OK, I've Predicted It, so What Does it Mean if the Countrywide Deal Crashes and Burns

It's pretty clear that if Bank of America does not go through with the purchase, Countrywide is insolvent, and it gets shut down, because it is, by any standard, insolvent without a white knight of some kind.

Nouriel Roubini considers this to be a distinct possibility:

The views of Whalen are – based on a survey I made of banking experts – shared by most bank analysts. On May 2nd S&P cut Countrywide's rating to junk; while on May 5th a number of analysts recommended that BAC walk away from this lousy deal. BAC is already sitting on a potential loss of about $1.3bn from its initial $2bn stake in CFC but as one analyst put it: "I hope Bank of America isn't throwing good money after bad".

Thus he raises the question as to what exactly such a collapse might mean, given that Countrywide has originated nearly 1/5 of the mortgages in the US in recent years.

He takes a look at the bigger picture:

Of course the bust of CFC is only a symptom of a much bigger systemic banking problem in the US: with 47% of the assets of all large US banks being related to real estate (residential, commercial, etc.) and with 67% of assets of smaller banks being related to real estate hundreds of smaller community banks and dozens of regional banks and a few national banks will be bankrupt in the likely scenario that home prices fall at least 20% (they are already down 14.7% from peak based on the Case and Shiller/S&P Index) and possibly as much as 30% by the time they bottom out in 2009-2010.

That's hundreds of banks, some of them of a fairly significant size, that end up liquidated and under FDIC stewardship.

If he is 10% right, then we aren't even half way through the down slope on this thing.