Illinois-Countrywide: Potentially Devastating

I'm a huge fan of Tanta, but I think she's either being far too dismissive of Illinois attorney general Lisa Madigan's lawsuit against Countrywide, or else she's being faux-naive. This case is a very big deal for Angelo Mozilo, for Countrywide, for Bank of America, and for pretty much any housing lender in the US still standing.

Is Madigan throwing everything and the kitchen sink into her 76-page complaint? I'm sure that she is. And I'm sure that some of those complaints cover behavior which was neither unusual nor illegal. But as the Wall Street banks who went up against Eliot Spitzer learned to their cost, in this kind of case it's the government, not the defendant, which holds all the cards.

What is Countrywide to do? It can't settle: the minute it did, functionally-identical suits would be launched by California, Florida, and all manner of other states, and would bankrupt Countrywide in no time. But what alternative does it have? A jury trial? You try finding 12 jury members not just itching to mete out some justice to the subprime lenders who have caused such devastation nationally. Never mind copycat lawsuits, the Illinois case alone could consign Countrywide to bankruptcy.

And of course if Countrywide settles or loses this case, any other subprime lender is likely to face something similar. There aren't many standalone subprime lenders left, but there's no shortage of banks which extended subprime loans over the past few years.

If I were Ken Lewis, I'd be desperately trying to work out whether it was possible to let Countrywide fail financially while still managing to retain its underwriting and origination network. Officially, the takeover is due to close on Tuesday. But in the wake of this case being filed, I'm not holding my breath.