So if the stock goes to nearly zero, BofA would receive billions, trillions or gazillions of shares, just so that they get some fixed amount of dollars back? Geez, I wonder how normal shareholders would feel about that?
So if the stock goes to nearly zero, BofA would receive billions, trillions or gazillions of shares, just so that they get some fixed amount of dollars back? Geez, I wonder how normal shareholders would feel about that?
After reading CR's post and reading your comment a phrase popped into my head, "Something wicked this way comes."
ShortCourage, exactly. That is why CFC should disclose more to make sure that isn't the case.
BTW, I checked BAC's filings and I didn't see any disclosure, but BAC raised $1.5B in a 6% debt offering and another $0.5 Billion from the Fed discount window. So I guess we know the source of the $2.0 Billion.
I just watched the CNBC video with Herb Greenberg and some buffoon talking down the use of the word "bankruptcy" in the Merrill Lynch downgrade for CFC.
I am guessing (having seen the death spiral converts you noted) that the "certain events" likely speaks to change of control events only. If the company gets sold at $15, then the strike price is 13 or some such.
The latter notion, that the convert isn't actually convertible is really strange and shocking if true given what many here were supposing were BoA's motives and goals. If this is purely a financial transaction/helping the Fed for BoA then at the end all it really requires is that BoA sell the convert as a convert and the buyer can do the conversion, which isn't a big deal. It is shocking that BoA would only now find this out.
Bank of America would need regulatory approval to convert its $2 billion purchase of preferred securities in Countrywide Financial Corp into common stock, the second-largest U.S. bank said on Thursday.
Banker, I agree we are missing some information here and that the "certain events" could - and probably do - mean something else. I've never seen a Death Spiral that didn't disclose the potential future dilution aspects, so maybe this speculation is completely wrong.
CFC is a key player, and I'm interested in the economic impact of this transaction. At first I thought this was a strategic investment for BAC, but the OCC comments bother me.
The bottom line is I think that CFC should disclose more.
The Office of the Comptroller of the Currency told Bank of America Corp. on Thursday that its OCC-regulated bank -- which holds a stake in Countrywide -- cannot convert the investment into common stock under current conditions.
Instead, Bank of America N.A. would have to transfer the security to its parent company and seek approval from the U.S. Federal Reserve and the Office of Thrift Supervision, which regulates Countrywide.
"While we hold the security at Bank of America N.A., we can transfer it to Bank of America Corporation and can convert it anytime subject to approval by the Federal Reserve and the Office of Thrift Supervision," Bank of America spokesman Scott Silvestri told Reuters.
I also don't think that the sentence in question should be interpreted to mean a death spiral convertible. ANY preferred stock would have a similar sentence to simply allow adjustment for stock splits.
If CFC is really a going concern, then this is a great deal for B of A.
Wow, after the market ate this "2 billion dollar sandwich" of news concerning the "investment" from B of A towards CFC, they sure vommited it out quick, from $24 per and change per share at the open, then down back to $22.02 to barely 20 cents gain in stock price at closing, and down in after hours.... sort of what I expect from a "surprise" rate cut......
Sounds like BofA is just acting as a conduit from the Fed to Countrywide.
Could it be that Countrywide is a little more important to our Washington leaders than earlier supposed?
"This instrument is similar to a convertible bond, but convertible at a discount to the share price at issuance and for a fixed dollar amount rather than a specific number of shares. The further the stock falls, the more shares you get. Popular in the mid to late 1990s. Also known as toxic convertibles or death spiral convertibles."
CR,
I think I'm missing something. Are you suggesting that the BoA preferred shares might be worth an ever greater share of the business if the shares dip below the $18 price? How would that work?
The OCC part is bugging me as well. It's equity, yet they are counting it as debt - so it doesn't help CW in terms of capital requirements, which I would think regulators would have wanted.
So there we have it. BofA got a 6% loan of $1.5B + a $500M window loan at 5.75% and lent the money to CFC for 7.25%. Was this con engineered to goose CFC at the open so some hedgie could book profits? My hatty sense is tingling...no wait, one of the expropriated 9volts is touching the sweat on my neck.
The defining characteristic of debt is that if a borrower defaults, a lender can declare the full amount due and payable. If a lender can't do that? It ain't debt.
Now I'm going to show my ignorance, is the OCC the arbiter for regulatory capital issues? Anyone? Bueller?
If BoA paid for this like CR posits (blessed by Occam himslef), where did the other $1.5 billion go?
As someone pointed out in this morning's press, this instrument looks a great deal like what Solly sold Buffet in 1987 to avoid a Pearlman takeover. I suppose Buffet would be a buyer of this security near or at par if BoA needed to offload it.
This investment is basically a no loose proposition for Bank of America...
If Countrywide was to fail it would allow them to be first in line after bondholders to pick through the assets. BofA has been trying to buy Countrywide for some time, but this would allow them to get the good stuff without the liabilities.
Second there are many ways they could hedge this convertable if they choose. Such as shorting stock or using some sort of derivative to get the same effect. Given the spread between the current share price and strike price, this would prove very profitable no matter what happened to Countrywide.
Personally I think with this "loan" in place BofA would gain much if Countrywide failed than if they survived.
In the case of Fed approval. This might have to do with the fact that BoA is bumping against the deposit cap (10% nationwide). So they might have to get rid of CW's bank (this is pure speculation on my part)
The convert language is somewhat unusual. I've seen similar cases where it has been both benign and toxic. Have to wait for the 8-k
Bob_in_MA, that is what I'd like to know. I find it hard to believe this is a death spiral convertible, but I think CFC should disclose more.
After some thought, I decided to change the title and a little bit of the text. I'm not sure this is the correct forum for this type of speculation. My interest is economic - and this is more related to a specific stock.
lowsmoke, you are probably correct. The more I think about it, the more I'd be surprised if this is a death spiral. CFC could easily disclose these "certain events" and eliminate all speculation. I've checked around and I've seen this speculation on a couple stock picker sites too.
Usually the lender for the death spiral is some, uh, some Soprano type outfit. I'm not sure BofA fits the bill.
All banks with assets between 8 and 11 million. If one od these is failing it is probably Corus since it is heavily into Florida condos. Then again R&G is also rather pathetic.
Bank name Assets $M
People's United Financial, Inc 10,932
East West Bancorp, Inc. 10,829
UCBH Holdings, Inc. 10,652
Whitney Holding Corporation 10,608
FirstMerit Corporation 10,429
International Bancshares Corpo 10,367
R & G Financial Corporation 10,199
Corus Bankshares, Inc. 9,610
Wintrust Financial Corporation 9,348
First Republic Bank 9,320
Santander Bancorp 9,196
Cathay General Bancorp, Inc. 8,901
Trustmark Corporation 8,829
Susquehanna Bancshares 8,314
Umpqua Holdings Corporation 8,145
United Community Banks, Inc. 8,088
First Midwest Bancorp 8,055
UMB Financial Corporation 8,034
GAH! You gotta put it like that...Simple answer I dunno...There surely isn't enough info released at the moment. Guess I should have NOT said "there we have it". I'll be more carefull down the road.
Of course ain't this the way the Buffett operates.
This now tilts my hat:
"Our conclusion is subject to the condition that (Bank of America) will not exercise the right granted to holders of the Securities to convert the Securities into common stock of (Countrywide) so long as the Securities are held by (Bank of America) or any subsidiary" of Bank of America, OCC chief counsel Julie Williams wrote Wednesday in a letter obtained by Dow Jones Newswires."
So...Maybe Bof A unloads the shares to someone else...I gotta say I've been on the road all day and still digesting...I think what I just posted is complete bollacks...but my wee brain is on to something..what it is ain't exactly clear...I'm going to ponder a Martooni...
Countrywide owns a large depository, Countrywide Bank, which is a national bank and, thus, regulated by the OCC. ANY investment in more than 10% of a national bank's outstanding shares, or in a holding company that controls a national bank (and the conversion feature would give BAC between 15% and 17% of CFC's - the holding company's - outstanding common shares), would have to be approved by the OCC, even though BAC is bank holding company and has a sub that's a national bank. So, it's possible that this conversion issue relates to the possibility of being a greater than 10% owner. Having said that, if that's the case it's odd that the wording wasn't "BAC shall not convert... without prior approval of the OCC." Instead it seems like the wording is just saying they can't convert period. Anyhow, just something to think about.
I suspect that the change in conversion price due to "certain events" probably relates to stock splits, special dividends, spin offs, those sorts of things. While it could include a death spiral feature, I suspect it doesn't as that would paint a bullseye on the stock for the shorts, and at the moment, CFC's stock price is serving as barometer on the health of the mortgage market. There is reference in the 8-K to an anti-dilution feature in the event of below market issuance of equity which could cause a lot of dilution if they have to do more rescue financings, but if they have to do another they are probably on their way to BK anyway.
The non-convertibility is almost certainly a function of the bank holding company act, which deems anyone who owns 10% of a bank's equity to have control of it. And as referenced above, BAC is close to exceeding the 10% limit on the national deposit base, so that makes sense to me.
I think we have to wait for CFC to file the Investment Agreement with the SEC to know for sure what "certain events" means.
"The foregoing descriptions of the Investment Agreement and the terms of the Convertible Preferred Securities do not purport to be complete and are qualified in their entirety by reference to the Investment Agreement and the Certificate of Designations, which will be filed by the Company with the Securities and Exchange Commission at a later date."
Maybe it's not that complicated. Even after drawing all of their bank credit lines down , CFC was still short of cash. They couldn't go anywhere else so they agree to vulture financing from Bank of America. We know they didn't go to the discount window. Mozzillo said on CNBC ( if you believe him ) , so , if you believe him they didn't have assets to take to the window. If true , CFC is a dead bank walking and what we're seeing is the first round of "suitors" that will divvie up the choice parts on the cheap. unless desperate , why would CFC take this deal ?
If Countrywide survives (and prospers - big 'ifs' in my mind) BofA would have approximately 1/6 ownership available for sale and any buyer would have conversion rights, I assume. (The OCC ruling must apply to BofA from the OCC's role as bank regulator and does not ride with the stock, which continues to be defined as 'convertible'). Correct? I notice a right of first refusal on a sale of Countrywide - would that ride with this stock as well?
The ruling does not flatly prohibit BofA conversion, but would allow it if approved at some later time. (Thus, political at least in part).
If Countrywide goes down the chute, BofA ranks after bondholders but before all other stock, including preferred. What that might be worth would only be a wild estimate by BofA, given current conditions.
All in all, I think this stock might be worth more to somebody other than BofA... someday and 'if'.
Spend 7.25$ to make a widget and sell it for 6.50$ (as in in a mortgage rate)
And stay in bizinessss.
And you fools bought in to WMD1964.
Hahahahhahahahaha
Banker, I believe the OTS examines Countrywide Bank, and would evaluate the adequacy of their capital. The Fed examines the Holding Co and nonbank entities including the mortgage co.
Having said that I can agree that in the worst case it will be arranged that BoFa will take over assets and Feds will arrange liquidity for that deal, probably involving allowing Fannie Mae to take over the mortgage portfolio despite all the limits.
But the company will continue to function non-interrupted.
I think this was a bailout, despite refusals on all parts to admit it. If Mozillo was calling the BofA money a "priceless" investment, then it means that it was necessary at any price in order to remain solvent. The terms weren't that good, but they can only appear so bad, because the worse they are, the more dire the deal looks. BofA gets a few things it wants in case they can't prevent the bankruptcy in the end, but in reality, someone had to step up, and who knows how it came to be that BofA drew the short straw.
The only question now really, is how close to bankruptcy are they going to get, and what are the consequences, and how did they change given this transaction? Mozillo also says they are no closer to bankruptcy than they were 6 months ago, when he was saying there was no chance. So, clearly, the guy is full of s&t now or was full of s(t then, or possibly both.
Would this have possibly happened if they weren't close to bankruptcy? I doubt it. Me thinks they are buying time so that when the bankruptcy does get announced (which means yes, I think it is inevitable) they will already have worked out some arrangement so that it doesn't bring down the entire mortgage market and servicing market (more importantly) with it.
I suspect there is a TON going on behind the scenes now and we have absolutely no clue about it.
(It was getting hot under that tinfoil hat. Whew...)
These deals do not happen overnight. They take time. I read somewhere that this deal was in the works for a week or so. Yet insiders still had autosales for Options - sell at market, from what I see on August 13th.
CFC is toast. Bank of America will get something or some assets that they want for buying time to arrange for an orderly disposal. It's not much deeper than that. But 's let's not think for a minute this was an equity injection. Bank of Amearica has made an accomodation... thus , they will get something in return. Maybe the servicing platform ?
Mozilo was on the PBS stock market show tonight and the woman who co-chairs it kept asking him point blank if CFC was "going bankrupt." He got a wee bit testy and told her repeatedly that there was no chance of that and never had been. Hmmmmm......he who protests too much.....hmmmmmmmm
Fredw - I havent figured out what they get, but the right of first refusal probably isn't much, since the chance of no BK is small in my opinion. So it must be something else they are angling for. Or, alternatively, someone had to do the deed, and there isn't much but some very small upside potential, and some guaranteed good will in the investment community. Dunno. But I dont think they'd be the one to get the servicing... or would they? Thoughts? Who is really the most capable of handling that major league workload and integrating it with their existing business. I mean, CW would still effectively run the servicing the same way, Id think, just with a different ownership structure and maybe would have to pare that piece of the pie off. Which I think is what is going on now - they know its BK, so they are taking the time to figure out how to break up the company and make sure the important working part bits are kept working by someone.
oh please..........in earlier reports it was a week or more and this in the WSJ
Countrywide, Bank of America Talked for Years
By JAMES R. HAGERTY and VALERIE BAUERLEIN
August 24, 2007
Bank of America Corp.'s $2 billion investment to shore up Countrywide Financial Corp. was put together in a few days but the companies' flirtation dates back at least six years, according to people familiar with the situation.
Sheep and goats: you can divide commentators pretty much into those who say it is a liquidity crisis and those who believe it is a solvency crisis. Roubini clarified this point. Mozilo, of course, said CFC had "liquidity" problems, nothing more. But if so many subprime mortgages are near worthless and will not revalue themselves, there have to be solvency issues somewhere. Where?
I am not a conspiracy nut but with all thats happened (money flows to the wrong places is not making it to the right places, and now sudden alliances to jump the cues ahead of common shareholders) are the smalls being squeezed out?
Why is it so inconceivable that CFC will go bankrupt? With the credit markets they way they are (and I don't see them improving anytime soon), what have they to offer?
They were a credit bubble company. They're done. I agree it is really really going to suck for the housing market and economy, but suckyness, unfortunately, is not the same as unlikelyness. Actually, I wouldn't be surprised if their BK is the trigger that goes into the history books.
Look at the state of the finances of the people they would give loans to, and in this market?!?! Would any of you buy anything CFC served up right now?
This is the bailout. They tried to spin a 2 billion dollar loan into a confidence building investment by placing a contrived floor on CFCs stock. It was an attempt to stop the run and buy more time. They have been exposed.
"If Countrywide survives (and prospers - big 'ifs' in my mind) BofA would have approximately 1/6 ownership available for sale and any buyer would have conversion rights, I assume. (The OCC ruling must apply to BofA from the OCC's role as bank regulator and does not ride with the stock, which continues to be defined as 'convertible'). Correct? I notice a right of first refusal on a sale of Countrywide - would that ride with this stock as well?
The ruling does not flatly prohibit BofA conversion, but would allow it if approved at some later time. (Thus, political at least in part).
If Countrywide goes down the chute, BofA ranks after bondholders but before all other stock, including preferred. What that might be worth would only be a wild estimate by BofA, given current conditions.
All in all, I think this stock might be worth more to somebody other than BofA... someday and 'if'."
Yeah, that tacks nicely with what I've been thinking yesterday and today. It's some kind of loss mitigation effort by BofA.... Although someone just posted that BofA got the short straw...which made me add some more copper wire to the hat. And change the 9volt...it was getting hot and weak at the same time (like CFC stock..lol...)
It's an insolvency crisis. We are a consumer based economy and the consumer, on average, is broke.
I always go back to that total debt normalized to GDP plot. It's higher than the worst parks of the Great Depression. And we haven't even got to the recession yet!
What kind of equity pays 7.25% come rain or shine. If it quacks like a bond, and walks like a bond, how does that make it a preferred stock equity investment?
It sounds like they have a bond component and an equity component. Last time I checked, the bankrupt company I used to work for ended up issuing shiny new stock to all the former bond holders, and told the equity holders to stick it.
The debt is insolvent...the pyramid is teetering...
The discussions here are more of a "How does the Fed and the Gov't (not the same thing...puhleeze) control the collapse so that the pig men and the rulers don't get burned...whilest pushing the cost onto us."
The hope here, at least for me is that they CAN'T. In the mean time, this stuff is useful so you don't get fleeced, like the sheeple undoubtably will.
Capital stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation. Like common stock, preferred stocks represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. Also unlike common stock, a preferred stock pays a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. The main benefit to owning preferred stock is that the investor has a greater claim on the companys assets than common stockholders. Preferred shareholders always receive their dividends first and, in the event the company goes bankrupt, preferred shareholders are paid off before common stockholders. In general, there are four different types of preferred stock: cumulative preferred, non-cumulative, participating, and convertible. also called preference shares.
Tin foil hat tip to "http://www.investorwords.com"
For it to quack like a debt duck, a default must give a lender the option of saying the entire amount is due and payable. This ain't debt. If six consecutive dividends are missed, then holders can elect two board seats. That is the extent of their remedies.
Spend 7.25$ to make a widget and sell it for 6.50$ (as in in a mortgage rate)
And stay in bizinessss.
And you fools bought in to WMD1964.
Hahahahhahahahaha
"The discussions here are more of a "How does the Fed and the Gov't (not the same thing...puhleeze) control the collapse so that the pig men and the rulers don't get burned...whilest pushing the cost onto us."
The hope here, at least for me is that they CAN'T. In the mean time, this stuff is useful so you don't get fleeced, like the sheeple undoubtably will."
I do not think the pig men and rulers can escape. ~70% homeownership and any bailout screwing the remaining renters. Man oh man there is going to be some grumpyness comin' soon. And approval ratings all around are already nearing record lows. And while all this finance stuff is a bit complicated, I bet the Average Joe has to know (in his gut ) where to direct his rage. It's all too human. Hell, just point to the guy still driving the Ferrari as his house is getting forclosed on.
You know when I think we went wrong? About 250 years ago when economic theory started treating humans as perfectly rational actors and workers as fungible. Ahhh, we might drink fine wine out of crystal and wear fancy suits, but those damn instincts. . .
Absolutely nothing freaks regulators out faster than a run or a mini-run or even rumors of a run. They will bend the rules, make up new rules, ignore rules, forget rules, create new rules, relax rules, forget rules, ask Congress for new rules, and lie about rules in an immediate effort to stop a run. Nothing else matters. Repeat: Nothing else matters. Move along. End of story.
"when economic theory started treating humans as perfectly rational actors and workers as fungible"
Austrians never went there. This is wha makes it difficult to point out Austrian theories.
My head is hung low after your comments. You are right about popular econ theories, and I am left low by the impact to my intellectual proffession. I feel dirty...but I was never a part of hte boom psychology. I hope to God my idiotic postings will save some.
As an economist, I AM SORRY. The profession is corrupted. I'll stop now.
Elvis,
When Tanta lets a two bit lawyer change her style this fast it will be the day Elvis enters the building again. Tanta is taking a kinder gentler approach because of that sweet girl Anne's comments that shook Tanta to her trailer park trash roots. I'll be glad when she gets back to her old common self and dear Anne has sex in this century. The both will be better for it and we can all relax.
I would assume BoA already has a good read on whether CW will go
BK or not.
Therefore, why put $2B into what you guys have helpfully verified to be second claim position, when the current distress of the CEO clearly shows BoA could've asked for and gotten pole position (i.e. loaned money to CW at 7.25% maybe with some warrants for equity on the side), rather than make a pure pre-conv-equity investment?
Either CW had more than one suiter that made BoA a tad bit desparate,
or BoA is doing something inexplicably stupid with it's $2B.
Doesn't this mystery have more to do with B of A's dire straits than CFC's? My speculation has less to do with what I think I know about either company than how emotion keeps us from following the money.
CFC's fight for its life, and its importance to American homes, don't imply that it swung this deal with an even more important company. Yet because it seems more imperiled, facts and speculation feel focused on how Countrywide might gain. The company's questionable statements and the toxic charisma of its CEO don't argue against this logic. Until time reveals, let's not be fooled by these fools.
Misean,
No need to hang your head low. While considered the dismal science by some, economics is a very important area of study and we have to start somewhere. The problem is that we make simplifying assumptions because of complexity and then make the mistake of generalizing our models too far. Just hubris. I am a scientist myself. I study a part of the brain involved in reinforcement learning. It is involved in Parkinson's disease, addiction, gambling, and. . . wait for it. . . financial decision making! There are MRI studies of people making financial decisions. Neuroeconomics is coming along. We are rational sometimes. Just not all the time.
"Bank of America has the right to match any buy-out offer for Countrywide Financial, according to a filing made as part of BofAs $2bn preferred share investment in the troubled mortgage lender."
I still don't get it. If it were my $2B, with CW in crisis mode over liquidity, I'd want a bond paying 7.25% and some equity warrants. Again, why are they willing to be second in line, and only have claim on a dividend instead of a loan? Is it xmas time already?
The only reason I can imagine BoA agreeing to preferred is so that the regulators (OCC aside) and the Rating agencies view this as equity and not debt.
The only reason I can imagine BoA agreeing to preferred is so that the regulators (OCC aside) and the Rating agencies view this as equity and not debt.
So then why not make the strike price $30 or something that really suggests confidence? Why this seemingly pattycake $18?
I can only really answer the way I did yesterday. It is hard to negotiate when one is bent over a barrel. Another thought is that by having an in the money strike price this is clearly equity (to everyone but the OCC).
I think if CFC thought they could have pulled off a 100 million share secondary at $18 they would have.
Although someone just posted that BofA got the short straw...which made me add some more copper wire to the hat. And change the 9volt...it was getting hot and weak at the same time
It's good to see that you read Snopes, and realize that you need a full Faraday cage to ward of the mind control lasers.
Elvis, nah. There was nothing wrong with my orginal post - I was speculating on the wording for the convertibles (although the more I think about it, the less likely it will be a floorless convertible). This post just seemed a little too stock specific for this blog. I admit I'm curious to read the actual agreement that CFC promises is forthcoming:
"The foregoing descriptions of the Investment Agreement and the terms of the Convertible Preferred Securities do not purport to be complete and are qualified in their entirety by reference to the Investment Agreement and the Certificate of Designations, which will be filed by the Company with the Securities and Exchange Commission at a later date."
For this blog, I'm interested in CFC from a housing / economy view point. If it ends up being a floorless convertible, then I'll become even more bearish on housing.
IMHO, have to separate the bank and rest of the company (ROC). Bank could be OK and ROC hurting because it is sitting on a bunch on mortgages that it cannot sell (not even to the bank because the auditors are watching). I believe that the next shoe to drop will be a sale of these mortgages that the GSEs will not buy at a substantial discount. This will eviscerate CFC earnings. I think that they have been pushing out a bow wave of mark to market and loss reserve issues. When they finally throw in the towel, my guess is that they will dump the paper, dump the REO, increase the loss reserves and survive as a much smaller mortgage operation until the next housing bubble.
Let me state right off that I know this may be a wild hare idea. However, CR, could we all be barking up the wrong tree here? It is occurring to me that this could be, in fact, a non-economic move on BOA's part. In other words, could this really be just a move to stabilize and support CFC (by indirect action of the Fed) and not be an attempt by BOA to take control. I say this mainly because BOA was one of the 4 main banks that show-borrowed from the Fed's Discount window, the amount invested in CFC is about the same as I recall, and Bernanke was reported to be making a lot of calls to banking heads and strong arming them. All the strange covenants could mainly be seen as loss mit clauses, such that BOA won't lose its investment. It would also explain why the details weren't in the 8k and why the OCC was so quickly and happily compliant. Exposure would ruin the illusion as the Fed tries to sooth the roiled market.
As stated above by FFDIC - "Absolutely nothing freaks regulators out faster than a run or a mini-run or even rumors of a run. They will bend the rules, make up new rules, ignore rules, forget rules, create new rules, relax rules, forget rules, ask Congress for new rules, and lie about rules in an immediate effort to stop a run. Nothing else matters. Repeat: Nothing else matters. Move along. End of story."
That would be an economic story and not a story about a single set of market participants.
I suppose we won't know until later when more details come out.
Actually tj I drove one of those in college, a rusted out '75 Triumph Spitfire. It's no as much fun as Fred Flinstone makes it out to be. To this day I still have an aversion to British automotive engineering.
as I suggested yesterday, wait until the final filing. Thus is not a "normal" environment and the speculative nature of the comments surrounding this preferred are baseless.
Once the filing is completed, what I will be looking for is what is "omitted" as opposed to what is "stated".
The rest is "noise" and you guys are "way" ahead of yourselves.
"Asset-backed commercial paper this week dropped $77.1 billion to $1.05 trillion from Aug. 15, according to the Federal Reserve. The percentage drop is the biggest since at least November 2000, according to data compiled by Bloomberg. Asset-backed commercial paper is down $125.5 billion over two weeks. "
Is it that less of this type of paper is being issued ?
is it that none is issued and the drop is because paper that mature, paid and retired and none (or less) is issued to replace it ?
If banks were finencing investment in long term debt using this papers what are they doing now ? going to the Fed to get money to pay the retired debt but keep hanging on to those long term paper they hold which is worth less and less ?
Even if all this is an orchestrated bail-out, how are 2B enough to save CFC from going belly up?
There is an opinion that CFC is following the fate of Enron, which was already insolvent, but was actually killed suddenly by inability to roll-over commercial paper.
Now with news about Coventree in Canada and failure of European companies to roll over 80% of CP that matured last month... CFC is the worst candidate to ask creditors for a roll over and while BofA could let them do it because of this newly-founded relationship, what about other creditors?
Let's face it:
1) With massive foreclosure rates the inflow of capital in terms of monthly payments to CFC is dropping.
2) Their REO portfolio is growing at 450M a month!!! Granted, it's not their money, but that means no monthly payments any more.
3) A good chunk of their mortgages intended for securitization is hanging as dead weight on them as all but prime segment of asset-back securities markets stalled completely - they said that themselves.
4) There was a note that they are burning through 300M in operating costs per quarter.
5) They are unable to fund their mortgage pipeline (previously 40B/month) - hence the move to offload it on their bank - now by 70% and according to them, hopefully 100% by the end of the year.
6) 76B in debt, and I don't know how much of it is in commercial paper.
7) Desperate tapping out of a credit line, which later turned out to be by 70% due in March 2008 (not 2001 like they lied when they tapped it out) and now also,
8) Giving up a stake on draconian terms to Bank of America on an almost emergency timeline - the whole deal seemed to have taken a week from engagement to closing and funding. Wow.
So if CFC has substantial commpercial paper amounts on their sheets and they fail to roll it over, 2B stake from BofA will not save them - wouldn't it go out with a sudden pop, like Enron?
About CFC: I am biased now since I closed my short but the main reason I did that is that the action last week showed me that they (the fed+all other) will simply not let CFC fall. It just will look so bad if the biggest ML in the US would BK. This has implications on how the US itself is viewed in the world.
I have not seen any reply to my comment about Angelo - how when he was asked by Maria if he had any contact with the Fed he qualified his answer to "NY Fed".
To me this sais that this guy (who is amzing in 'not lying' while creating any impression that he wants to create in the minds of his listener) had actually had much contact with the FED - either for month he was crying to SF Fed to help him (inituially they did not - and this is why Cramer exploded on Aug 10) or with Ben B himslef as of lately.
so my conclusion is that while the situation is bad (for CFC and for Crdit markets as the links by risk C show - see my question above about those links) the effort now is on preventing CFC from BK and preventing credit crunch/melt down. I think the FED will push any amount of liqudity to let banks susrvive the next 2-3 month. Congress/administration will raise the $417K limit and portfolio limits and we shall go through some time in which it will look like crisis is solved.
Where am I wrong. How unslovable is it and when will it be aparent that it is unsolvable ????
For the purposes of disclosure I hold some CFC Jan 09 puts, which I purchased right before this BofA deal surfaced.
And I actually completely agree with the importance of preventing BK of CFC.
All I am saying is it does not look to me that these 2B are enough to prevent CFCs default. I think they need MUCH MUCH more and the only way to provide it, seems via such emergency "infusions".
So given their size, how many more "investments" in CFC are we going to see in the next several months.
Mind you that 70% of those 11.5B of revolving credit come due in March 2008 already - what happens then?
As some people noted, due to regulatory difficulties (10% nationwide deposit cap) BofA (or anyone else big enough) has no chance to absorb CFC. Besides, mergers and aquisitions take way longer than a couple of months.
So, first - credit line tapping. Now it's this emergency "investment" from BofA. What's next? Just passing them money under the table to keep them afloat?
Even IF CFC begins to downsize now, it will take them MONTHS to reduce their costs to sustainable levels (i.e., in the environment of inability to securitize mortgages, roll over commercial paper, skyrocketing defaults, and now pay off the credit line and 145M in interest on the BofA stake.
Even if it's a bail-out it seems that it was not really planned but executed on the spot. This may have to do with CFC denying being on the brink of collapse until very very recently (remember the rumored call from the SF Fed to NY Fed saying there is a disstressed financial company on the west coast).
There should never be a convertible issued without adjustments in case of "certain events" such as a stock split, extraordinary dividend or similar.
Death spiral convertibles are still issued, search the words private investment in public equity.
Per Dow Jones "When Bank of America Corp. (BAC) eventually converts its $2 billion investment in Countrywide Financial Corp. (CFC) into common stock, it must be done by the parent company and not the banking unit that had originally purchased the securities, the Office of the Comptroller of the Currency said."
A year and a half ago, the popular press liked to point to England and say "Well, they're 8 months ahead of us on the tightening curve, and not much of a problem yet."
At this point Angelo must know he faces time in court, if not in prison. First, there will be shareholder and class action suits. Second, there is the obvious flirting with sales based on insider information. Third, the discovery process for shareholder suits may uncover things that interest regulators and finally, Congress will eventually pull a face out of the crowd to put in front of the cameras for 'hearings'. His is a very likely face.
Has anyone looked at the value of the call option?
Think about it this way, you hold the prefered stock and sell an equivalent number of Jan09 18 Calls. Come January 09, if the options are in the money, you convert the preferred and deliver the common to option holders.
Unless my math is wrong, the 2billion in preferred can be converted into 111 million shares. Using the preopen price of Jan09 17.5 Calls as a guide, each option (on a per share price) is worth around $9.20. Total value comes close to 1 billion.
Granted, this is a back on the envelope calculation (i doubt you could sell all those calls and the price would be a lot lower), but it shows that there is a lot of value in the convertible option even without any other conditions.
Do we know now that CFC is insolvent ? Do we know that CFC owe more than it holds ?
How much does CFC really own as far as mortgages ? In how much can it sell it ? 95 cents on the dollar or 50 cents on the dollar ?
CFC survicing biz ? How many of CFC employees actually working in this area (my guess : not many) How much does it generate for CFC ? How much does it as a servicer loose on the hugh REO ?
is the Fed totaly out of their mind in trying to save CFC. Is that something that has no chance of working or is it just a matter of CFC loosing all it's current sources of funding due to fear ?
I use to short CFC big time but never out of a thought that it would go BK. maybe I was wrong and it is going to BK. BoA money made me think they will not let it go down but who knows - maybe I am very wrong.
Red Pill said: "...The problem is that we make simplifying assumptions because of complexity and then make the mistake of generalizing our models too far...."
Yes! Like Fed behavior that means one thing at one point in the business cycle, but the same action might mean something entirely different at another point.
It would be great if there were "all-weather" rules that never changed regardless of conditions, but it simply doesn't work that way when you're trying to make economic or stock market forecasts.
I just don't understand why Bank of America dished up 2 billion to get served a turd sandwich. Is there something we are all missing?
BoA and three of its friends "borrowed" 2B from the discount window. Maybe BoA drew the short straw on who would actually eat the turd sandwich.
So if the stock goes to nearly zero, BofA would receive billions, trillions or gazillions of shares, just so that they get some fixed amount of dollars back? Geez, I wonder how normal shareholders would feel about that?
So if the stock goes to nearly zero, BofA would receive billions, trillions or gazillions of shares, just so that they get some fixed amount of dollars back? Geez, I wonder how normal shareholders would feel about that?
After reading CR's post and reading your comment a phrase popped into my head, "Something wicked this way comes."
Maybe I'm wrong.
How can anyone have confidence in the system?
ShortCourage, exactly. That is why CFC should disclose more to make sure that isn't the case.
BTW, I checked BAC's filings and I didn't see any disclosure, but BAC raised $1.5B in a 6% debt offering and another $0.5 Billion from the Fed discount window. So I guess we know the source of the $2.0 Billion.
Best Wishes.
I just watched the CNBC video with Herb Greenberg and some buffoon talking down the use of the word "bankruptcy" in the Merrill Lynch downgrade for CFC.
Anyways, Angelo Mozilo is the NEW Kenneth Lay!
CR,
I am guessing (having seen the death spiral converts you noted) that the "certain events" likely speaks to change of control events only. If the company gets sold at $15, then the strike price is 13 or some such.
The latter notion, that the convert isn't actually convertible is really strange and shocking if true given what many here were supposing were BoA's motives and goals. If this is purely a financial transaction/helping the Fed for BoA then at the end all it really requires is that BoA sell the convert as a convert and the buyer can do the conversion, which isn't a big deal. It is shocking that BoA would only now find this out.
We are missing some material information here.
Banker,
After reading the link my take is that they knew it.
Don,
If that's true, then what have they really done? They don't even have a block on another acquirer coming in.
Bank of America would need regulatory approval to convert its $2 billion purchase of preferred securities in Countrywide Financial Corp into common stock, the second-largest U.S. bank said on Thursday.
BofA: Converting Countrywide stake requires Fed OK
| Reuters
Banker, I agree we are missing some information here and that the "certain events" could - and probably do - mean something else. I've never seen a Death Spiral that didn't disclose the potential future dilution aspects, so maybe this speculation is completely wrong.
CFC is a key player, and I'm interested in the economic impact of this transaction. At first I thought this was a strategic investment for BAC, but the OCC comments bother me.
The bottom line is I think that CFC should disclose more.
Best Wishes.
From above article:
The Office of the Comptroller of the Currency told Bank of America Corp. on Thursday that its OCC-regulated bank -- which holds a stake in Countrywide -- cannot convert the investment into common stock under current conditions.
Instead, Bank of America N.A. would have to transfer the security to its parent company and seek approval from the U.S. Federal Reserve and the Office of Thrift Supervision, which regulates Countrywide.
"While we hold the security at Bank of America N.A., we can transfer it to Bank of America Corporation and can convert it anytime subject to approval by the Federal Reserve and the Office of Thrift Supervision," Bank of America spokesman Scott Silvestri told Reuters.
I also don't think that the sentence in question should be interpreted to mean a death spiral convertible. ANY preferred stock would have a similar sentence to simply allow adjustment for stock splits.
If CFC is really a going concern, then this is a great deal for B of A.
Wow, after the market ate this "2 billion dollar sandwich" of news concerning the "investment" from B of A towards CFC, they sure vommited it out quick, from $24 per and change per share at the open, then down back to $22.02 to barely 20 cents gain in stock price at closing, and down in after hours.... sort of what I expect from a "surprise" rate cut......
Sounds like BofA is just acting as a conduit from the Fed to Countrywide.
Could it be that Countrywide is a little more important to our Washington leaders than earlier supposed?
BTW,
The OCC idea that this is better thought of as debt is remarkably...um...wrong. If they don't get paid their remedies are not remotely debt-like.
"This instrument is similar to a convertible bond, but convertible at a discount to the share price at issuance and for a fixed dollar amount rather than a specific number of shares. The further the stock falls, the more shares you get. Popular in the mid to late 1990s. Also known as toxic convertibles or death spiral convertibles."
CR,
I think I'm missing something. Are you suggesting that the BoA preferred shares might be worth an ever greater share of the business if the shares dip below the $18 price? How would that work?
Thanks. Great post.
CR,
I suspect that you are the "certain event" that causes the conversion adjustment. Excellent job as always.
I detect a pattern. Every time you turn over a rock the vermin scurry. At some point "contained" and "isolated" and "unique" don't work anymore.
Lowsmoke makes a good point above. On the first point, we may all be making too much of this, but like CR, I'd sure like to know more.
The OCC part is bugging me as well. It's equity, yet they are counting it as debt - so it doesn't help CW in terms of capital requirements, which I would think regulators would have wanted.
So there we have it. BofA got a 6% loan of $1.5B + a $500M window loan at 5.75% and lent the money to CFC for 7.25%. Was this con engineered to goose CFC at the open so some hedgie could book profits? My hatty sense is tingling...no wait, one of the expropriated 9volts is touching the sweat on my neck.
Cheers
rcryan,
The defining characteristic of debt is that if a borrower defaults, a lender can declare the full amount due and payable. If a lender can't do that? It ain't debt.
Now I'm going to show my ignorance, is the OCC the arbiter for regulatory capital issues? Anyone? Bueller?
Misean,
If BoA paid for this like CR posits (blessed by Occam himslef), where did the other $1.5 billion go?
As someone pointed out in this morning's press, this instrument looks a great deal like what Solly sold Buffet in 1987 to avoid a Pearlman takeover. I suppose Buffet would be a buyer of this security near or at par if BoA needed to offload it.
This investment is basically a no loose proposition for Bank of America...
If Countrywide was to fail it would allow them to be first in line after bondholders to pick through the assets. BofA has been trying to buy Countrywide for some time, but this would allow them to get the good stuff without the liabilities.
Second there are many ways they could hedge this convertable if they choose. Such as shorting stock or using some sort of derivative to get the same effect. Given the spread between the current share price and strike price, this would prove very profitable no matter what happened to Countrywide.
Personally I think with this "loan" in place BofA would gain much if Countrywide failed than if they survived.
Maybe OCC concerned about antitrust or deposit concentration issues?
e.g. either you must approval before convert or you remain a passive investor?
Why do a convert otherwise when by dint of outside reg'lor you have a subordinated straight "bond"
CR-
In the case of Fed approval. This might have to do with the fact that BoA is bumping against the deposit cap (10% nationwide). So they might have to get rid of CW's bank (this is pure speculation on my part)
The convert language is somewhat unusual. I've seen similar cases where it has been both benign and toxic. Have to wait for the 8-k
Bob_in_MA, that is what I'd like to know. I find it hard to believe this is a death spiral convertible, but I think CFC should disclose more.
After some thought, I decided to change the title and a little bit of the text. I'm not sure this is the correct forum for this type of speculation. My interest is economic - and this is more related to a specific stock.
lowsmoke, you are probably correct. The more I think about it, the more I'd be surprised if this is a death spiral. CFC could easily disclose these "certain events" and eliminate all speculation. I've checked around and I've seen this speculation on a couple stock picker sites too.
Usually the lender for the death spiral is some, uh, some Soprano type outfit. I'm not sure BofA fits the bill.
Best to all.
rcyran, good point. BAC is bumping against the 10% ceiling.
Best Wishes.
All banks with assets between 8 and 11 million. If one od these is failing it is probably Corus since it is heavily into Florida condos. Then again R&G is also rather pathetic.
Bank name Assets $M
People's United Financial, Inc 10,932
East West Bancorp, Inc. 10,829
UCBH Holdings, Inc. 10,652
Whitney Holding Corporation 10,608
FirstMerit Corporation 10,429
International Bancshares Corpo 10,367
R & G Financial Corporation 10,199
Corus Bankshares, Inc. 9,610
Wintrust Financial Corporation 9,348
First Republic Bank 9,320
Santander Bancorp 9,196
Cathay General Bancorp, Inc. 8,901
Trustmark Corporation 8,829
Susquehanna Bancshares 8,314
Umpqua Holdings Corporation 8,145
United Community Banks, Inc. 8,088
First Midwest Bancorp 8,055
UMB Financial Corporation 8,034
Banker.
GAH! You gotta put it like that...Simple answer I dunno...There surely isn't enough info released at the moment. Guess I should have NOT said "there we have it". I'll be more carefull down the road.
Of course ain't this the way the Buffett operates.
This now tilts my hat:
"Our conclusion is subject to the condition that (Bank of America) will not exercise the right granted to holders of the Securities to convert the Securities into common stock of (Countrywide) so long as the Securities are held by (Bank of America) or any subsidiary" of Bank of America, OCC chief counsel Julie Williams wrote Wednesday in a letter obtained by Dow Jones Newswires."
So...Maybe Bof A unloads the shares to someone else...I gotta say I've been on the road all day and still digesting...I think what I just posted is complete bollacks...but my wee brain is on to something..what it is ain't exactly clear...I'm going to ponder a Martooni...
Cheers
Matt Heaton,
That was my position yesterday. Banker has made me rethink it.
Cheers
I agree with the above post. "Certain events" is short-hand for stock splits, reverse stock splits, recapitalizations, and the like.
Here's another possibility.
Countrywide owns a large depository, Countrywide Bank, which is a national bank and, thus, regulated by the OCC. ANY investment in more than 10% of a national bank's outstanding shares, or in a holding company that controls a national bank (and the conversion feature would give BAC between 15% and 17% of CFC's - the holding company's - outstanding common shares), would have to be approved by the OCC, even though BAC is bank holding company and has a sub that's a national bank. So, it's possible that this conversion issue relates to the possibility of being a greater than 10% owner. Having said that, if that's the case it's odd that the wording wasn't "BAC shall not convert... without prior approval of the OCC." Instead it seems like the wording is just saying they can't convert period. Anyhow, just something to think about.
CR,
I suspect that the change in conversion price due to "certain events" probably relates to stock splits, special dividends, spin offs, those sorts of things. While it could include a death spiral feature, I suspect it doesn't as that would paint a bullseye on the stock for the shorts, and at the moment, CFC's stock price is serving as barometer on the health of the mortgage market. There is reference in the 8-K to an anti-dilution feature in the event of below market issuance of equity which could cause a lot of dilution if they have to do more rescue financings, but if they have to do another they are probably on their way to BK anyway.
The non-convertibility is almost certainly a function of the bank holding company act, which deems anyone who owns 10% of a bank's equity to have control of it. And as referenced above, BAC is close to exceeding the 10% limit on the national deposit base, so that makes sense to me.
DaveJ, Where's FED. $9.3B
Corus & People's United are both rumored to be on shaky ground. I'll bet tanta can put a short list of 3 (or maybe 1) together...
Don,
If that's true, then what have they really done? They don't even have a block on another acquirer coming in.
Banker | 08.23.07 - 8:53 pm |
Trying to find the news link, but I read today that BoA got right of first refusal as part of the deal.
I think we have to wait for CFC to file the Investment Agreement with the SEC to know for sure what "certain events" means.
"The foregoing descriptions of the Investment Agreement and the terms of the Convertible Preferred Securities do not purport to be complete and are qualified in their entirety by reference to the Investment Agreement and the Certificate of Designations, which will be filed by the Company with the Securities and Exchange Commission at a later date."
old news by a few days but it still exposes the lie:
This is the Senator Dodd video, CNBC interview, to watch, right around the 3min 50sec mark
Video - CNBC.com
It explains last Thursdays 300plus rally.
Banker,
I found it: FT.com / Financials - BofA elaborates on Countrywide
Maybe it's not that complicated. Even after drawing all of their bank credit lines down , CFC was still short of cash. They couldn't go anywhere else so they agree to vulture financing from Bank of America. We know they didn't go to the discount window. Mozzillo said on CNBC ( if you believe him ) , so , if you believe him they didn't have assets to take to the window. If true , CFC is a dead bank walking and what we're seeing is the first round of "suitors" that will divvie up the choice parts on the cheap. unless desperate , why would CFC take this deal ?
If Countrywide survives (and prospers - big 'ifs' in my mind) BofA would have approximately 1/6 ownership available for sale and any buyer would have conversion rights, I assume. (The OCC ruling must apply to BofA from the OCC's role as bank regulator and does not ride with the stock, which continues to be defined as 'convertible'). Correct? I notice a right of first refusal on a sale of Countrywide - would that ride with this stock as well?
The ruling does not flatly prohibit BofA conversion, but would allow it if approved at some later time. (Thus, political at least in part).
If Countrywide goes down the chute, BofA ranks after bondholders but before all other stock, including preferred. What that might be worth would only be a wild estimate by BofA, given current conditions.
All in all, I think this stock might be worth more to somebody other than BofA... someday and 'if'.
No matter what happens CFC will be bailed out. You can count on that. If they go BK the very dark ages will start immediately.
The CountryFried BOA scam is so simple:
Spend 7.25$ to make a widget and sell it for 6.50$ (as in in a mortgage rate)
And stay in bizinessss.
And you fools bought in to WMD1964.
Hahahahhahahahaha
Banker, I believe the OTS examines Countrywide Bank, and would evaluate the adequacy of their capital. The Fed examines the Holding Co and nonbank entities including the mortgage co.
Having said that I can agree that in the worst case it will be arranged that BoFa will take over assets and Feds will arrange liquidity for that deal, probably involving allowing Fannie Mae to take over the mortgage portfolio despite all the limits.
But the company will continue to function non-interrupted.
I think this was a bailout, despite refusals on all parts to admit it. If Mozillo was calling the BofA money a "priceless" investment, then it means that it was necessary at any price in order to remain solvent. The terms weren't that good, but they can only appear so bad, because the worse they are, the more dire the deal looks. BofA gets a few things it wants in case they can't prevent the bankruptcy in the end, but in reality, someone had to step up, and who knows how it came to be that BofA drew the short straw.
The only question now really, is how close to bankruptcy are they going to get, and what are the consequences, and how did they change given this transaction? Mozillo also says they are no closer to bankruptcy than they were 6 months ago, when he was saying there was no chance. So, clearly, the guy is full of s&t now or was full of s(t then, or possibly both.
Would this have possibly happened if they weren't close to bankruptcy? I doubt it. Me thinks they are buying time so that when the bankruptcy does get announced (which means yes, I think it is inevitable) they will already have worked out some arrangement so that it doesn't bring down the entire mortgage market and servicing market (more importantly) with it.
I suspect there is a TON going on behind the scenes now and we have absolutely no clue about it.
(It was getting hot under that tinfoil hat. Whew...)
Theroxylander - same thought, same time.
Nude,
Thanks for that info, I had forgotten about the right of first refusal.
My two bits:
These deals do not happen overnight. They take time. I read somewhere that this deal was in the works for a week or so. Yet insiders still had autosales for Options - sell at market, from what I see on August 13th.
Makes you wonder.........
CFC is toast. Bank of America will get something or some assets that they want for buying time to arrange for an orderly disposal. It's not much deeper than that. But 's let's not think for a minute this was an equity injection. Bank of Amearica has made an accomodation... thus , they will get something in return. Maybe the servicing platform ?
Mozilo was on the PBS stock market show tonight and the woman who co-chairs it kept asking him point blank if CFC was "going bankrupt." He got a wee bit testy and told her repeatedly that there was no chance of that and never had been. Hmmmmm......he who protests too much.....hmmmmmmmm
Fredw - I havent figured out what they get, but the right of first refusal probably isn't much, since the chance of no BK is small in my opinion. So it must be something else they are angling for. Or, alternatively, someone had to do the deed, and there isn't much but some very small upside potential, and some guaranteed good will in the investment community. Dunno. But I dont think they'd be the one to get the servicing... or would they? Thoughts? Who is really the most capable of handling that major league workload and integrating it with their existing business. I mean, CW would still effectively run the servicing the same way, Id think, just with a different ownership structure and maybe would have to pare that piece of the pie off. Which I think is what is going on now - they know its BK, so they are taking the time to figure out how to break up the company and make sure the important working part bits are kept working by someone.
oh please..........in earlier reports it was a week or more and this in the WSJ
Countrywide, Bank of America Talked for Years
By JAMES R. HAGERTY and VALERIE BAUERLEIN
August 24, 2007
Bank of America Corp.'s $2 billion investment to shore up Countrywide Financial Corp. was put together in a few days but the companies' flirtation dates back at least six years, according to people familiar with the situation.
Sheep and goats: you can divide commentators pretty much into those who say it is a liquidity crisis and those who believe it is a solvency crisis. Roubini clarified this point. Mozilo, of course, said CFC had "liquidity" problems, nothing more. But if so many subprime mortgages are near worthless and will not revalue themselves, there have to be solvency issues somewhere. Where?
ok
I am not a conspiracy nut but with all thats happened (money flows to the wrong places is not making it to the right places, and now sudden alliances to jump the cues ahead of common shareholders) are the smalls being squeezed out?
Why is it so inconceivable that CFC will go bankrupt? With the credit markets they way they are (and I don't see them improving anytime soon), what have they to offer?
They were a credit bubble company. They're done. I agree it is really really going to suck for the housing market and economy, but suckyness, unfortunately, is not the same as unlikelyness. Actually, I wouldn't be surprised if their BK is the trigger that goes into the history books.
Look at the state of the finances of the people they would give loans to, and in this market?!?! Would any of you buy anything CFC served up right now?
They're toast.
Chris, it certainly could be a major league solvency issue, made worse by a liquidity issue of more recent origin, right?
This is the bailout. They tried to spin a 2 billion dollar loan into a confidence building investment by placing a contrived floor on CFCs stock. It was an attempt to stop the run and buy more time. They have been exposed.
DaveJ You mean billion not million, right? Of the banks you list I would be almost certain R&G is the one. Trouble there.
From Wally:
"If Countrywide survives (and prospers - big 'ifs' in my mind) BofA would have approximately 1/6 ownership available for sale and any buyer would have conversion rights, I assume. (The OCC ruling must apply to BofA from the OCC's role as bank regulator and does not ride with the stock, which continues to be defined as 'convertible'). Correct? I notice a right of first refusal on a sale of Countrywide - would that ride with this stock as well?
The ruling does not flatly prohibit BofA conversion, but would allow it if approved at some later time. (Thus, political at least in part).
If Countrywide goes down the chute, BofA ranks after bondholders but before all other stock, including preferred. What that might be worth would only be a wild estimate by BofA, given current conditions.
All in all, I think this stock might be worth more to somebody other than BofA... someday and 'if'."
Yeah, that tacks nicely with what I've been thinking yesterday and today. It's some kind of loss mitigation effort by BofA.... Although someone just posted that BofA got the short straw...which made me add some more copper wire to the hat. And change the 9volt...it was getting hot and weak at the same time (like CFC stock..lol...)
Cheers
It's an insolvency crisis. We are a consumer based economy and the consumer, on average, is broke.
I always go back to that total debt normalized to GDP plot. It's higher than the worst parks of the Great Depression. And we haven't even got to the recession yet!
Hey guys,
What was the original title of the post by CR that he later removed? I came to late to see it - it was already changed.
What kind of equity pays 7.25% come rain or shine. If it quacks like a bond, and walks like a bond, how does that make it a preferred stock equity investment?
It sounds like they have a bond component and an equity component. Last time I checked, the bankrupt company I used to work for ended up issuing shiny new stock to all the former bond holders, and told the equity holders to stick it.
Pavel,
It had the words "D**** S*****" in it, which CR prudently removed because it was so speculative.
Red Pill,
(Ed McMahon)You are correct sir!
The debt is insolvent...the pyramid is teetering...
The discussions here are more of a "How does the Fed and the Gov't (not the same thing...puhleeze) control the collapse so that the pig men and the rulers don't get burned...whilest pushing the cost onto us."
The hope here, at least for me is that they CAN'T. In the mean time, this stuff is useful so you don't get fleeced, like the sheeple undoubtably will.
Cheers
KnotRP:
It's called Preffered Stock:
preferred stock
Definition
Capital stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of a liquidation. Like common stock, preferred stocks represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. Also unlike common stock, a preferred stock pays a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. The main benefit to owning preferred stock is that the investor has a greater claim on the companys assets than common stockholders. Preferred shareholders always receive their dividends first and, in the event the company goes bankrupt, preferred shareholders are paid off before common stockholders. In general, there are four different types of preferred stock: cumulative preferred, non-cumulative, participating, and convertible. also called preference shares.
Tin foil hat tip to "http://www.investorwords.com"
That's the difference.
Cheers,
The whole world is watching.
I can't get on to CNBC Asia on my CNBC Plus subscription.
Pavel Levin, the original title was: "CFC: Death Spiral Convertibles?"
The content of the post is almost the same - I just wanted to make clear I was speculating ...
Best Wishes.
KNOTPR,
For it to quack like a debt duck, a default must give a lender the option of saying the entire amount is due and payable. This ain't debt. If six consecutive dividends are missed, then holders can elect two board seats. That is the extent of their remedies.
I don't care what the OCC says, this is equity.
The initial reason I thought these might have a bond component is because I thought I saw the word "convertible" near the word "preferred stock".
No?
The CountryFried BOA scam is so simple:
Spend 7.25$ to make a widget and sell it for 6.50$ (as in in a mortgage rate)
And stay in bizinessss.
And you fools bought in to WMD1964.
Hahahahhahahahaha
"The discussions here are more of a "How does the Fed and the Gov't (not the same thing...puhleeze) control the collapse so that the pig men and the rulers don't get burned...whilest pushing the cost onto us."
The hope here, at least for me is that they CAN'T. In the mean time, this stuff is useful so you don't get fleeced, like the sheeple undoubtably will."
I do not think the pig men and rulers can escape. ~70% homeownership and any bailout screwing the remaining renters. Man oh man there is going to be some grumpyness comin' soon. And approval ratings all around are already nearing record lows. And while all this finance stuff is a bit complicated, I bet the Average Joe has to know (in his gut
) where to direct his rage. It's all too human. Hell, just point to the guy still driving the Ferrari as his house is getting forclosed on.
You know when I think we went wrong? About 250 years ago when economic theory started treating humans as perfectly rational actors and workers as fungible. Ahhh, we might drink fine wine out of crystal and wear fancy suits, but those damn instincts. . .
Banker,
Is that the case?
If six consecutive dividends are missed, then holders can elect two board seats.
I know I haven't read the CFC covenant on preferred. Can you link it...sorry to ask this late at night...but I'm curious.
Agree...this ain't debt...it's got inside deal written all over it.
Cheers,
"I just wanted to make clear I was speculating"
The question mark in the title made it very clear.
Very interesting post and comments.
Absolutely nothing freaks regulators out faster than a run or a mini-run or even rumors of a run. They will bend the rules, make up new rules, ignore rules, forget rules, create new rules, relax rules, forget rules, ask Congress for new rules, and lie about rules in an immediate effort to stop a run. Nothing else matters. Repeat: Nothing else matters. Move along. End of story.
CR,
Did you get a call from a lawyer or something? You seem to be doing a lot of CYA (which is okay, but a bit out of the norm.)
Red Pill,
"when economic theory started treating humans as perfectly rational actors and workers as fungible"
Austrians never went there. This is wha makes it difficult to point out Austrian theories.
My head is hung low after your comments. You are right about popular econ theories, and I am left low by the impact to my intellectual proffession. I feel dirty...but I was never a part of hte boom psychology. I hope to God my idiotic postings will save some.
As an economist, I AM SORRY. The profession is corrupted. I'll stop now.
Cheers..but that doesn't cut it...sorry...
Elvis,
When Tanta lets a two bit lawyer change her style this fast it will be the day Elvis enters the building again. Tanta is taking a kinder gentler approach because of that sweet girl Anne's comments that shook Tanta to her trailer park trash roots. I'll be glad when she gets back to her old common self and dear Anne has sex in this century. The both will be better for it and we can all relax.
Thanks Banker and all.
I would assume BoA already has a good read on whether CW will go
BK or not.
Therefore, why put $2B into what you guys have helpfully verified to be second claim position, when the current distress of the CEO clearly shows BoA could've asked for and gotten pole position (i.e. loaned money to CW at 7.25% maybe with some warrants for equity on the side), rather than make a pure pre-conv-equity investment?
Either CW had more than one suiter that made BoA a tad bit desparate,
or BoA is doing something inexplicably stupid with it's $2B.
Doesn't this mystery have more to do with B of A's dire straits than CFC's? My speculation has less to do with what I think I know about either company than how emotion keeps us from following the money.
CFC's fight for its life, and its importance to American homes, don't imply that it swung this deal with an even more important company. Yet because it seems more imperiled, facts and speculation feel focused on how Countrywide might gain. The company's questionable statements and the toxic charisma of its CEO don't argue against this logic. Until time reveals, let's not be fooled by these fools.
Misean,
No need to hang your head low. While considered the dismal science by some, economics is a very important area of study and we have to start somewhere. The problem is that we make simplifying assumptions because of complexity and then make the mistake of generalizing our models too far. Just hubris. I am a scientist myself. I study a part of the brain involved in reinforcement learning. It is involved in Parkinson's disease, addiction, gambling, and. . . wait for it. . . financial decision making! There are MRI studies of people making financial decisions. Neuroeconomics is coming along. We are rational sometimes. Just not all the time.
"Bank of America has the right to match any buy-out offer for Countrywide Financial, according to a filing made as part of BofAs $2bn preferred share investment in the troubled mortgage lender."
Source - FT.com / Mergermarket - BofA elaborates on Countrywide
I offer $1.
The PR campaign:
$2B stake in Countrywide may pay off - USATODAY.com
I still don't get it. If it were my $2B, with CW in crisis mode over liquidity, I'd want a bond paying 7.25% and some equity warrants. Again, why are they willing to be second in line, and only have claim on a dividend instead of a loan? Is it xmas time already?
Red pill any recommended reading?
Misean,
Click on CR's link for the 8-k. It's in there.
KnotPR,
The only reason I can imagine BoA agreeing to preferred is so that the regulators (OCC aside) and the Rating agencies view this as equity and not debt.
The only reason I can imagine BoA agreeing to preferred is so that the regulators (OCC aside) and the Rating agencies view this as equity and not debt.
So then why not make the strike price $30 or something that really suggests confidence? Why this seemingly pattycake $18?
Pablo,
I can only really answer the way I did yesterday. It is hard to negotiate when one is bent over a barrel. Another thought is that by having an in the money strike price this is clearly equity (to everyone but the OCC).
I think if CFC thought they could have pulled off a 100 million share secondary at $18 they would have.
Two points:
1) BofA doesn't have a good read on the economy, so why should they have a clue regarding CFC's prospects?
2) If you add no-mortgage homeowners to renters, you have a two-thirds majority that will not support any bailout.
Although someone just posted that BofA got the short straw...which made me add some more copper wire to the hat. And change the 9volt...it was getting hot and weak at the same time
It's good to see that you read Snopes, and realize that you need a full Faraday cage to ward of the mind control lasers.
The NY Times
In Britain and U.S., Urgent Steps to Change Mortgage Systems
In Britain and U.S., Urgent Steps to Change Mortgage Systems - NY Times
Elvis, nah. There was nothing wrong with my orginal post - I was speculating on the wording for the convertibles (although the more I think about it, the less likely it will be a floorless convertible). This post just seemed a little too stock specific for this blog. I admit I'm curious to read the actual agreement that CFC promises is forthcoming:
"The foregoing descriptions of the Investment Agreement and the terms of the Convertible Preferred Securities do not purport to be complete and are qualified in their entirety by reference to the Investment Agreement and the Certificate of Designations, which will be filed by the Company with the Securities and Exchange Commission at a later date."
For this blog, I'm interested in CFC from a housing / economy view point. If it ends up being a floorless convertible, then I'll become even more bearish on housing.
Best Wishes.
IMHO, have to separate the bank and rest of the company (ROC). Bank could be OK and ROC hurting because it is sitting on a bunch on mortgages that it cannot sell (not even to the bank because the auditors are watching). I believe that the next shoe to drop will be a sale of these mortgages that the GSEs will not buy at a substantial discount. This will eviscerate CFC earnings. I think that they have been pushing out a bow wave of mark to market and loss reserve issues. When they finally throw in the towel, my guess is that they will dump the paper, dump the REO, increase the loss reserves and survive as a much smaller mortgage operation until the next housing bubble.
Floorless convertible? Doesn't Fred Flintstone have one of those?
Let me state right off that I know this may be a wild hare idea. However, CR, could we all be barking up the wrong tree here? It is occurring to me that this could be, in fact, a non-economic move on BOA's part. In other words, could this really be just a move to stabilize and support CFC (by indirect action of the Fed) and not be an attempt by BOA to take control. I say this mainly because BOA was one of the 4 main banks that show-borrowed from the Fed's Discount window, the amount invested in CFC is about the same as I recall, and Bernanke was reported to be making a lot of calls to banking heads and strong arming them. All the strange covenants could mainly be seen as loss mit clauses, such that BOA won't lose its investment. It would also explain why the details weren't in the 8k and why the OCC was so quickly and happily compliant. Exposure would ruin the illusion as the Fed tries to sooth the roiled market.
As stated above by FFDIC - "Absolutely nothing freaks regulators out faster than a run or a mini-run or even rumors of a run. They will bend the rules, make up new rules, ignore rules, forget rules, create new rules, relax rules, forget rules, ask Congress for new rules, and lie about rules in an immediate effort to stop a run. Nothing else matters. Repeat: Nothing else matters. Move along. End of story."
That would be an economic story and not a story about a single set of market participants.
I suppose we won't know until later when more details come out.
Actually tj I drove one of those in college, a rusted out '75 Triumph Spitfire. It's no as much fun as Fred Flinstone makes it out to be. To this day I still have an aversion to British automotive engineering.
CR, banker, rcryan-
as I suggested yesterday, wait until the final filing. Thus is not a "normal" environment and the speculative nature of the comments surrounding this preferred are baseless.
Once the filing is completed, what I will be looking for is what is "omitted" as opposed to what is "stated".
The rest is "noise" and you guys are "way" ahead of yourselves.
Of interest-
Banks Have $891 Billion at Risk in CP, Fitch Says (Correct) - Bloomberg.com
Commercial Paper Has Biggest Weekly Drop Since 2000 (Update3) - Bloomberg.com
Investors in KKR Affiliate Seek Advice on Payment-Delay Plan - WSJ.com
What does this means:
"Asset-backed commercial paper this week dropped $77.1 billion to $1.05 trillion from Aug. 15, according to the Federal Reserve. The percentage drop is the biggest since at least November 2000, according to data compiled by Bloomberg. Asset-backed commercial paper is down $125.5 billion over two weeks. "
Is it that less of this type of paper is being issued ?
is it that none is issued and the drop is because paper that mature, paid and retired and none (or less) is issued to replace it ?
If banks were finencing investment in long term debt using this papers what are they doing now ? going to the Fed to get money to pay the retired debt but keep hanging on to those long term paper they hold which is worth less and less ?
Even if all this is an orchestrated bail-out, how are 2B enough to save CFC from going belly up?
There is an opinion that CFC is following the fate of Enron, which was already insolvent, but was actually killed suddenly by inability to roll-over commercial paper.
Now with news about Coventree in Canada and failure of European companies to roll over 80% of CP that matured last month... CFC is the worst candidate to ask creditors for a roll over and while BofA could let them do it because of this newly-founded relationship, what about other creditors?
Let's face it:
1) With massive foreclosure rates the inflow of capital in terms of monthly payments to CFC is dropping.
2) Their REO portfolio is growing at 450M a month!!! Granted, it's not their money, but that means no monthly payments any more.
3) A good chunk of their mortgages intended for securitization is hanging as dead weight on them as all but prime segment of asset-back securities markets stalled completely - they said that themselves.
4) There was a note that they are burning through 300M in operating costs per quarter.
5) They are unable to fund their mortgage pipeline (previously 40B/month) - hence the move to offload it on their bank - now by 70% and according to them, hopefully 100% by the end of the year.
6) 76B in debt, and I don't know how much of it is in commercial paper.
7) Desperate tapping out of a credit line, which later turned out to be by 70% due in March 2008 (not 2001 like they lied when they tapped it out) and now also,
8) Giving up a stake on draconian terms to Bank of America on an almost emergency timeline - the whole deal seemed to have taken a week from engagement to closing and funding. Wow.
So if CFC has substantial commpercial paper amounts on their sheets and they fail to roll it over, 2B stake from BofA will not save them - wouldn't it go out with a sudden pop, like Enron?
About CFC: I am biased now since I closed my short but the main reason I did that is that the action last week showed me that they (the fed+all other) will simply not let CFC fall. It just will look so bad if the biggest ML in the US would BK. This has implications on how the US itself is viewed in the world.
I have not seen any reply to my comment about Angelo - how when he was asked by Maria if he had any contact with the Fed he qualified his answer to "NY Fed".
To me this sais that this guy (who is amzing in 'not lying' while creating any impression that he wants to create in the minds of his listener) had actually had much contact with the FED - either for month he was crying to SF Fed to help him (inituially they did not - and this is why Cramer exploded on Aug 10) or with Ben B himslef as of lately.
so my conclusion is that while the situation is bad (for CFC and for Crdit markets as the links by risk C show - see my question above about those links) the effort now is on preventing CFC from BK and preventing credit crunch/melt down. I think the FED will push any amount of liqudity to let banks susrvive the next 2-3 month. Congress/administration will raise the $417K limit and portfolio limits and we shall go through some time in which it will look like crisis is solved.
Where am I wrong. How unslovable is it and when will it be aparent that it is unsolvable ????
"There was a note that they are burning through 300M in operating costs per quarter" - by far more:
61K people is at least $300M a month in salaries alone.
red pill,
just to note that it's not been 250 years but somewhat over 100 since the type of economics you refer to, neoclassical, began to dominate.
both marxist and austrian economics are better able to connect theory and reality,,,naturally then, both are outside the norm.
Yal, you are not necessarily wrong.
For the purposes of disclosure I hold some CFC Jan 09 puts, which I purchased right before this BofA deal surfaced.
And I actually completely agree with the importance of preventing BK of CFC.
All I am saying is it does not look to me that these 2B are enough to prevent CFCs default. I think they need MUCH MUCH more and the only way to provide it, seems via such emergency "infusions".
So given their size, how many more "investments" in CFC are we going to see in the next several months.
Mind you that 70% of those 11.5B of revolving credit come due in March 2008 already - what happens then?
As some people noted, due to regulatory difficulties (10% nationwide deposit cap) BofA (or anyone else big enough) has no chance to absorb CFC. Besides, mergers and aquisitions take way longer than a couple of months.
So, first - credit line tapping. Now it's this emergency "investment" from BofA. What's next? Just passing them money under the table to keep them afloat?
Even IF CFC begins to downsize now, it will take them MONTHS to reduce their costs to sustainable levels (i.e., in the environment of inability to securitize mortgages, roll over commercial paper, skyrocketing defaults, and now pay off the credit line and 145M in interest on the BofA stake.
Even if it's a bail-out it seems that it was not really planned but executed on the spot. This may have to do with CFC denying being on the brink of collapse until very very recently (remember the rumored call from the SF Fed to NY Fed saying there is a disstressed financial company on the west coast).
"Exposure would ruin the illusion as the Fed tries to sooth the roiled market. "
""Absolutely nothing freaks regulators out faster than a run on the bank"
Exactly. The fed gives 2B. 0.5 to BAC.
BAC uses 2B of which 1.5B comes from a bond it floats - so i wonder if this the other 3 who were getting the 1.5B at the fed window.....
"Popular" economic theories, hell, it worse than that, we've been handing out Nobels to these "geniuses".
Red Pill are you looking for any RA's or are you down there on the food chain yourself?
There should never be a convertible issued without adjustments in case of "certain events" such as a stock split, extraordinary dividend or similar.
Death spiral convertibles are still issued, search the words private investment in public equity.
Per Dow Jones "When Bank of America Corp. (BAC) eventually converts its $2 billion investment in Countrywide Financial Corp. (CFC) into common stock, it must be done by the parent company and not the banking unit that had originally purchased the securities, the Office of the Comptroller of the Currency said."
The NY Times
In Britain and U.S., Urgent Steps to Change Mortgage Systems
- NY Times? ref=business
FFDIC
A year and a half ago, the popular press liked to point to England and say "Well, they're 8 months ahead of us on the tightening curve, and not much of a problem yet."
At this point Angelo must know he faces time in court, if not in prison. First, there will be shareholder and class action suits. Second, there is the obvious flirting with sales based on insider information. Third, the discovery process for shareholder suits may uncover things that interest regulators and finally, Congress will eventually pull a face out of the crowd to put in front of the cameras for 'hearings'. His is a very likely face.
Has anyone looked at the value of the call option?
Think about it this way, you hold the prefered stock and sell an equivalent number of Jan09 18 Calls. Come January 09, if the options are in the money, you convert the preferred and deliver the common to option holders.
Unless my math is wrong, the 2billion in preferred can be converted into 111 million shares. Using the preopen price of Jan09 17.5 Calls as a guide, each option (on a per share price) is worth around $9.20. Total value comes close to 1 billion.
Granted, this is a back on the envelope calculation (i doubt you could sell all those calls and the price would be a lot lower), but it shows that there is a lot of value in the convertible option even without any other conditions.
"Just passing them money under the table to keep them afloat?"
Not exactly - but we will see sale of assets. many of them at a price which will prevent BK.
Let me ask a question in a different way:
Do we know now that CFC is insolvent ? Do we know that CFC owe more than it holds ?
How much does CFC really own as far as mortgages ? In how much can it sell it ? 95 cents on the dollar or 50 cents on the dollar ?
CFC survicing biz ? How many of CFC employees actually working in this area (my guess : not many) How much does it generate for CFC ? How much does it as a servicer loose on the hugh REO ?
is the Fed totaly out of their mind in trying to save CFC. Is that something that has no chance of working or is it just a matter of CFC loosing all it's current sources of funding due to fear ?
I use to short CFC big time but never out of a thought that it would go BK. maybe I was wrong and it is going to BK. BoA money made me think they will not let it go down but who knows - maybe I am very wrong.
Red Pill said: "...The problem is that we make simplifying assumptions because of complexity and then make the mistake of generalizing our models too far...."
Yes! Like Fed behavior that means one thing at one point in the business cycle, but the same action might mean something entirely different at another point.
It would be great if there were "all-weather" rules that never changed regardless of conditions, but it simply doesn't work that way when you're trying to make economic or stock market forecasts.
Sebastia