We saw this article in the press, Bank of America invests $2 bln in Countrywide:
In a move that could help the largest U.S. mortgage lender survive a crisis that’s rocking the home-loan industry, Bank of America said late Wednesday it invested $2 billion in convertible preferred securities of Countrywide.. The nonvoting securities pay an annual interest rate of 7.25%.
Where does Bank of America gets its money?
With the banks getting suspicious of each other’s exposure to bad debt (e.g. sub-prime debt), they stopped lending to each other (see How does liquidity dry up?). Thus, the Fed stepped in to become the lender of last resort. Not only did the Fed cut its discount rate by 0.5%, which is the rate that banks can borrow from it, it also lowered its lending standards by accepting dubious sub-prime mortgage debts as collaterals (which is pretty much worthless as judged by the financial market). The Fed, with its license to print money, need not worry about the quality of the collaterals that it borrowed or whether the banks could actually repay the loans.
In U.S. banking giants borrow $2 bln from Fed:
J.P. Morgan, Bank of America and Wachovia said in a joint statement that they each borrowed $500 million, including some on a term basis, at the discount window.
So, 25% of Bank of America’s investment in CountryWide comes from the Fed!
