September 16, 2011
By: Chris Kramer
According to reports from Bloomberg Friday, Bank of America is currently weighing bankruptcy as an option for dealing with litigation losses the company faces from the takeover of Countrywide Financial Corp.
After taking over the subprime lender in 2008, Bank of America upheld a separate legal identity for Countrywide. As a result, the parent company could potentially file a separate bankruptcy for the acquired firm. Executives realize, however, that Bank of America's reputation could take a hit from such a move.
As Bank of America seeks to defend itself against plaintiffs seeking refunds for bad Countrywide mortgages, Mike Mayo, an analyst from Credit Agricole Securities USA, spoke with Bloomberg about the situation.
"If the losses become so great, how can Bank of America at least not discuss internally the relative tradeoff of a Countrywide bankruptcy?" Mayo asked rhetorically.
Mayo also referred to bankruptcy as a "nuclear" option for the nation's largest bank. Though, after the company lost nearly half its market value this year, other analysts have begun to support the possibility.
The situation remains a sensitive issue, as a bankruptcy filing could call to question Bank of America's willingness to support its other subsidiaries, in turn damaging the company's credit rating and possibly hurting its ability to borrow.
"It's not some sort of magic elixir that makes it all go away," University of Texas law professor Jay Westbrook told Bloomberg. "I suspect that's one reason they haven’t done it yet."
At this time, Bank of America has declined to comment publicly on whether the company plans to file for bankruptcy on behalf of Countrywide. In a statement for the company, however, a spokesman said the bank "took great pains to preserve the separate identity of Countrywide."
In most instances, a corporation isn’t liable for the debts of an acquired firm unless there is fraud in the takeover or if the transaction is considered a de facto merger.
Coutrywide currently has $6.53 billion in outstanding debt.