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How The Government Kept Countrywide Afloat

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There’s little in Countrywide’s earnings announcement that seem likely to shake Bank of America from its desire to own the home lending giant. Indeed, shares of Countrywide moved up this morning and the merger arb gap narrowed to 80% or so, implying that traders are getting more confident the deal will eventually close.
This morning the Wall Street Journal carried an interesting article that claims to explain why Countrywide agreed to sell out to Bank of America. Pressure from ratings agencies and regulators threatened to end the way Countrywide did business, the article claims, and this drove the mortgageer into the arms of Bank of America.
But to really understand the article you have to read it backwards, like a teenager spinning a record backwards to hear the hidden demonic exhortation. The real story here is how the government has been funding Countrywide by lending it money through the Federal Home Loan Banks system and guaranteeing deposits in its CDs through the Federal Deposit Insurance Corp. Countrywide CDs had enormous interest rates, and those government guarantees allowed depositors to derive risk free yields of more than 5% in recent months. As those deposits grew, so did its ability to borrow through the FHLB, which allows borrowing on up to 50% of a home loan banks deposit assets.
In short, these government programs allowed Countrywide to escape the discipline of the marketplace for several months. And it was only recent attention from lawmakers and regulator that cast doubt on the willingness of the government to continue these subsidies.
Countrywide Deal Driven by Crackdown Fear [Wall Street Journal]