In this case, its Bank America that's on the "receiving" end.

Lookie what got filed yesterday - a document in Washington State that essentially threatens to put Countrywide out of business in that state for the next five years.

This adds on to the pile from Illinois and California.

Now here's why it matters - BAC is purchasing Countrywide and intended to stuff the company into a separate LLC - a place where they are presumably "bankruptcy remote", and if push comes to shove, they could let die on the vine.

Not so fast!  Now, with the suits filed, if they close the transaction there's no way they're going to be able to slither out from under the liability.  Transferring the shares into an LLC once the suit has been filed is like trying to transfer assets out of our estate after someone slips and falls on your porch and sues you - it won't work and the courts will forcibly unwind the transaction so your soft underbelly (and money) are exposed.

Now this was always a losing gambit for BAC anyway, because the acts that gave rise to the liability happened in the past.  But - up until yesterday, they might have gotten away with it.

In my opinion the odds of that working today are now zero.

The calculus for Lewis over at BAC got a lot more difficult yesterday.

Yes, The Housing Bill was basically written by Bank America (and allegedly UBS), but does it really matter now?  How much liability is there in these suits?  $10 billion?  $20?  Half or more of all the business Countrywide wrote in the last five years?

There's no way to know.  But the Illinois suit in particular asked for the right to break any loan that had fraud in it and force it back on CFC; such relief, if granted, is certainly going to be in the many billions of dollars.

Now multiply by 50 because there is zero chance that this remains local to one or two states; I expect 47 more lawsuits in the next few days.

The filing of these suits was a stroke of genius on the part of the State AGs that are involved.  They in essence put a fork into the idea that Congress (or anyone else) was going to let Countrywide off the hook for all this garbage within their jurisdiction - not so fast, says the AG.

If BAC closes then they own the liability - a liability they willingly assumed.  You can't stick that in a separate LLC and bankrupt it - that won't be allowed as this is not a "hypothetical" liability it is a known, filed lawsuit!

If BAC doesn't close then CFC dies immediately under the crushing weight of all the suits and, I would assume, an immediate lack of funding.  Bang.

Lewis would have to be an absolute idiot to close the deal under these circumstances.  Nothing short of an explicit backstop by The Feds helps here, and I doubt very much that any such thing is forthcoming, as the potential damages run into the tens or even hundreds of billions.

Worse, if Lewis does close the transaction I believe that he risks an immediate shareholder lawsuit from Bank America's shareholders as it sure appears that he has just chosen to intentionally damage their stake in the firm.

Damned if you do, damned if you don't. 

Or if you prefer, just plain damned.

I like it.

This sort of damage doesn't stop with Countrywide either.  Reuters is reporting that the same sort of "no, you can't do that" situation exists with the bond insurers as well:

"Companies that fall below the minimum requirements risk
being seized by regulators, which in turn would trigger the
immediate payment on insurance they sold with credit default
swaps.

And this would make the companies insolvent, as they would
not have enough to pay out what would be billion of dollars in
claims.

The New York State Insurance Department, however, "has authority to block payments on a credit default swap," said Rob Haines, analyst at CreditSights in New York. "Regulators have a lot of power."

No kidding?  Heh heh.....

The pension fund warning I sounded a while back appears to be coming true.  This is seriously not good......

"In the nine months leading up to March 31, the city's five pension funds lost a total of nearly $5 billion, or 4.4%, according to data from the city comptroller's office. This is a far cry from projections published as recently as last month, when budget planners assumed the pension system would post no losses."

The Fed's so-called "inflation hawkishness" in the FOMC statement was greeted with immediate skepticism in the FX markets yesterday, with the DX plunging.  Into the overnight and this morning the dollar selling has picked up materially, and both Gold and Oil are going higher.  I guess nobody thinks much of Ben's price inflation convictions eh? 

Me neither; my prediction is that you're not going to see anything good in this department until there is an actual draining of the liquidity swamp, and frankly, I don't think Ben has the balls to step in and do anything about it. 

They should have done it yesterday and pulled some of the slosh, along with a 25 bips raise.  Now Bernanke gets punished for his lack of conviction.

Speaking of conviction, Goldman put Citibank on the "Conviction Sell List", which boils down to a recommendation to short the stock.  Now there's something you don't hear very often from anyone on Wall Street. 

In other news Tickerforum is celebrating its first birthday today.  On June 26th 2007, in a fit of pique because Yahoo's investment boards were down, I set up the forum as a place to chat about investments.

On the first day 96 people registered.

By the first month, 315.

Today, its over 4,000, with over half a million individual messages.

Over 50,000 unique "eyeballs" see Tickerforum pages every month.  Every major search engine is picking up and archiving the content on the forum for posterity.  Users come from places as varied as Estonia, Latvia, Switzerland, The Cocos Islands and The Dominican Republic, along with all the "expected" places such as Japan, Germany, England and of course the United States.

I'm pleased with how Tickerforum has evolved over the last year, and how it has placed increasing demands on the infrastructure.  The system has undergone several bandwidth upgrades with the latest being completed just the other day.  There is now a separate, multi-way database server that handles the actual DBMS transactions necessary to process the forum, separate and aside from the web server.  A completely distinct leased server system handles the nightly videos, tied back into the database for authentication and access control.  In general the software architecture works extremely well; I'm very happy with it.

May Tickerforum celebrate many more birthdays to come!