The Gift That Keeps On Taking: Bank Of America Facing $6.2 Billion Collateral Call

Tyler Durden's picture

There is hardly any more long-suffering investor in this market than anyone who has held the stock of that worst of breed American bank: Bank of Countrywide Lynch (BAC), which following the worst M&A transaction in history, namely its purchase of Countrywide, has found out that one does not pay billions for hundreds of billions in contingent liabilities, which will manifest themselves in tens of billions in putback claims against the underreserved bank over time. But all that is now known, grudgingly, after being pointed out here back in 2010, and when all is said and done, BofA will be finished, with the contingent liability pool spun off in a special purpose entity which files for bankruptcy, while the equity remaining at the successor entity will be worth pennies on the dollar. The question is what are the catalysts that get the bank there. Luckily, yesterday the bank itself highlighted what the key driver to put events in motion may be, after it disclosed that should the bank be downgraded, which it will be as Moody's has warned, it would need to post up to $6.2 billion in collateral: an amount which would cripple the bank's liquidity,  and send its stock plunging as visions of AIG resurface, and concerns about a toxic downward spiral emerge.

From Bloomberg:

Bank of America Corp., the lender that has bought back debt to strengthen its balance sheet, said credit downgrades in a hypothetical scenario could trigger demands for about $6.2 billion in collateral.


A two-level downgrade of long-term senior debt ratings would have prompted the bank to post about $5.1 billion of collateral tied to derivatives contracts and other trading agreements as of March 31, the Charlotte, North Carolina-based firm said today in a regulatory filing. It would have had to post an additional $1.1 billion of collateral if trading partners opted to tear up contracts in a two-level cut.


Moody’s Investors Service, which is reviewing banks and securities firms with global capital markets operations, has said it’s considering downgrades of lenders including Bank of America, ranked second by assets in the U.S. While ratings cuts typically raise borrowing costs and force banks to increase collateral, analysts have said the change was expected.


Bank of America may be cut by one grade to Baa2, the second-lowest investment-grade rating, Moody’s said on Feb. 16.


Competitors such as New York-based Morgan Stanley may be cut as many as three levels, Moody’s said. The ratings company wrote that credit profiles of investment banks are weakening amid worsening government finances, economic uncertainty and higher funding costs.

Finally, it is not a question of whether BofA will be downgraded but when. The answer: soon. We hope readers are ready for what may be the long-anticipated waterfall moment.

True to form, Bank of America continues to perform just like any highly contagious virus contract on a wilde spree in Las Vegas. Only in reverse.

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l1b3rty's picture

OH, dear BoA Constrictor Bank You!

idea_hamster's picture

"Countrywide Lynch"

Is that a call to action?!  Oh, wait ... there's a new episode of The Voice coming on ....

mayhem_korner's picture



This should be bullish for Uncle Warren's ticker.

brewing's picture

"get bove on the line, we need to pump"...

Hippocratic Oaf's picture

Tyler, people give you hell at times for 'preaching the doom', but please......keep us informed. If the truth hurts, so be it.

JailBank's picture

Moody's won't downgrade BAC! Buffett had huge stakes in both companies.

junkyardjack's picture

Moody's announcement: "After much due diligence we find BAC is actually in a great position and we upgrade them three notches"

AustriAnnie's picture

Unless Moody's has been told to downgrade BAC to lower the stock price so a more-favored bank can acquire it even cheaper?

ebworthen's picture

Bunk of Amurika!

No worries, FED will give them whatever they need in future debt on the backs of retirees and the unborn.

Moynihan on the phone with Timmy and the Bernank telling them it's the patriotic thing to do.

XitSam's picture

Nah, BofA will just rehypothecate the customer savings and checking accounts. Problem fixed!

LetThemEatRand's picture

I'm just glad that Mozilo got his!   Paying back upwards of 10% of his ill-gotten gains will sure show him and the rest of the banking community that the U.S. government will not tolerate massive fraud.  Who's laughing now, Mozilo?!  

GeneMarchbanks's picture

Set the precedent didn't it? Might as well have put up a big We Do Not Prosecute Financial Crime Anymore sign in front of every state building.

donsluck's picture

You must be kidding, or sarcastic? Yes, it must be sarcastic since Mozilo belongs in prison.

pods's picture

10% of his gains? Shit, that is on par with the mob.

Or the Catholic Church.  Just a tithe.


Dr. Engali's picture

But the world's greatest investor (at least according to CNBS and Yahoo) grandpa take a bath with Becky Quick Buffet said that BAC is an undervalued investment. Surely grandpa  crony capitalist tool can't be wrong.

NotApplicable's picture

So... somebody has likely rehypotheticated my dead IRA over at Merril? Is that what you're saying?

CClarity's picture

A.P. Giannini trying to claw way out of his grave to raise the fine tradition of BofA that was tarnished and then slaughtered by Coleman,  Hugh (the crystal grenade) McCall, and the terrible team since 2007, Moynihan not being the worst of them.  Sad sad sad.

junkyardjack's picture

In a hypothetical situation, the Fed can print up $6.2bn and give it to BAC to use as collateral.  Problem solved, no?

donsluck's picture

As long as BAC posts $6,200,000,000.00 face value in toxic debt as collatoral.

hidingfromhelis's picture

Pssst, I know a guy that will take that at par, no questions asked.

i_call_you_my_base's picture

I was thinking they could sell the fed a can of coke for $7 billion (someone has to make something on the deal). I already have its value modeled, here it is: 1 can of coke = $7 billion. Do you like my model?

Donnie Duvanie's picture


mayhem_korner's picture

In a hypothetical situation, the Fed can print up $6.2bn and give it to BAC to use as collateral.  Problem solved, no?


That's a re-hypothetical situation, methinks.

El's picture

So in essence, the so-called "stress test" was that much more smoke.

WonderDawg's picture

Did you ever doubt it?

buzzsaw99's picture

They used all the loan loss reserves to pay out bonuses. The regulators are doin' a heckuva job!

Max Cynical's picture

If I could only be as smart as Ken Lews and Oranzilo...

"Countrywide presents a rare opportunity for Bank of America to add what we believe is the best domestic mortgage platform at an attractive price and to affirm our position as the nation's premier lender to consumers," Bank of America Chairman and Chief Executive Officer Kenneth D. Lewis said. "Countrywide customers will gain access to a broad set of consumer products including credit cards and deposit services. Home ownership is a fundamental pillar of the U.S. economy and over time it will be a key area of growth for Bank of America."

"We are aware of the issues within the housing and mortgage industries," Lewis continued. "The transaction reflects those challenges. Mortgages will continue to be an important relationship product, and we now will have an opportunity to better serve our customers and to enhance future profitability."

"We believe this is the right decision for our shareholders, customers and employees," said Countrywide Chairman and Chief Executive Officer Angelo R. Mozilo. "Bank of America is one of the largest financial institutions in the U.S. and internationally, and we are confident that the combination of Countrywide and Bank of America will create one of the most powerful mortgage franchises in the world. We have had a long and positive relationship with Bank of America and our servicing and origination businesses, as well as other aspects of our operations, will be substantially enhanced as a result of this transaction."

zebrasquid's picture

What would happen if everyone in the country that owed BAC a monthly payment-- mortgage, credit card, other loan...just didn't pay it..withheld it for a while? Wouldn't that be something? Just saying..

mayhem_korner's picture



Somehow, I feel disreality is re-coupling just a bit with reality today.

williambanzai7's picture

Bernanke is doing a good job.

Donnie Duvanie's picture

Obama: "After much deliberation, I've decided that one of my Tzars will declare a that bankruptcy holiday so we can all go party. Then, bankruptcy court will be circumvented, and all BOfA assets will be directly transferred to people whose mortgages are owned by BOfA. Note to self: Make sure this happens just before election. Michelle! Have you seen my golf shoes? Peace Brotha's! "

navy62802's picture

Shit, $6.2 Billion? Treasury can come up with that in a flash. Just ask Hank Paulson.

PaperBear's picture

Bank of unAmerica going bankrupt ? WOOHOOO, WOOHOOO, WOOHOOO, WOOHOOO.

Donnie Duvanie's picture

If Bank of America goes Bankrupt, does that mean America will go bankrupt?

dbTX's picture

Couldn't happen to a nicer group of felons. 

El Viejo's picture

Is the claw-back time limit 3 or 6 months????

WallowaMountainMan's picture

this is no such thing as bank of america goes bankrupt. it is all tbtf go bankrupt or none due. choas driven unwinding a bubble of cds linear transactions is a death knell to Fed and the Gov, not to mention the rest of us. the big boys are not dumb. with boc going down for the count, the only thing that motivates them more than greed is fear of death and that will be front and center. my hunch is that behind the scenes the unwind is being worked out. after all, big ben publicly announced that the shadow banking system is the biggest threat. he has cleared the history books looking back at him. tbtf certainly understand that ben meant he can't help them anymore. the numbers are just tooooooooooooooooo.....big.

unununium's picture

> it is all tbtf go bankrupt or none due.

I'll take the other side of that.  All signs have pointed to BAC as the next victim for a couple years now.

WallowaMountainMan's picture

you're on :)  say a trader joe's one pound bar of chocolate, 72% dark, f.o.b. usa destination? 12/12/12 time horizon? hope this aint illegal...

WallowaMountainMan's picture

just another thought...if memory serves, boa moved a big hunk of funny money to a fed insured structure, with legislation in place to have it payed ahead of real people fdic insured deposits. why nobody else of the tbtf made the same move? just perhaps that was the aig move ahead of time to set the anchor.....

Matt's picture

That's just for the Credit Default Swaps and other derivatives, I think. This sounds like their own debts need to be backed with more collateral if they are downgraded, seperate from their outstanding derivatives exposure, but I can't say for sure.

WallowaMountainMan's picture

agreed.... if they can't make up their collateral then the house comes down, triggering the other tbtfs. the unwind goes from there with the appearance of fed funds buying time for the whole kit and kaboodle of linear contracts to be unwound. seems like a reasonable play given the alternatives.

dcb's picture

You fail to mention that a while ago against the wishes of the fdic the federal reserve determinde that the bank deposits could be used as trading collateral. Those with money there should be running away with it while they can.