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Friday, January 11, 2008


bank of america to buy countrywide

the very definition of throwing good money after bad:

Bank of America Corp., the biggest U.S. bank by market value, agreed to buy Countrywide Financial Corp. for about $4 billion, five months after making a $2 billion investment in the unprofitable mortgage lender.

Bank of America will acquire Countrywide for approximately $7.16 a share in stock, the Charlotte, North Carolina-based company said in a statement today. The offer is 7.6 percent below Countrywide's closing share price yesterday on the New York Stock Exchange.

``I hope Bank of America isn't throwing good money after bad,'' said Eric Schopf, a fund manager at Baltimore-based Hardesty Capital Management LLC, which owns 216,000 Bank of America shares, in a Bloomberg TV interview. ``They struck a deal that wasn't very attractive. Hopefully they can get it right the second time around.''

the primary benefit to BoA that i can see is that it won't have to realize its stupidly incurred $1.5bn (75%) loss on its last "investment" into countrywide.

the rumor mill is going now as well for washington mutual.

Washington Mutual Inc., the largest U.S. thrift, rose in early trading on speculation that it will be bought by JPMorgan Chase & Co., the No. 3 U.S. bank by assets.

look at the deal for BoA in terms of its balance sheet.

as of september 30, 2007, by FDIC data, BoA was carrying a tier one capital ratio of just 5.9%, with $1.29tn in total assets over just $109bn in equity capital.

included in those assets are $390bn in real estate loans, most of it ($310bn) in 1-4 family residentials. the breakdown of that $310bn includes $82bn in HELOCs, $17bn in junior liens, and $55bn secured by adjustable rate mortgages.

outside that, there's $52bn in unsecured credit cards, $150bn in mortgaged-backed securities -- which includes $10bn in private label CMOs and RMBS. so bank of america has plenty to worry about in the capital constraint department.

it is buying CFC for a song, no doubt, but could countrywide be considered a trojan horse? does anyone really know if countrywide is bringing any equity to the table at all? and what are its potential liabilities?

so look at countrywide's data -- a tier one ratio of 7.3%, $121bn in assets over just $8.8bn in equity capital (7.2%). seems like it would actually improve BoA's ratio somewhat -- until you consider the quality of the assets.

of $18bn in MBS, $16bn are private label CMOs and probably generated in-house. these are likely to come to very little when marked to reality. right there, CFC is probably a net $7bn capital loss which BoA is taking a $1.2bn charge for the right to claim.

of its $84bn in loans and leases, all of which is 1-4 family residential, $13bn in HELOCs and $16bn in junior lien. that's 35% which would be total loss in foreclosure, with delinquencies in CFC's portfolio at ridiculous rates. there are surely well more than $10bn in losses here, making the liability to BoA something more in the ballpark of $17bn or more.

why on earth would bank of america do something like this at ANY price?

herb greenberg claims that the fed is behind it because countrywide really is facing bankruptcy -- citing moody's attack on CFC's debts on january 9 as evidence -- and that cannot be allowed to happen because of the counterparty fallout. the government would, in this scenario, inoculate BoA against any countrywide-related losses.

8. BofA gets a free bank and a put to the government.

sounds about right to me. this sort of machination is commonplace in true banking crises and no one should be surprised. while there was an decent chance that CFC was going to be allowed to go bankrupt, it is one of the fed's primary dealer banks. it owed the FHLB at least $50bn. it had some right to expect a bailout. it got one, albeit disguised as a 'free market' act.

BoA is also a primary dealer, and moreover is now the largest home lender in the country on top of being the largest retail banker and largest credit card issuer. the chances of it being allowed to fail are now zero.

wamu, however, is not -- and someone is going to be allowed to fail in all this.

UPDATE: more from housing wire.

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