There are times when one has to shout, stop!!!!! Today is one of those days. I compose an internal use only fixed income report for a major investment bank. The report is sent to several thousand brokers at the firm. Each day I lay out market conditions, what it all means and where it may be heading. Every now and then I will repeat a topic, usually when there are signs that my prior concerns may prove true or may be unfounded.
Today I wrote that Bank of America may not guarantee Countrywide debt should the deal close in the third quarter of this year. My partner and I were flooded with e-mail asking if BAC is legally required to guarantee CFC debt if they merge? The answer is no.
Let's break things down. The ability of a parent to guarantee the debt of a subsidiary or vice versa (or one sub to guarantee another) is called cress default protection. You know what. Most corporations to do not have it. Ford does not guarantee Ford Motor Credit debt (or vice versa). Verizon does not guarantee its subsidiaries' debt or vice versa (nor do subs guarantee each other). To assume that BAC will back stop CFC debt is a dangerous assumption. Just as dangerous as assuming that large investment firms would always violate SEC rules and back stop ARS auctions.
I have the opportunity to work as a retail financial advisor. If I have to deal with, not only a lack of knowledge, but also a stubbornness to ignore the truth if it is not what one wants to hear, then maybe I will stick to bloviating.
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