The BofA And Countrywide Marriage

I was just as surprised as anybody else when BofA announced an agreement to take over troubled mortgage lender Countrywide. As you may recall, BofA had made a $2 billion investment last year, when the stock price hovered around $18. Why would they now throw good money after bad?

Some analysis I read offered the thought that maybe the Fed had something to do with that, since rumors were swirling that Countrywide was heading towards bankruptcy. Having the largest mortgage lender in the country go bankrupt would certainly have other repercussions. To me, one big one would be how regulators would sort through the 9 million mortgage payments that Countrywide collects every month.

Columnist Herb Greenberg had this to say in his blog:

1. The Fed is behind the deal.
2. The Fed is behind the deal because the rumors yesterday of a near bankruptcy were probably true.
3. As part of the deal, the government likely agrees to guarantee BofA against Countrywide-related losses.
4. Lost in the in the noise yesterday was that Moody’s downgraded the ratings on 30 (count ‘em — THIRTY!) tranches of Countrywide’s mortgage debt by more than a few notches. They did something similar before American Home Mortgage filed for bankruptcy.
5. Investors bid the stock higher assuming a premium when it’s likely that BofA still needs to fully assess the value of the assets before the deal’s full value will be known.
6. Big question, of course, is what Countrywide investors will get.
7. Rule of thumb with bankruptcies: Stocks often double on their way to zero.
8. BofA gets a free bank and a put to the government.

No matter what the real reason, given the fact that the credit/Subprime/housing crisis continues to spread, this “takeover” looked like an act of desperation to me in order to avoid the first direct bankruptcy casualty. If others can be avoided remains to be seen.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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