Friday, August 17, 2007
As explained by Doug Kass over at thestreet.com, the party is over. No more unlimited access to credit for those who want to speculate with debt. Kass focuses upon the consequences for investors, but the implications are much more serious.
Anxious customers jammed the phone lines and website of Countrywide Bank and crowded its branch offices to pull out their savings because of concerns about the financial problems of the mortgage lender that owns the bank.
Countrywide Financial Corp., the biggest home-loan company in the nation, sought Thursday to assure depositors and the financial industry that both it and its bank were fiscally stable. And federal regulators said they weren't alarmed by the volume of withdrawals from the bank.
The mortgage lender said it would further tighten its loan standards and make fewer large mortgages. Those moves could make it harder to get a home loan and further depress the housing market in California and other states.
The rush to withdraw money -- by depositors that included a former Los Angeles Kings star hockey player and an executive of a rival home-loan company -- came a day after fears arose that Countrywide Financial could file for bankruptcy protection because of a worsening credit crunch stemming from the sub-prime mortgage meltdown.
The parent firm borrowed $11.5 billion Thursday by using up an existing line of credit from 40 banks, saying the money would help the lender meet its funding needs and continue to grow. But stock investors, apparently alarmed that the company felt compelled to use the credit line, sent Countrywide's already battered stock down an additional 11%.
At Countrywide Bank offices, in a scene rare since the U.S. savings-and-loan crisis ended in the early '90s, so many people showed up to take out some or all of their money that in some cases they had to leave their names.
In West Los Angeles, a Countrywide supervisor brought in from another office served coffee to more than 25 people waiting calmly for their turn with the one clerk who could help them.
Bill Ashmore drove his Porsche Cayenne to Countrywide's Laguna Niguel office and waited half an hour to cash out $500,000, which he then wired to an account at Bank of America.
"It's because of the fear of the bankruptcy," said Ashmore, president of Irvine's Impac Mortgage Holdings, which escaped bankruptcy itself recently by shutting down virtually all its lending and laying off hundreds of employees.
"It's got my wife totally freaked out," he said. "I just don't want to deal with it. I don't care about losing 90 days' interest, I don't care if it's FDIC-insured -- I just want it out."
Countrywide Bank, the nation's third largest savings and loan, is a classic example. It created a mortgage unit, Countrywide Financial, based upon the belief that it could always sell the unit's paper in the market to institutions willing to package the loans as bonds. Now, with the markets nearly frozen for mortgage backed securities that are not guaranteed by the federal government, Countrywide Financial is generating approximately 20 billion dollars in home mortgages per month, without the capital to finance them. And, the parent, Countrywide Bank doesn't have sufficient resources to do it, either, especially when depositors are withdrawing their money.
Clearly, from the perspective of bankers and investors, Countrywide Bank is too big to fail, given the deflationary consequences for real estate, stocks and bonds. Of course, Federal Reserve Bank President of Saint Louis, Willliam Poole, says that the real economy, you know the one that actually involves the manufacture, distribution of goods and services is fine. But, what happens if it we discover that Countrywide Bank is more representative of the US economy today than GM or Intel, and that neither the Federal Reserve nor Wall Street can prevent the demise of it?