Countrywide Class Action: What’s a Good Sale?

Just catching up on some other things that need attention.

Over  the past year or more we have been writing about the Countywide Financial saga and the refusal of Bank of America (NYSE:BAC) to do the right thing and explicitly state that the Countrywide bonds were money good. See a couple of comments:

‘Countrywide Bondholders Settle; Paulson Bails as Next Wave of Approaches’, October 14, 2008

‘Is Countrywide Financial Headed for Bankruptcy?’, August 6, 2008

After a couple of lawsuits and a lot more behind-the-scenes communication, it looks like most of the bond holders are whole or holding an explicit representation from BAC on that count.

But the story continues.  A few months ago, CFC, then controlled by BAC but prior to the close, negotiated a settlement with a number of states attorneys general for various alleged violations of law.  Unfortunately for holders of the pass throughs, the company formerly traded under the ticker CFC agreed to stick the $8.4 billion cost of the settlement to them via a haircut on all pass throughs.

Now two units of BAC have been sued by a group of bold holders seeking to essentially undo the settlement, with potentially destabilizing effects on what remains of CFC, a direct sub of BAC which still, in turn, owns Countrywide Bank FSB.   We long speculated that CFC might be pushed into a liquidation, even after the close with BAC, and the litigation seemed the wild card.  But this development is certainly a novel example of corporate debtor litigation.

“To settle allegations of widespread predatory lending made against it by the Attorneys General of at least 15 States, Countrywide Financial Corporation has agreed to reduce payments due on hundreds of thousands of mortgage loans by a total of up to $8.4 billion,” states the class action lawsuit filed against BAC by Greenwich Financial Services et al in the southern district of NY.

What is remarkable about this litigation is two things.  First, the Plaintiffs are bondholders suing directly and seeking class status in New York Supreme Court (the Court of Appeals is the highest court in NY State), without either obtaining or compelling action by the indenture trustee.  The implied reason: because the trustee (aka the sponsor dealer’s lawyer), through its financial dealings with the Delaware trust that is the legal issuer of the bonds, has a conflict.

The second thing which is interesting is that the posture of the Plaintiffs essentially challenges the whole status of the securitization as a good sale.  Transfers of cash and/or collateral essentially make the notion of a “good sale” between two arm’s length parties a sham, it is argued.  And I think just about everyone in the industry knows that this is in fact the case.

The good sale debate is a fight that has periodically broken the surface in the courts over thee years, but has never been carried forward to an appeal.  This case raises the prospect of doing just that and could eventually force the powers that be to preempt the action.

Just imagine if a judge in the southern district of New York were to rule that a securitization pass through issued by the company formerly known as CFC was a fraud and a sham to hide a financing for the issuer?

Here’s a link to the complaint: http://www.rcw halen.com/pdf/cfc.pdf