Countrywide=Household Finance Corp (HFC)

The situation with Countrywide reminded me of what happened to HFC five years ago. Back then, HFC, the consummate sub-prime lender, got into trouble and was eventually sold to HSBC. In late 2002, the US was coming out of recession and credit spreads were relatively wide. HFC tried to issue more debt to keep itself going, but investors finally balked. Unable to sell debt, including retail-target notes and preferreds, at any level, HFC rushed into the waiting arms of HSBC, which was just beginning a large US expansion. The end came very quickly.

Perhaps this is what Mr. Mozilo has on his mind when he sold $2 billion of convertible preferred stock to B of A. His desire to remain independent, and nominally in charge, must have influenced his decision to grant B of A such favorable terms. Or, maybe the company is in worse shape than is generally known. Either way, this ends up being a great deal for B of A.

For now, this effectively creates a floor on how low Countrywide's debt will go. It is not likely that B of A is going to let it deteriorate further. Unless there is a quick turnaround from the housing market "recession", it looks like B of A will absorb another bank, barring any regulatory hurdles