How Gene Ludwig Forced the Countrywide Sale

Why did Countrywide sell out to Bank of America? Because it had to. That's the message of a very good WSJ piece today, which explains that Countrywide, before its takeover by the Charlotte giant, was essentially throwing itself upon the mercy of the US government - and that the government wasn't feeling very merciful.

We already knew about the enormous sums of money which were being lent to Countrywide by the Federal Home Loan Banks: more than $50 billion, by the end of the third quarter. News to me, however, was Countrywide's next step: selling federally-insured certificates of deposit at interest rates of more than 5%. Reports the WSJ:

Advisers to Countrywide's board -- including representatives of Promontory Financial Group, a Washington consulting firm headed by Eugene Ludwig, a former U.S. bank regulator -- saw the risk that the FDIC would start asking tougher questions about the safety of funding Countrywide's large mortgage holdings through those insured deposits, people familiar with the discussions say. These people viewed the FDIC's chairman, Sheila Bair, as a tough regulator willing to take on the big players.

This makes perfect sense. Buying a high-yielding CD from Countrwide is a no-risk no-brainer for the saver; for the guarantor, by contrast, it's decidedly unpleasant. With the amount of money invested in those CDs increasing by over $2 billion a month, it was only a matter of time before the FDIC started cracking down on the practice.

I'm also not surprised to see Gene Ludwig's name front and center here. Angelo Mozilo is a tough character, and Ludwig is one of the few people with enough clout to persuade him that the game really was up. As Yves Smith suggests, now that he's found a solution to Countrywide's problems, he'd be perfect to clean up SocGen.

Update: Belligerati says that investing in an FDIC-insured Countrywide CD isn't as low-risk as I thought.