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Shareholders of Countrywide Financial have voted for Bank of America's estimated $3 billion takeover of the struggling mortgage company. Many analysts and investors publicly wonder why Bank of America would buy the troubled mortgage lender, which holds a rapidly deteriorating portfolio of tens of billions of dollars in exotic loans, owns almost $2.6 billion in foreclosed properties, and is trading below book value. The information surfacing about Sen. Christopher Dodd's mortgage lender bailout bill may provide the answer.
Paul Miller, a Friedman Billings Ramsey analyst, told the New York Times last month, "This is a horrible deal. ... They don't need this." Stuart Plesser, of Standard & Poors, told Business Week, "There's a lot of downside and it's unquantifiable." Investors have knocked Bank of America's stock down 35 percent since the January takeover announcement.
But analysts and investors are looking for answers in the wrong place. The numbers that make this deal work are not found on the company's balance sheets, but rather on Capitol Hill. Senate Banking Chairman Dodd, Connecticut Democrat, in tandem with Rep. Barney Frank, Massachusetts Democrat, is advancing legislation that shifts liability of $300 billion in high-risk mortgages from banks to taxpayers and, according to the Wall Street Journal, is worth around $25 billion to Countrywide.
The deal is starting to look like Bear Stearns 2.0, where taxpayers are put on the hook for one bank's riskiest assets. While the legislation is often touted as a measure to help homeowners in distress, analysis by the Congressional Budget Office makes clear who benefits: "Mortgage holders would evaluate loans that are eligible for the new Federal Housing Administration program and determine if the program would provide a better return than modifying the loans on their own, despite the risk of default." In other words, the program allows lenders to cull their worst loans and pass that liability to the taxpayer.
Messrs. Dodd and Frank appear to have gotten this idea directly from the banks that would benefit. Shortly after Bank of America announced plans to acquire Countrywide, it began lobbying Capitol Hill for a bailout of mortgage lenders.
Bank of America was reportedly circulating "confidential proposals" to members of Congress in February. The central feature of its secret plan, said the New York Times, was to have the federal government "buy up billions of dollars in troubled mortgages at a deep discount, forgive debt above the current market value of the homes and use federal loan guarantees to refinance the borrowers at lower rates." That's essentially what the Dodd-Frank bill does.
"Business as usual" may be the response of many to lobbyists drafting legislation for Congress, and to the $15,000 Countrywide and the $15,000 Bank of America gave this year alone to Mr. Dodd. It is not illegal. However, Mr. Dodd clearly violated the Senate Ethics rule that senators "can no longer accept gifts of any value from registered lobbyists" when he received special mortgages with $75,000 in discounts from Countrywide. These facts combined should make Congress slow down long enough to figure what is going on.
Instead of rushing to get this bill completed in a legislative stampede, senators should wait until they have sufficient information on a long list of questions. Did Messrs. Dodd, Frank or their staffs receive confidential proposals from Bank of America? If so, what did these plans call for? What role exactly did Bank of America play in crafting the legislation to create $25 billion in benefits to the company they are about to take over? And how much will Bank of America benefit directly, considering its own exposure to billions in bad mortgages?
Moreover, what will come of the Federal Trade Commission investigation of Countrywide launched this month? What is the Senate leadership to make of Sen. Charles Schumer, New York Democrat, telling the FTC that Countrywide has "an emerging pattern of apparent misconduct" in its loan service operation? What will the FBI find in its reported criminal investigation into potential wrongdoing in Countrywide's lending operation?
In addition to these open questions and investigations, the Center for Responsibility and Ethics in Congress has filed a formal ethics complaint, nine senators have sent a letter to Senate leadership asking for more time, and Rep. Jeb Hensarling, Texas Republican, has called for congressional investigations into the sweetheart loan deals for Mr. Dodd and Sen. Kent Conrad, North Dakota Democrat.
Given the enormous benefit of the bill to both Countrywide and Bank of America, their potential involvement in crafting the legislation and all the open questions and investigations, the vote should wait until Congress - and the public - have the answers they deserve.
Matt Kibbe is president of FreedomWorks, a national grass-roots organization dedicated to lower taxes, less government and more freedom.