matter of "national security", therefore the debt ceiling will be raised again, and billions of freshly-flung Uncle Gorilla Notes will be floated, and investors will wolf them down like McDonald's french fries.

Corn1945's picture

I tend to agree. The entire point of the last three years was to prevent the business cycle from working and thus preventing anyone (politcally connected) from failing. Bank of America isn't going anywhere. The share price may go to zero but the government absolutely will bail them out again. If push comes to shove, they make influence the courts to throw the judgements out. Anyone who thinks they will get justic from this system is out to lunch.

The public simply refuses to take any concrete steps against the bailouts.

New_Meat's picture


"The entire point of the last three years was to prevent the business cycle from working and thus preventing anyone (politcally connected) from failing."

I remember Tiny Tim Taking over and Talking about "we can't afford business cycles anymore".

I didn't think along those lines back when, now, different matter.

- Ned

{after I finish cleaning the garage, I'll look up the citation, see how close it is.}

Atomizer's picture

Methinks JPmorgue will pick up Skank of America for pennies on the dollarette.

Steroid's picture



And Countrywide, the disease becomes a country wide epidemic (not as if the underlying cancer would not have killed them anyway).

Gohn Galt's picture

It's almost like you guys were in the meeting.  Or is it just that obvious. 

As far as BAC shares below $5, I think it will, but Robo you call stocks better than I do.  Thats why I just do credit and futures.

Landrew's picture

So you followed Robo's China Solar stocks down the crapper, did you fill bankruptcy?

Ruffcut's picture

I've bought nearly 600 put contracts on these shitbags. Exhausting profits since the middle of last year. Only in a little. Oh the pain.

IF some these criminals saw jail time, would make me feel a little better, but I doubt that. The tan man lives to contaminate the bigger crime bosses.

dizzyfingers's picture


I think anyone who bets on what you say will win.

LetThemEatRand's picture

I'll bet we end up with a largely taxpayer funded version of the fund that allows BAC to survive and the executives who caused this mess to continue receiving their pensions.  

Monkeyfister's picture

Sadly, I think you're correct. Our lousy Politicians know who butters their bread.

Seasmoke's picture

I want to see you smile again
The day the banks collapse
The amazing sound of the killing hordes

Zee hordes of vigalantees
The day the banks collapse on us

Id fight Gandhi's picture

Follow in CIT footsteps. Wipe out the common holders to come back and IPO a month later like nothing happened.

Piranhanoia's picture

  We do not need BOA alive.  It has fed on the living and carcasses of the dead.  It needs to be dissolved so that the criminal enterpirse can not be revived.  We know it is organized crime, and that is something that we can only eradicate to protect ourselves.

Monkeyfister's picture

No way! Just let the Zombie Bank die, already. Chop up the pieces and scatter them to the winds.