Maybe I didn't make myself clear. I meant the exact terms of the merger agreement. Doesn't there have to be some publically available filing? Do BofA shareholders get to vote on this?
Of course, there are rumors that there is some covert payment for this deal from various federal agencies. If I were BofA, I might worry about the enforcability of such a deal under the next president.
Since 75% of the holders of the first lien Pay Option Arm only make the minimum monthly payment, I think your 15% default rate for this loan is conservative (as I am sure you intended). I think you and Shiller are right that most underestimate the trouble in housing. Certainly the brief history of this bubble has proven even the most bearish haven't been too bearish.
"As of Sept. 30, Countrywide's savings bank held about $79.5 billion of loans as investments. Three-quarters of these loans were second-lien home-equity loans ... or option adjustable-rate mortgages..."
This part stuck out when I read the original article. People keep wondering will house prices fall 10% or 20%...doesn't really matter. What matters is the geographic distribution of CFCs loan book. My bet is a huge amount of it is in CA, which means the risk is much higher than you would think on a weighted national level.
There is really no way to know how this works out for now, but if home prices are falling for another year, then weve got a giant amount of option arm junk loans in CA turning over to interest an principal when home prices there are down a good chunk already. Only an insane person would decide to start paying the principal on a mortgage tied to an asset already far underwater and sinking deeper. But that's a matter of if they can. Chances are they cant.
This will turn out to be one of the stupidest and most expensive purchases ever.
Should the gamble be 6B mortgage loss rather than 8B since BAC already paid 2B for the convertible preferred two or three months ago? I think the other part of the calculas is the service right. How much do CFC carry in the book and how much they are actually worth? I know CFC pay a lot of money to get those service right that they own...
AZ_Cowboy - I am with you 90% (unlike enConomists who say 50/50 which means I am not taking a position) chance this deal does not get done and CW goes BK.
Another perma-bull talking his book. I hope he, Gary Watts and all other hacks Jon had on their read the comments. They were especially cruel to Gary "its in the bag" Watts.
The most important questions people need to ask are these:
First, Has the Fed finally caught up with reality? Beginning with the August FOMC statement, the Fed made it plain that it was tuned in to old style economics (eg., the Phillips curve) and had no understanding of the importance of recent innovations in finance (eg., SIVs, CDOs, SPVs,...).
Second, what damage will the Federal govnt. do if/when it enacts a fiscal stimulus package? Hillary Clinton's policy proposal was purely political and I assume all others will be, as well.
In my opinion, the Fed is run by economists who have worked for the govnt. all their lives, and who look at the world in terms of potential output, the productivity trend, and the Phillips curve. They don't have a clue as to how the mortgage meltdown will play out. I bet they wish it would just go away so they could get back to focusing in the productivity trend. I also think that any policy the Congress passes will be harmful.
I was not this cynical a few months ago, but looking at the reaction of the Fed, the Congress, and the presidential candidates to the meltdown in the housing sector has stripped away any hope that I had.
Billy Hill, sorry - most of the details have been released (about $4 billion in BofA stock, to close in Q3). According to the BofA CEO there was no agreement with regulators:
Historically, federal regulators have played an active role directing a struggling financial institution towards a takeover, particularly because of the liability to the federal deposit insurance fund. Countrywide operates a thrift whose deposits are insured by the Federal Deposit Insurance Corp.
The Office of Thrift Supervision, a division of the U.S. Treasury Department, began regulating Countrywide in March, after the company converted to a federal thrift from a national bank. The OTS set up a full-time presence at Countrywide's headquarters in August. However, people familiar with regulators' thinking said they didn't actively encourage the BofA deal.
"There was no encouragement in all this," Mr. Lewis said. "It doesn't mean they're not happy we did it, but there was no pressure at all and no prior discussions."
The big thing to watch is the MAC (material adverse conditions). If the losses start to pile up, and BofA has a good MAC, then this might fall apart.
I have to admit he is the first one to use that line with some numbers. I think that is one area that will get killed. I have a lot of family in orange county and up until a year ago they all told me I was nuts.
The problem is many (of my family) have homes worth $1.0 million plus with no debt. So for them if they drop 50% they are still ok, now their neighborhoods will go to shit will all the newcomers who paid $1.0 million on 100% financing...
Let me start by saying I may not know what I am talking about, but I think that the thing you haven't included in your analysis is the Tax benefits to BAC.
If CFC does loose $10B after it is acquired by BAC, can't they use that to offset their tax liability. I read somewhere that they may be able to deduct losses of around $250M per year for 5 years, then any remainder can be used in the 6th+ years. So if they Do loose +10B, it is still may be a bargain.
"So over the first five years, Bank of America can use a total of $1.35 billion of Countrywide's losses to shelter its income. (That's five years of $270 million annual losses.) If Countrywide's embedded losses when Bank of America buys it exceed $1.35 billion, Willens says, the bank will be able to deduct the rest of the losses, without limit, starting in the sixth year."
I know you are just doing a back-of-the-envelope calculation but Countrywide likely has some brand value as well. I don't know much about the mortgage business but I suspect it will take several billion to set up something similar to CFC's operations (assuming someone can compete against them).
As someone pointed out above, BAC will also get potential tax shelters.
BAC management forecasts that this deal will be accretive to earnings within a couple of years so it's a good deal for BAC. Assuming losses are manageable, this is close to a steal for BAC IMO.
Countrywide also has 20 BILLION in "mortgage servicing rights". If, as most suspect, the mortgage troubles cut seriously into the profits of servicing, that asset also becomes worth much less - or even possibly worthless.
The mortgage investment portfolio doesn't include 30 billion held for securitization. Good look on that with all the option-ARMS and home equity! So their real mortgage exposure is more like 110 billion.
There is almost nothing CW owns that doesn't look shaky. It's easy to think of plausible scenarios with additional writedowns eventually reaching 20 billion dollars.
For the second lien (specifically the 20's of the 80/20).. didnt HSBC write off their whole portfolio (at the time the biggest write off yet of something like 10 billion, they turned out to be ahead of the curve) of second lien mortgages at the end of last year?
How much are Countrywide's mortgages actually worth? If B of A gets 30 cents on the dollar, then they got a decent deal
OMG no! BoA would lose 77 billion dollars with that! That's more that half their equity.
Assuming losses are manageable, this is close to a steal for BAC IMO.
I'm glad your not the only one thinking it's a little to cheap to aquire CFC....
Let the bidding war begin, especially if the sentiment is that BOFA is stealing it
So there's going to be blood in the street. Apparently it's not gonna be Countrywide's blood, as it's too big to fail. So's BofA. And Citi. And, likely, Mother Merryl. And the rest of'em big ole banks. Who's left? There's New Century and the like but that's, like, so last year.
When did we lose the information about how many are "logged on"? And also, the info at the bottom of the CR post showing "number of comments so far" has become totally worthless.
Shiller and by association CR are looking at the numbers. I don't think that's enough. FUD, fear uncertainty and doubt are about to dominate the retail housing market. Few are willing to buy primary residence housing in this new situation. We are likely a long way from fear but uncertainty? Until REOs stop accumulating near every aspect of a potential home purchase is uncertain. And how many here are ready to trust California isn't going to raise uncertainty over property taxes? Nationally there are three levels of uncertainty. Will laws be tightened concerning jingle mail and/or recourse? Will FB bailouts be put on the backs of whoever is left standing? Will the HMID survive for the middle class?
Summary, the housing bubble was a consequence of a misperception that real estate was a sure thing (absolute certainty). For some strange reason no one seems to think the two conditions are one in the same with opposite signs.
Estimates of Countrywide's coming write-offs do not factor in the accelerating loss of jobs in RE, CRE, Financial, Retail and Restaurant industries. There is a vicious negative feedback loop (job losses, foreclosures, declining business earnings, job losses, ...) about to play out, and CFC's losses will be much worse than now assumed.
Weather - I wouldn't act on investing advice off a blog. That said, there's a couple big gold miners with incredible P/E's. The put prices are a little high, but there's lots of downside if gold craters. There's always SMN for an easy commodity short for the buy and holders.
There may be other significant losses in store for BoA beyond the Countrywide owned mortgages: write-downs of capitalized mortgage servicing rights as the serviced portfolios go to hell, large litigation liabilities, and loan put-backs, to name a few items...
IMO gold will likely suffer a major correction when the market really crashes, but (again, IMO) it'll recover quickly and soar thereafter. A nimble trader could use some well-timed puts, but direct shorting could be extremely treacherous.
BAC could well be in trouble all on it's own; adding CFC could be like mixing drugs & alcohol. Just the difficulties involved in merging have been enough to seriously damage strong companies.
I'm just a newbie so that makes me a long-only investor. I'm long ABK... and looking at the housing-related industries. Whoever that picks the right stocks will likely make a bundle.
The thing that you bears don't realize is that the market prices in the downside long before a bottom. My guess is that the residental real estate market hits a bottom in 2009. So a lot of the negativity should be priced in by middle to late this year.
As far as Countrywide is concerned, I think BAC is getting a good deal. I'm not saying it's the steal of the decade but it looks like a good deal in my opinion. You imply that BAC's original investment was bad but is that so? Practically no one can predict the short-term move. If BAC thought that the original deal was bad they wouldn't be trying to buy Countrywide now. They see something good in CFC.
Speaking of CFC's book value - they do have $105 billion in notes payable, $54 billion in current liabilities and $30 billion in loans held for sale and not much in a way of cash flow to service it all
CFCs book value is declining daily and thus is meaningless. This deal is all about BAC trying to protect its own book since 34% of their $271 billion residential mortgage portfolio is in California (anyone interested in hiring BAC's risk management team?). Add to that $100 billion in equity lines. Their $5 billion write-down is what they call a good start.
If CFC goes under, its portfolio is to be liquidated and nobody can afford that. BAC more so than anybody else. In this case $4 billion is nothing compare to what's at risk.
The way I'm trying to make sense of this announcement, BofA basically bought a call option on CFC for the price of all the due diligence, legal, and other costs linked to getting a proposed deal this far along.
Should the next few months validate the widely held view that the mortgage mess was a large but one-off event that occurred in 2007 (subprime, contained, pig moving through the python, etc.) that will clear the financial markets in Q4 2007 & Q1 2008, then they exercise that option (do the deal) at about 1/3 of the cost they were willing to pay earlier this year. And they are willing to consider that many billions of added writedowns are acceptable for the "jewel" they will add to their business.
When conditions actually deteriorate dramatically, they likely can get out of the deal based on adverse developments that will be evident and accepted by all parties (we'll see).
Meanwhile, they can continue to sniff out the hen house and be ready to pick up the pieces that may fall out in the latter case (including a deal post a CFC BK that gets them what they want for next to nothing (equity owners wiped out), since they "know the situation so much better than anybody else"). In the meantime, they induce a degree of stability at CFC and forestall a collapse that seemed very likely a week ago, perhaps preserving something of the "CFC franchise" in the process.
The thing that you bears don't realize is that the market prices in the downside long before a bottom.
The thing that you don't realize is that the market's expectation of the bottom is the deep end of the pool, whereas the true bottom is more like the Marianas Trench.
In my Short investing career. 8 Years with two being in high school I have noticed that things that do well in the first 2-3 weeks of the year do not do well for the next 2-3 months of the year. I was short financials but they went don't so fast I though they may need to correct themselves before they sell off again. The CFC news provides the perfect turnaround excuse. Also I would be careful going long gold at this point. The carts seem to be screaming for a correction
"This deal is all about BAC trying to protect its own book since 34% of their $271 billion residential mortgage portfolio is in California."
What about Wells Fargo. Don't they have a higher concentration in CA? I think most of the mortgages are in concentrated in CA,NV,FL anyways. Do you think other banks will come in with more help?
TJ & the Bear: "The thing that you don't realize is that the market's expectation of the bottom is the deep end of the pool, whereas the true bottom is more like the Marianas Trench."
Are you sure the market isn't looking further than the deep end of the pool? Life is going to get tougher for the shorts as the months pass...
Given all the negative news all over the place, considerable selling off of certain sectors, and the seemingly low valuations, I think a lot of negativity is being priced in. At least this is true of certain sectors like financials and consumer discretionary. This doesn't mean that they can't drop further but it does mean that some sectors are getting cheaper and cheaper. The key for the longs is to navigate the field without getting blown up by the failed ones...
Ditto that. I'm putting a big chunk of my life savings (I don't have much money though) into Ambac so I have staked out my life--literally. This thing is going to get resolved one way or another.
I don't believe that Countrywide holds $32 Billion in 2nd loans (that would be 40% of their $80 Billion portfolio). I don't care what the other WSJ article says, it was probably a misquote or a misinterpretation by the article writer. My estimate would be that on a dollar basis Countrywide's portfolio is only 10% junior mortgages.
SV, as far as stocks getting cheaper, not sure what valuations you're looking at but remember that the E in PE is declining also. What appears to be a low valuation may look expensive as earnings dive.
AZ I would never base an investment decision off a blog. I do try to at least inform my own decision making with what smart investors are thinking. It's more for context than anything.
That said, my view on shorting CFC is purely hypothetical. I wouldn't do a raw short, and currently I can't buy puts anyway.
I do however have long positions in miners and occasionally think about exiting them. And even if I did, I would choose to avoid them rather than short them.
That said, I'm still short RE, retail, and financials via Ultrashorts. These have been performing very well for me. I have a few months to go before I can sell them as LTCG. I'm wondering whether I should hold on for tax purposes, or quit being piggly and just count my blessings.
I'm long WDC, which to me looks like a screaming buy.
Wow. Long ABK with your life savings is something to behold. I'm trying to figure out what disappears faster - Ambac earnings or cocaine at a Britney Spears backstage party.
Dumb question for everyone... why is everyone saying B of A paid 4B for CW? Didn't they put 2B down in the form of convertables that, in theory, would have been paid back if another bank bought CW? Adding that to the 4B in stock they're paying should make 6B right?
"I don't believe that Countrywide holds $32 Billion in 2nd loans (that would be 40% of their $80 Billion portfolio). I don't care what the other WSJ article says, it was probably a misquote or a misinterpretation by the article writer. My estimate would be that on a dollar basis Countrywide's portfolio is only 10% junior mortgages."
Man, this is one of the most egotistic comment I read today.. Why not go to the 10Q and read it for yourselves.. It is one thing to not know. It is quite another to say that other is wrong becuase you don't know the fact and don't bother to check it out.
""This deal is all about BAC trying to protect its own book since 34% of their $271 billion residential mortgage portfolio is in California.""
Care to explain how does the protection work? Mortgage is not a CDO. Someone else has a lot of mortgage to liquidate has nothing to do with your own portfolio. . So how does buying CFC protect BAC's portfolio of mortgage? If CFC were to go BK, they would have re-organized by selling asset, cramp down debt and exchange ownership for the debt. What exactly is the impact to BAC portfolio?
The key for the longs is to navigate the field without getting blown up by the failed ones
the central issue is going to be that a lot of the P/E is going to be priced out this year now that the HELOC ATM is closing down.
Home mortgages became a TRILLION dollar per year booster rocket powering the economy 2004-2006, but it's return-to-mean pattern time, with the fall scheduled to chase the 1999-2000 plateau of $400B.
A $600B downtrace of mortgage activity is going to be . . . disruptive.
As is the capital destruction of current mortgage assets that people from Calabasas to Narvik are holding.
CFC has 209B of asset and 194B of liability with 15B+ of stockholder equity. So they leverage their business by roughly 14:1. Lossing 8% of their asset (209B) will wipe off all their equity and BAC's investment of 6B will become zero..
"If CFC goes under, its portfolio is to be liquidated and nobody can afford that"
We need serious help in understand BK laws and company going through BK. May be Tanta or CR can help us. If CFC were to BK and sell their asset, they won't fetch the full value. The court will hold an auction and someone may pay only 20-30 cents to the dollars. The most likely case is the senior bond holder will exchange their debt and become the new CFC owner. Junior debt holder probably don't get anything but a warrent to buy some new CFC stock after the emerge from BK. Same for common holder. That is the cramp down process in the BK court.
I noticed my chart above didn't have 2007 . . . I fixed this by estimating 2007 by duplicating 3Q07 numbers for 4Q07, which of course errs to towards the happy side of these numbers.
My parents have their mortgage with Countrywide. They consolidated their original first+second with CW late 2006 (Oct '06-ish if memory serves) into the single mortgage. Their rate is just under 6% and fixed.
So... Saturday morning (as in the day after the BofA purchase was announced) dad gets a call which states something along these lines:
If you are willing to commit TODAY to refinance with Countrywide, we will knock off a half percent from your fixed rate (so down to low/mid 5%).
What the hell are they trying to do here? Again, my 'rents had the original 1st, added a 2nd then "refinanced" both back into a new 1st with CW in late '06. My mom wasn't sure if their loan is non-recourse and basically no details were given on the purposed refi (I'd assume it was also fixed, else dad wouldn't have listened that far). They declined the offer, BTW.
I think much of what you say is correct, or even too conservative. But I've spent much of my life thinking about how well thought out scenarios can go awry. In this instance, I ask you to consider the following: What is the real value of Countrywide to BOA in the absence of any mortgage problems? I submit that 1x book is FAR too cheap. 1x clean book is a steal. 2x book sounds more like a reasonable number.
Therefore, BOA can afford to lose far more than you are assumuing and still make this deal work.
All of which is not to say that your analysis of the potential magnitude of the problems is in any way off kilter. But there theoretically could be smart plays here (to Buy) even as very draconian scenerios play out.
Is BofA also buying Countryfried's mortgage processing and servicing technology?
The NYT's article on Financial Accounting Standard 114 quoted Countryfried as explicitly saying that their system's could handle FAS 114. The four big banks (including BofA) did not state whether or not they had the systems in place that could handle FAS 114 accounting.
As I recall, couple of decades ago BofA (pre-Tarheel management) implemented a new accounting system in their custody business. It didn't work so well. Eventually, they had to move the accounting records to a legacy system used by their Seafirst subsidiary. Then, they hired, bought, or stole just about every accountant in the San Francisco Bay area to reconcile and clean up the mess.
Fugly.
Is BofA buying technology that they need or technology that their competitors might need to comply with FAS 114? Is this also strategy technology purchase?
Thanks for the concern, but they didn't take the offer (thankfully). I guess it was my parents that taught me "if it sounds too good to be true, it probably is!"
Just with the pressure sales tactics and the "too good" aspects was enough for dad to decline. More then anything, I found the timing suspect, but maybe that was just happenstance!?
the problems with the proposed deal and my interpretation-
per the conference call, too much reliance on reported book value which is a pipe dream.
Lewis's inability to report the proposed "structure" of the deal and whether CFC debt would become a direct obligation of bac, this speaks volumes and if due dilgence was as good as Lewis said it was, this should have been decided.
Countrywide to retain its name, ok, separate operating entity for legal purposes? If it does BK, bac picks apart the carcus.
The MAC will provide much more information as will the proposed structure, whether this deal gets done is a crap shoot. If it does the result may be the same.
Watch the common. Without this deal the bond market was telling you this was a distressed situation with likely bankruptcy, my belief is that bac wished to make sure that in a workout scenario, they had first shot at the remains.
At this point, I think CFC is purely an arbitrage play. You could speculate on the deal collapsing with some LEAPS, though (far out puts), but these should be considered lottery tickets (money you can afford to lose.)
One aspect of the deal I haven't heard much talk here about is Countrywide's CD rates. As of this week they were offering 5.45% APY. If this continues I am way tempted to put some money in a Countrywide CD, as Bank of America will surely end that little sweety.
As long as you are under the FDIC limit and have no moral qualms about lending your cash to an ethically questionable company, of course ...
"Lenders typically change hands for at least one times book and seven times estimated future earnings."
I don't think a thrift has traded hands at one times book value or seven times earnings since the early nineties. If one did sell at that kind of price, it's balance sheet would have carried a lot of bad debt.
Healthy thrifts are more likely to sell at two or three or even four times book value.
From CR's post:
"Even without the actual details of Countrywide's mortgage portfolio, a $8 billion write down might be optimistic. According to another WSJ article:
...Countrywide has $32 billion in second-lien, home-equity loans. Of these, 44% have a loan-to-value ratio over 90%.
This suggests there are about $28 billion in option ARMs in the portfolio. "
Where does the figure $28 billion come from? Naively I thought it should be 80-32=48 billion.
I agree with those of you who think that BOA will either live to regret the plan to buy CFC or that the deal will not go through (or both)
Slightly OT. The local paper for Fort Wayne, IN says that home starts were off 25% for 2007 and 75% YOY for December 2007. This might suggest that next week's new home starts for December will be WAY LOWER than expected. Of course, it's possible that builders are more optimistic in other regions (?)
I think your tin foil hat isn't on tight enough. I've seen this done in other industries. Bad news or merger news hits the press. The competition starts calling up the customers of the company in the press (Countrywide) and either posing as CW offering a better offer or some other lie.
Long distance companies do it. Mortgage companies do it.
I'd bet that wasn't countrywide on the phone. If you've ever worked in a company going through something like CW is going through now you probably would know the only thing going on their is people polishing resumes and looking on Hotjobs all day.
Okay - I'm no where near the level of some of the commentators here as far as being able to pull apart a financial statement. I have some questions and observations about CFC that most likely are obvious to those more informed than I - so please go easy on me - I'm still working on my first cup of coffee this morning...
Anyway - of the $3.2 billion in REO property that CFC holds - what "value" is there in that for BAC?? If you mark it down 20 to 25% you still have $2.5 billion in assets right?? At what point does this REO property become a liability from the standpoint of taxes, insurance, upkeep, etc. - in other words how long does a REO have to sit on the books before it gets to the point of "Just sell the farkin thing - I don't care just get it off the books?"
Now for the observation part - WARNING the following is a link to a PDF found on CFC's website from a press release on 1/9/08
A few things jumped out at me:
1- Look at the number of automated property valuations (page 2) performed in October. It looks like they normally spike up in the month preceding the calendar quarter (Feb, May, Aug). Starting in Aug they appear to have seen something they didn't like - Sept has 25% more automated property valuations performed. Then in Oct it looks like all hell broke loose as they finally try to get a handle on what they were likely to recover in the event of jingle mail...
2 - Look at the steady ramp up in headcount in the servicing area - is this a case of too little to late?
3- Same comment for the banking area - is this them filling storefronts with signs for 5.4% cd rates and plopping someone behind a desk in an effort to raise deposits? I'd love to see that cost benefit analysis on that...
4- Starting in Oct delinquencies as a percent of unpaid balance became larger than delinquencies as a percent of loans serviced. Is this an indication of defaults as a result of ARM adjustments or something else??
Back to the coffee...Thanks everyone keep the commentary coming.
"What are LEAPS?
REBear | 01.13.08 - 9:12 am | # "
REBear LEAPs are just long dated options - currently with expirations in Jan 2009 and Jan 2010. When equity options are first listed for trading they normally have just 4 expirations available for trading - the 2 front months and 2 back months with the longest going out no more than 9 months. LEAPS as stated can go out 2 1/2 years...
Just a long dated option and its my own personal bias but I'd never want to be a seller of one...buyer yes but seller "no thanks". Just look at the theta on a LEAP vs a 1 month option for why I'd rather buy em than sell em...
Can BAC buy CFC and then immediately spin off the crap?
Altria is thinking about spinning off Kraft... AmEx spun off Ameriprize Financial...
could BAC buy CFC and then literally the same month spin off the unprofitable parts.... essentially picking CFC's carcas clean and getting all the remaining meat?
Are there rules against this sort of thing? or does BAC keep liability even for a spun off CFC?
I believe Ken Lewis sees Countrywide's $400 billion in loan origination and $1.5 trillion loan servicing book (9 million customers) as the jewel in the crown. Throw in Countrywide's reportedly best in class computer/servicing systems. He sees those 9 million mortgage payers as credit card, home equity, insurance and other services customers. Offer them 25 basis points off their mortgages if they open up savings, checking and credit card accounts with Bank of America, and I'll bet a lot of them would bite.
Normally, servicing portfolios are valued at somewhere around 1.5% of the total. Because of the problems Countrywide will be having (legally, elevated foreclosures), that value is probably closer to 1% (Lou Barnes). That would put the value of the servicing portfolio at $15 billion by itself. Throw in the loan origination and the bank, and normally you would have something worth in the neighborhood of $25 billion. But of course, we know it isn't.
The downside, of course, is the $209 billion asset base. What is that really worth? According to yesterday's Wall Street Journal, they sent a team of 40 analysts to California in early December to pore over Countrywide's books. Apparently, they believe that the potential losses are manageable.
My problem with that -- are these the same people who did the analysis for the $2 billion investment in Countrywide last September? Time and again, we have seen the smartest guys in the room -- Merrill, Bear Stearns, Citigroup and yes, Bank of America-- severely underestimate the losses lurking in their portfolios. If I were at a Bank of America shareholder (I'm not), I would want a lot of details on exactly how they are valuing the asset base they are purchasing from Countrywide. However, I doubt they will be forthcoming.
amazingly, Countrywide hasn't even put a press release of the deal on their website!
a href="http://about.countrywide.com/relation/relation.aspx">http://about.countrywide.com/relation/relation.aspx
as a shareholder (albeit I bought at an average of $5.50) I'd really want to know the reason that CFC is selling itself at a fraction of book value to someone they know has been interested at MUCH highers prices within the last year. Of course, I know the reason for this, but I'd just like to hear CFC say it.
It is safe to say that BAC paid $4 bln too much in what clearly is a bailout from behind the scenes by the Feds. It may very well be that BAC will reap nice benefits for playing the game, but not because of anything good in CFC portfolio. Shareholder equity would have been completely wiped out in a ch11, yet BAC comes along and pays $4 bln.
If JPM steps up to the plate and picks up Washington Mutual, at a so called bargain when there's still a few years to go before housing hits bottom, then we'll know with complete certainty that these transaction actions are merely masked bailouts done at the behest of the government.
--
I am sure that most here have seen the headline:
Countrywide's Mozilo May Reap $83 Million in Takeover
And did anyone listen to the comments that Mozilo made in 2003 at Harvard Housing Studies, reported by Charlie Gasparino on CNBC? This born-and-bred American Crook laid down the groundwork for keeping poor blacks, Hispanics, single women, etc. forever poor by burdening them with huge debt by peddling dreams. Debt Pushers are evildoers. Is that hard to understand?
Back to the announced buyout One Crook is marrying another Crook. It is like some marriages in monarchies to combine the domains of two. Mozilo should be nailed to the cross and left for full public display.
Americans are bred to be total dopes and morally bankrupt (War On Iraq is a minor case) so as not to see the criminality of the banking and financial Crooks, or corporate crooks in general. Because these Crooks control the lawmakers, the President, the Fed (no one unacceptable to the Crooks can get appointed to the Fed), etc., they truly are above the laws because whatever they wish to do is made legal, or not specifically forbidden.
Jesus preached against the legalism of Jews of his time and not much has changed since. We are in much worse shape in terms of slavery to legalism than was the case in Judea at the time of Jesus. Populations are always doped by one group or another, mostly the group in power. We know full well who Americans are doped by. Legalism is a morally bankrupt philosophy.
Never a dull moment in the unfolding saga of Americas banking and finance Crooks. Americans love crime and gangster stories, real as well as imaginary.
These 2 deserve each other and I wouldn't touch them with a ten foot pole regardless of possible potential.
The one thing I am sure about is that these 2 crooks will look for every way to pass this onto J6P via the government. Problem is that the governement is BROKE! Print away I guess?
I can just see the Tan Man leaning over to Lewis and saying "Bail us out, or I take you down with us!"
I still feel you have to look at who is going to have the dominant currency. Is it really going to be Gold and Silver. I mean silver has some usefulness but gold is just a shiny rock? It's so Stone Age(no pun intended).
To find out why such a generous price was paid for Countrywide just go back a few years and see how often and how much Mozilo was in D.C. greasing all of the politicians and banks. He knew this day was coming and he knew if he didnt cover his behind he was in some serious legal trouble. He is going to walk away with shy of a Billion dollars and leave nothing but heartache and destruction behind. He never cared about any of employees that built that company for him. The only true justice that could come out of all this is if the legal system does what is right and investigates Mozilo and his dirty book keeping.
BofA may know something about the approaching federalization of mortgages, therefore it may make sense that they try to get as much of the pie, even bad pie, before the feds step in and leverage the mortgage market.
Considering Citi is writing off another $24 billion, its hard to believe that $4 billion is THAT bad of a deal, but I agree that CFC was probably 3 months from declaring BK, so maybe it is.
Troy: thanks for the charts. Informative - and daunting.
An astonishing thing about Countrywide is that you can actually make money borrowing from them and buying their CDs, if you have a couple filing separately in distinctly different tax brackets! Say pay 5.85% in a 33% bracket and make 5.4% in a 15% bracket = +0.67% differential in net rates!
Just FYI the rates on 3 and 6 month CDs at Countrywide are now 5.25%. I was about to put some money there and checked before and after the deal was announced. Oops, I missed out on 0.2%! Guess the liquidity crunch has been lessened.
NSA...Woah! Now this is thinking outside the beltway. Very impressive.
Only Jim Sinclair has suggested another which is the CDS links between BofA and CW are so many and so large that if the chain were broken by CW's default, BofA would be stuck with incredible losses because CW would become a non-performing counterparty.
Your idea and Jim's each jolted my unimaginative brain cells.
Jim's idea is small compared to yours.
Yet Jim's idea is a lynchpin to the stability of the entire RE finance and thus credit finance universe.
Comments??
BofA may know something about the approaching federalization of mortgages, therefore it may make sense that they try to get as much of the pie, even bad pie, before the feds step in and leverage the mortgage market.
About the only positive thing I can say about ABK is, at least it's not as bad as MBI, which is not as bad as SCA.
Buffett-pumps are the last refuge. If he takes anything in this space, it's going to be AGO. If I were in ABK or MBI, I'd hit the bid you got on Friday and bail on that sucker.
Long one of the monolines seems to me a bet that it'll be nationalized. I expect there's a pre-packaged BK all ready for these.
Biflation is the state of an economy where the processes of inflation and deflation occur simultaneously. During this period there is a rise in the purchasing prices of commodity items and a fall in the purchasing prices of non-commodity items.
The purchasing price of an item is based on the demand for it and the amount of money in circulation to pay for it.
Biflation is preceded by an overabundance of money placed in circulation within the population by a central bank
Speaking of bets, here's one I was thinking of: Buy far out-of-the-money puts on CFC's shares (well, as far as you can get at a $6 share price)and go long their preferred shares. The preferreds are paying 9-10% and selling at like $18. If the deal goes through, they'll go up to ca. $23. If it doesn't, you stand just behind bond holders, meaning you probably get zip...
Everyone seems to assume that CFC will be absorbed into BAC. If so, then yes, BAC will be on the hook for all those liabilities.
But the news says that BAC is buying the stock. CFC will be the sole shareholder of BAC, and if BAC goes bankrupt, BAC, as the majority shareholder, loses its investment (i.e. $2bn + $4bn).
As I see it, it's just a relatively small bet for BAC (and the Material Adverse Change clause essentially turns it into a call option... I don't think the deal is going to happen).
Mozilo understands the true nature of the American system and the blind faith in the system that Americans are BRED with from birth onwards with the Propaganda Machine.
Mozilo was and is simply taking advantage of the American system and the suckers that have to pay for it -- honest and hardworking Americans whose % will keep on shrinking. That is why we need immigrants!
fwiw, regarding option arm losses, the most recent estimates i've seen (which assume 30% HPD) are for 5% cum losses on 2007 vintage OAs. 2007 is the worst vintage, and i would assume countrywide's portfolio is mostly 05 to 07. a blended cum loss rate on those vintages is closer to 4% with 30% HPD.
BofA bought Continental Illinois way back in 1991 after CI was nationalized by the govt. It made BofA what BofA is today in many respects.
Perhaps this is payback?
I've long thought that there are a lot of back room handshakes and winks/nods in the Financial industry (for example, think of LTCM pseudobailout engineered by the Fed but done privately).
I'm thinking that the Fed and Treasury went to BofA and said "we've never let you down before. You take one for the team... we'll make sure you do ok so don't worry about it"
So BofA takes over Countrywide. It will clearly be too big to fail.
Wouldn't a short on CFC be a pretty good bet at this point?
Hedge funds that want to bet on a further deterioration in mortgage portfolios will play this short CFC and long BAC.
This strategy has a fixed loss if the deal is consumated and a pretty decent upside if the deal falls through.
Most likely, this was the reason for the sell-off in CFC and rise in BAC after the deal was announced. Not, as the bubble-heads like to believe, a sign that the market approved of the deal.
I also think that is why they did the buyout at .18 per share and not a fixed price per share?
Anyone wanting to get cute about this could put on a short of CFC, hedging the position with a long position in BAC. The thesis here is that while the acquisition is still in play, BAC and CFC will move synchronously up or down.
However, if the deal falls through (and I think it will eventually), then your CFC short decouples from BAC and falls like a rock dropped from a high altitude on Jupiter.
I'm not doing this myself, just thinking out loud about the possibilities.
We really need the S4 filing. When does THAT come out ? We need that to understand the structure of the deal - whether they are taking on CFCs loans on the books or not, what terms in addition to the material adverse change are part of the deal. As reported on CNBC, it was curious that questions on these aspects were not answered in the press conference and the presentation at BAC's site doesn't address this either.
But, trading goes on regardless so I went short BAC - they are known as cost cutters in their M&A activities not managing distressed debt, they STILL have 2 other recent acquisitions that they are trying to absorb, they are known as serial acquirers and overpayers AND they have the MBNA credit card operation.
If the belief is that this deal will break then of course shorting CFC is right.
Nobody mentions the usual merger arbitrage trade in this case do they - long the acquisition, short the acquirer. That's interesting.
But you are just assuming that "prime home equity" = "junior mortgage". It could include a lot of other things. One can get an equity line of credit for a first position mortgage (I have a couple of these). This number could include Reverse Mortgages. This number could inculde no doc loans that were made based soley upon equity/LTV. Or the number include something I can't even imagine. You don't know. I don't know. But it is my opinion that a portfolio ratio of 40% by dollar of junior liens does not make any sense when the "$" porportion of junior liens to 1st postion liens nationally is much less than 10%.
Considering that I think Ambac is almost certainly going BK, ballsy doesn't begin to describe it.
The line between ballsy and foolish is broad. If this person is risking his life savings on this gamble, as he says, rather than a speculative portion of his portfolio, then this clearly marks it as foolish in the extreme.
Nice analysis, CR, of the potential downside for B of A.
I'm with tj, that the bottom is Marianas Trench depth.
Please, Saudis and Chinese, buy ALL of Citi, ML, B of A, Bear, JPM, and GS. Nothing would warm my heart more than seeing patriarchical dictators and communists lose everything that they invest in these to-be-bankrupt entities.
"Anyone wanting to get cute about this could put on a short of CFC, hedging the position with a long position in BAC. The thesis here is that while the acquisition is still in play, BAC and CFC will move synchronously up or down."
I don't follow you. If the deal falls through, you would do OK, especially if there's a relief rally in BAC. But let's say the deal goes through, you get burned on your CFC short and then BAC tanks further as it becomes obvious it was a shitty deal and their business deteriorates...
The thing with the preferred shares is that they move like bonds, they don't follow common shares. My trade is strictly an arbitrage play, it's exploiting an inefficiency in the market.
Stupid question by a newbie (who locked in a lot of money at high rate CDs at CFC):
Where do depositors stand in the heiarchy of who gets paid back if a bank goes BK? I know the bondholders get paid before the equity share holders.... Do the depositors get first dibs ahead of the bond holders? Or are the depositors at the mercy of the FDIC?
We really need the S4 filing. When does THAT come out ? We need that to understand the structure of the deal - whether they are taking on CFCs loans on the books or not, what terms in addition to the material adverse change are part of the deal.
I agree that these issues are crucial. A number of recent cases have made clear that the phrase "material adverse change" is too ambiguous (although maybe ambiguity is what somebody wants here). I would think one side or the other would be well-motivated to want something more precise included in the offering.
Do the parties who are already suing countrywide have legal standing to challenge this deal?
BAC protects its portfolio by stopping CFC collapse and liquidation as follows: Look back at 1994 and NAVs muni-bond funds. When OC treasury went messy, market for munis became illiquid, thus causing major losses for many muni bonds, not only OC's bonds. Munis funds suffered 20% declines. The same way game goes here -- imagine someone tries to unload $20 billion in mortgages. Look at E-Trade bail-out recently. They got $.17 bid on their $3 billion portfolio (if I recall with large % of 2nd lien loans). Do you think CFC underwriting was that much better that E-Trade's?
It works like a domino effect - if CFC's bonds fetch $.30 on $1, a whole bunch of banks will have their similar MBS downgraded by Fitchs of the world, subsequently forcing writedowns that would put banks below capital requirements. Thus, more capital would need to be raised, at higher interest rates and more equity dilution.
Ken is like a neighbor buying pre-foreclosure from his drunkard buddy, he is trying to save neighborhood values. He hopes soon big rate cuts will slow the slide and give him time and needed margin to make money, to take inevitable charge-offs against.
BAC protects its portfolio by stopping CFC collapse and liquidation as follows:...
2kt
Can you complete that sentence with some concrete data ? I looked at the latest BAC 10-Q for over 2 hours. They don't write CDS' so I don't see how they are on the hook for a CFC default. They purchase CDS protection sure - but from CFC ? a search of CFCs 10Q shows no match for the acronym CDS.
The risk from swimming with the same reptiles applies to everybody in the financial market - anyway its already caused a 25% drop in the stock price - Not enough ?
I'm short BAC because the (short-term) logic of the merger escapes me - these conspiracy theories for the buyout are always plausible - all financial companies are snakes for sure but I see no evidence. - and in the long run.. well that's for another day far into the future.
BAC is not on the hook for CFC defaults. IF CFC portfolio and MBS that have their mortgages are sold in masse, other similar securities and portfolios (especially those stuffed with loans from CA) will be downgraded thus forcing banks to take further massive writedowns.
Wow, the default rates mentioned in the article (25 %) for second lien heloc correlates to the default rate on auto loans for people with a fico score of 520-539. And many posts above thought that the estimate was low. One post even suggested that people would completely stop buying homes. I have never before seen such negative sentiment
here is another not widely known aspect of the Option ARM mortgages. Current accounting rules allow for lenders to count as income the accrued interest, even if the borrower hasnt sent it in. As the borrower makes the minimum payment, the loan (an asset for banks) increases and the interest that is added on is counted as income. There was a great article in BusinessWeek Sept 2006 about this.
As the Option ARM loans go bad, not only will the asset go bad, but the 'income' to the lender will be decimated. I'm no accountant but this struck me as quite odd that one can book the interest income prior to receiving it.
Don't see how anyone can even guess about this deal until the exact conditions become known. Any idea when that will be?
Billy Hill, we will have a good idea in about 2 to 3 years.
Best Wishes.
Maybe I didn't make myself clear. I meant the exact terms of the merger agreement. Doesn't there have to be some publically available filing? Do BofA shareholders get to vote on this?
Of course, there are rumors that there is some covert payment for this deal from various federal agencies. If I were BofA, I might worry about the enforcability of such a deal under the next president.
Since 75% of the holders of the first lien Pay Option Arm only make the minimum monthly payment, I think your 15% default rate for this loan is conservative (as I am sure you intended). I think you and Shiller are right that most underestimate the trouble in housing. Certainly the brief history of this bubble has proven even the most bearish haven't been too bearish.
it is possible to imagine scenarios with losses of more than $10 billion
Another classic CR understatement.
"As of Sept. 30, Countrywide's savings bank held about $79.5 billion of loans as investments. Three-quarters of these loans were second-lien home-equity loans ... or option adjustable-rate mortgages..."
This part stuck out when I read the original article. People keep wondering will house prices fall 10% or 20%...doesn't really matter. What matters is the geographic distribution of CFCs loan book. My bet is a huge amount of it is in CA, which means the risk is much higher than you would think on a weighted national level.
There is really no way to know how this works out for now, but if home prices are falling for another year, then weve got a giant amount of option arm junk loans in CA turning over to interest an principal when home prices there are down a good chunk already. Only an insane person would decide to start paying the principal on a mortgage tied to an asset already far underwater and sinking deeper. But that's a matter of if they can. Chances are they cant.
This will turn out to be one of the stupidest and most expensive purchases ever.
Should the gamble be 6B mortgage loss rather than 8B since BAC already paid 2B for the convertible preferred two or three months ago? I think the other part of the calculas is the service right. How much do CFC carry in the book and how much they are actually worth? I know CFC pay a lot of money to get those service right that they own...
The deal isn't supposed to close until Q308. I expect the number of defaults between now and then will sour the deal.
I think BAC is hoping this third quater closing period will be enough to shake things out. Hope and denial!
I also think that is why they did te buyout at .18 per share and not a fixed price per share?
On the bright side BofA will be picking up some hard assets: Countrywide Foreclosures (REO) Blog
AZ_Cowboy - I am with you 90% (unlike enConomists who say 50/50 which means I am not taking a position) chance this deal does not get done and CW goes BK.
Compare this to Brians Etrade analysis and see how bad this deal is!
c&c,
Saw your comment on the Lansner blog. Interesting comments Buzz made about boomers, no?
"roughly 2.9 times forecast 2009 earnings,"
Assuming it would have existed in 2009.
CR,
Is there data on CFC's geographic exposure? If not, maybe the distribution of their REO could be instructive...
LMAO!!
Another perma-bull talking his book. I hope he, Gary Watts and all other hacks Jon had on their read the comments. They were especially cruel to Gary "its in the bag" Watts.
The most important questions people need to ask are these:
First, Has the Fed finally caught up with reality? Beginning with the August FOMC statement, the Fed made it plain that it was tuned in to old style economics (eg., the Phillips curve) and had no understanding of the importance of recent innovations in finance (eg., SIVs, CDOs, SPVs,...).
Second, what damage will the Federal govnt. do if/when it enacts a fiscal stimulus package? Hillary Clinton's policy proposal was purely political and I assume all others will be, as well.
In my opinion, the Fed is run by economists who have worked for the govnt. all their lives, and who look at the world in terms of potential output, the productivity trend, and the Phillips curve. They don't have a clue as to how the mortgage meltdown will play out. I bet they wish it would just go away so they could get back to focusing in the productivity trend. I also think that any policy the Congress passes will be harmful.
I was not this cynical a few months ago, but looking at the reaction of the Fed, the Congress, and the presidential candidates to the meltdown in the housing sector has stripped away any hope that I had.
Billy Hill, sorry - most of the details have been released (about $4 billion in BofA stock, to close in Q3). According to the BofA CEO there was no agreement with regulators:
Historically, federal regulators have played an active role directing a struggling financial institution towards a takeover, particularly because of the liability to the federal deposit insurance fund. Countrywide operates a thrift whose deposits are insured by the Federal Deposit Insurance Corp.
The Office of Thrift Supervision, a division of the U.S. Treasury Department, began regulating Countrywide in March, after the company converted to a federal thrift from a national bank. The OTS set up a full-time presence at Countrywide's headquarters in August. However, people familiar with regulators' thinking said they didn't actively encourage the BofA deal.
"There was no encouragement in all this," Mr. Lewis said. "It doesn't mean they're not happy we did it, but there was no pressure at all and no prior discussions."
The big thing to watch is the MAC (material adverse conditions). If the losses start to pile up, and BofA has a good MAC, then this might fall apart.
Best Wishes.
If this deal doesn't include reset/escape provisions, BAC deserves to get fried. Better BAC shareholders than taxpayers...
c&c,
No doubt, but the "boomers are done moving" thing was a rather bearish statement.
The boomer comment - very interesting. Yet, he quickly dismisses it and then tells us that it does not matter...by saying prices will be going up.
Yep, typical REIC cognitive dissonance.
I have to admit he is the first one to use that line with some numbers. I think that is one area that will get killed. I have a lot of family in orange county and up until a year ago they all told me I was nuts.
The problem is many (of my family) have homes worth $1.0 million plus with no debt. So for them if they drop 50% they are still ok, now their neighborhoods will go to shit will all the newcomers who paid $1.0 million on 100% financing...
Let me start by saying I may not know what I am talking about, but I think that the thing you haven't included in your analysis is the Tax benefits to BAC.
If CFC does loose $10B after it is acquired by BAC, can't they use that to offset their tax liability. I read somewhere that they may be able to deduct losses of around $250M per year for 5 years, then any remainder can be used in the 6th+ years. So if they Do loose +10B, it is still may be a bargain.
Didnt E-trade basically say their HELOC's were worthless? What happens to this deal if that turns out to the be the case?
Found what I was referring to:
"So over the first five years, Bank of America can use a total of $1.35 billion of Countrywide's losses to shelter its income. (That's five years of $270 million annual losses.) If Countrywide's embedded losses when Bank of America buys it exceed $1.35 billion, Willens says, the bank will be able to deduct the rest of the losses, without limit, starting in the sixth year."
Taxpayers to help foot BofA's $4.1 billion Countrywide bill - Jan. 11, 2008
How much are Countrywide's mortgages actually worth? If B of A gets 30 cents on the dollar, then they got a decent deal.
Test
I know you are just doing a back-of-the-envelope calculation but Countrywide likely has some brand value as well. I don't know much about the mortgage business but I suspect it will take several billion to set up something similar to CFC's operations (assuming someone can compete against them).
As someone pointed out above, BAC will also get potential tax shelters.
BAC management forecasts that this deal will be accretive to earnings within a couple of years so it's a good deal for BAC. Assuming losses are manageable, this is close to a steal for BAC IMO.
Countrywide also has 20 BILLION in "mortgage servicing rights". If, as most suspect, the mortgage troubles cut seriously into the profits of servicing, that asset also becomes worth much less - or even possibly worthless.
The mortgage investment portfolio doesn't include 30 billion held for securitization. Good look on that with all the option-ARMS and home equity! So their real mortgage exposure is more like 110 billion.
There is almost nothing CW owns that doesn't look shaky. It's easy to think of plausible scenarios with additional writedowns eventually reaching 20 billion dollars.
For the second lien (specifically the 20's of the 80/20).. didnt HSBC write off their whole portfolio (at the time the biggest write off yet of something like 10 billion, they turned out to be ahead of the curve) of second lien mortgages at the end of last year?
"this is close to a steal for BAC"
I am sure they thought the same when they invested $2billion @ $18 a share? Where was the due diligance then?
Are you long or short ABK?
How much are Countrywide's mortgages actually worth? If B of A gets 30 cents on the dollar, then they got a decent deal
OMG no! BoA would lose 77 billion dollars with that! That's more that half their equity.
Also, you have CFC and BZH on your watch list? As longs??
Wouldnt BofA in reality be paying 16% less than the 4.1 billion of the purchase price due to their partial ownership?
And then there is the approximately 1 year of payments they should be receiving at 7.25% on their 2 billion.
In the end it will be interesting what the shareholders really get. I think if they actuall get .182 shares it will be a miracle.
Wouldn't a short on CFC be a pretty good bet at this point? There seems to be 2 possible scenarios:
1) Deal goes through as currently stated. CFC goes from 6.33 to 7.12 times whatever appreciation BAC stock has (which probably isn't much).
2) Deal fails to materialize due to deteriorating conditions causing BAC to balk. CFC promptly becomes a penny stock.
Seems CFC shorting would have plenty of upside and little downside.
Assuming losses are manageable, this is close to a steal for BAC IMO.
I'm glad your not the only one thinking it's a little to cheap to aquire CFC....
Let the bidding war begin, especially if the sentiment is that BOFA is stealing it
SM - Willen's analysis assumes BofA will have earnings to shelter.
So there's going to be blood in the street. Apparently it's not gonna be Countrywide's blood, as it's too big to fail. So's BofA. And Citi. And, likely, Mother Merryl. And the rest of'em big ole banks. Who's left? There's New Century and the like but that's, like, so last year.
Logistical Question about the comments section:
When did we lose the information about how many are "logged on"? And also, the info at the bottom of the CR post showing "number of comments so far" has become totally worthless.
SM: "Don't worry ma'am, I've got you"
LL: "You've got me . . .Who, who's got you?"
Shiller and by association CR are looking at the numbers. I don't think that's enough. FUD, fear uncertainty and doubt are about to dominate the retail housing market. Few are willing to buy primary residence housing in this new situation. We are likely a long way from fear but uncertainty? Until REOs stop accumulating near every aspect of a potential home purchase is uncertain. And how many here are ready to trust California isn't going to raise uncertainty over property taxes? Nationally there are three levels of uncertainty. Will laws be tightened concerning jingle mail and/or recourse? Will FB bailouts be put on the backs of whoever is left standing? Will the HMID survive for the middle class?
Summary, the housing bubble was a consequence of a misperception that real estate was a sure thing (absolute certainty). For some strange reason no one seems to think the two conditions are one in the same with opposite signs.
Weather - The time to short CFC was early last year. Not much meat left on that bone. And the govt has an interest in seeing this deal get done.
Now gold miners on the other hand....
I side with Shiller. Nearly everybody continues to underestimate the scale of the housing debacle YET TO COME.
AZ_Cowboy - "Now gold miners on the other hand...."
Gold miners as long, or short? Any other short ideas?
Estimates of Countrywide's coming write-offs do not factor in the accelerating loss of jobs in RE, CRE, Financial, Retail and Restaurant industries. There is a vicious negative feedback loop (job losses, foreclosures, declining business earnings, job losses, ...) about to play out, and CFC's losses will be much worse than now assumed.
Weather - I wouldn't act on investing advice off a blog. That said, there's a couple big gold miners with incredible P/E's. The put prices are a little high, but there's lots of downside if gold craters. There's always SMN for an easy commodity short for the buy and holders.
There may be other significant losses in store for BoA beyond the Countrywide owned mortgages: write-downs of capitalized mortgage servicing rights as the serviced portfolios go to hell, large litigation liabilities, and loan put-backs, to name a few items...
AZ,
IMO gold will likely suffer a major correction when the market really crashes, but (again, IMO) it'll recover quickly and soar thereafter. A nimble trader could use some well-timed puts, but direct shorting could be extremely treacherous.
Excellent point, Steve.
BAC could well be in trouble all on it's own; adding CFC could be like mixing drugs & alcohol. Just the difficulties involved in merging have been enough to seriously damage strong companies.
Crispy & Cole,
I'm just a newbie so that makes me a long-only investor. I'm long ABK... and looking at the housing-related industries. Whoever that picks the right stocks will likely make a bundle.
The thing that you bears don't realize is that the market prices in the downside long before a bottom. My guess is that the residental real estate market hits a bottom in 2009. So a lot of the negativity should be priced in by middle to late this year.
As far as Countrywide is concerned, I think BAC is getting a good deal. I'm not saying it's the steal of the decade but it looks like a good deal in my opinion. You imply that BAC's original investment was bad but is that so? Practically no one can predict the short-term move. If BAC thought that the original deal was bad they wouldn't be trying to buy Countrywide now. They see something good in CFC.
TJ - Agreed. Anyone going short the miners must have cajones of steel.
Speaking of CFC's book value - they do have $105 billion in notes payable, $54 billion in current liabilities and $30 billion in loans held for sale and not much in a way of cash flow to service it all
CFCs book value is declining daily and thus is meaningless. This deal is all about BAC trying to protect its own book since 34% of their $271 billion residential mortgage portfolio is in California (anyone interested in hiring BAC's risk management team?). Add to that $100 billion in equity lines. Their $5 billion write-down is what they call a good start.
If CFC goes under, its portfolio is to be liquidated and nobody can afford that. BAC more so than anybody else. In this case $4 billion is nothing compare to what's at risk.
The way I'm trying to make sense of this announcement, BofA basically bought a call option on CFC for the price of all the due diligence, legal, and other costs linked to getting a proposed deal this far along.
Should the next few months validate the widely held view that the mortgage mess was a large but one-off event that occurred in 2007 (subprime, contained, pig moving through the python, etc.) that will clear the financial markets in Q4 2007 & Q1 2008, then they exercise that option (do the deal) at about 1/3 of the cost they were willing to pay earlier this year. And they are willing to consider that many billions of added writedowns are acceptable for the "jewel" they will add to their business.
When conditions actually deteriorate dramatically, they likely can get out of the deal based on adverse developments that will be evident and accepted by all parties (we'll see).
Meanwhile, they can continue to sniff out the hen house and be ready to pick up the pieces that may fall out in the latter case (including a deal post a CFC BK that gets them what they want for next to nothing (equity owners wiped out), since they "know the situation so much better than anybody else"). In the meantime, they induce a degree of stability at CFC and forestall a collapse that seemed very likely a week ago, perhaps preserving something of the "CFC franchise" in the process.
The thing that you bears don't realize is that the market prices in the downside long before a bottom.
The thing that you don't realize is that the market's expectation of the bottom is the deep end of the pool, whereas the true bottom is more like the Marianas Trench.
they induce a degree of stability at CFC
Tell that to 50,000 CFC employees wondering about "cost efficiencies" to be realized in the takeover.
I'm no CR, but here's my attempt at graphing the borrowing data in the most recent Federal Flow of Funds report
In my Short investing career. 8 Years with two being in high school I have noticed that things that do well in the first 2-3 weeks of the year do not do well for the next 2-3 months of the year. I was short financials but they went don't so fast I though they may need to correct themselves before they sell off again. The CFC news provides the perfect turnaround excuse. Also I would be careful going long gold at this point. The carts seem to be screaming for a correction
Certainly the brief history of this bubble has proven even the most bearish haven't been too bearish.
Average Joe
This is true
Hey, maybe now BofA can collect on that $50,000 unsecured promissory note that Casey signed to make Countrywide stop bothering him.
"This deal is all about BAC trying to protect its own book since 34% of their $271 billion residential mortgage portfolio is in California."
What about Wells Fargo. Don't they have a higher concentration in CA? I think most of the mortgages are in concentrated in CA,NV,FL anyways. Do you think other banks will come in with more help?
In for a penny, in for a pound?
TJ & the Bear: "The thing that you don't realize is that the market's expectation of the bottom is the deep end of the pool, whereas the true bottom is more like the Marianas Trench."
Are you sure the market isn't looking further than the deep end of the pool? Life is going to get tougher for the shorts as the months pass...
Given all the negative news all over the place, considerable selling off of certain sectors, and the seemingly low valuations, I think a lot of negativity is being priced in. At least this is true of certain sectors like financials and consumer discretionary. This doesn't mean that they can't drop further but it does mean that some sectors are getting cheaper and cheaper. The key for the longs is to navigate the field without getting blown up by the failed ones...
Things not looking good for Orange County developers who tried to gobble up Bakersfield with the help of Greg Norman:
Bakersfield Bubble
Sivaram-
Stick around for a while and we will see if you are right...
Crispy & Cole,
Ditto that. I'm putting a big chunk of my life savings (I don't have much money though) into Ambac so I have staked out my life--literally. This thing is going to get resolved one way or another.
Pretty ballsy. Not sure if I agree, ok I don't, but pretty ballsy.
I don't believe that Countrywide holds $32 Billion in 2nd loans (that would be 40% of their $80 Billion portfolio). I don't care what the other WSJ article says, it was probably a misquote or a misinterpretation by the article writer. My estimate would be that on a dollar basis Countrywide's portfolio is only 10% junior mortgages.
JD - which 10K or Q are you using for that estimate?
Considering that I think Ambac is almost certainly going BK, ballsy doesn't begin to describe it.
SM - Willen's analysis assumes BofA will have earnings to shelter.
AZ_Cowboy | 01.13.08 - 1:24 am | #
Just thinking about GM writing off that $38B tax carry, heh?
Speaking of bargains and cars, how is that Chrysler bargain looking?
SV, as far as stocks getting cheaper, not sure what valuations you're looking at but remember that the E in PE is declining also. What appears to be a low valuation may look expensive as earnings dive.
AZ I would never base an investment decision off a blog. I do try to at least inform my own decision making with what smart investors are thinking. It's more for context than anything.
That said, my view on shorting CFC is purely hypothetical. I wouldn't do a raw short, and currently I can't buy puts anyway.
I do however have long positions in miners and occasionally think about exiting them. And even if I did, I would choose to avoid them rather than short them.
That said, I'm still short RE, retail, and financials via Ultrashorts. These have been performing very well for me. I have a few months to go before I can sell them as LTCG. I'm wondering whether I should hold on for tax purposes, or quit being piggly and just count my blessings.
I'm long WDC, which to me looks like a screaming buy.
Wow. Long ABK with your life savings is something to behold. I'm trying to figure out what disappears faster - Ambac earnings or cocaine at a Britney Spears backstage party.
Dumb question for everyone... why is everyone saying B of A paid 4B for CW? Didn't they put 2B down in the form of convertables that, in theory, would have been paid back if another bank bought CW? Adding that to the 4B in stock they're paying should make 6B right?
"I don't believe that Countrywide holds $32 Billion in 2nd loans (that would be 40% of their $80 Billion portfolio). I don't care what the other WSJ article says, it was probably a misquote or a misinterpretation by the article writer. My estimate would be that on a dollar basis Countrywide's portfolio is only 10% junior mortgages."
Man, this is one of the most egotistic comment I read today.. Why not go to the 10Q and read it for yourselves.. It is one thing to not know. It is quite another to say that other is wrong becuase you don't know the fact and don't bother to check it out.
The resource cannot be found.
Loans held for investment include the following:
\t \tSeptember 30,
2007
\t \tDecember 31,
2006
\t
\t \t(in thousands) \t
Mortgage loans: \t \t \t \t \t \t \t
\tBanking Operations: \t \t \t \t \t \t \t
\t \tPrime \t \t$ \t46,980,635 \t \t$ \t51,762,137 \t
\t \tPrime home equity \t \t \t32,431,662 \t \t \t20,036,126 \t
\t \tNonprime \t \t \t46,664 \t \t \t \t
\t \tCommercial real estate \t \t \t385,238 \t \t \t19,413 \t
\t \t \t \t \t
\t \t \t79,844,199 \t \t \t71,817,676 \t
\t \t \t \t \t
\tMortgage Banking: \t \t \t \t \t \t \t
\t \tNonprime \t \t \t1,061,326 \t \t \t115,054 \t
\t \tPrime \t \t \t669,782 \t \t \t252,731 \t
\t \tPrime home equity \t \t \t262,410 \t \t \t57,518 \t
\t \t \t \t \t
\t \t \t1,993,518 \t \t \t425,303 \t
\t \t \t \t \t
\tCapital Marketscommercial real estate \t \t \t20,000 \t \t \t53,000 \t
\t \t \t \t \t
\t \tTotal mortgage loans \t \t \t81,857,717 \t \t \t72,295,979 \t
Defaulted FHA-insured and VA-guaranteed loans repurchased from securities \t \t \t2,141,774 \t \t \t1,761,170 \t
Warehouse lending advances secured by mortgage loans \t \t \t567,743 \t \t \t3,185,248 \t
\t \t \t \t \t
\t \t \t84,567,234 \t \t \t77,242,397 \t
Premium and discounts and deferred loan origination fees and costs, net \t \t \t210,905 \t \t \t1,104,414 \t
Allowance for loan losses \t \t \t(1,219,963 \t) \t \t(261,054 \t)
\t \t \t \t \t
\t \tLoans held for investment, net \t \t$ \t83,558,176 \t \t$ \t78,085,757
""This deal is all about BAC trying to protect its own book since 34% of their $271 billion residential mortgage portfolio is in California.""
Care to explain how does the protection work? Mortgage is not a CDO. Someone else has a lot of mortgage to liquidate has nothing to do with your own portfolio. . So how does buying CFC protect BAC's portfolio of mortgage? If CFC were to go BK, they would have re-organized by selling asset, cramp down debt and exchange ownership for the debt. What exactly is the impact to BAC portfolio?
The key for the longs is to navigate the field without getting blown up by the failed ones
the central issue is going to be that a lot of the P/E is going to be priced out this year now that the HELOC ATM is closing down.
Home mortgages became a TRILLION dollar per year booster rocket powering the economy 2004-2006, but it's return-to-mean pattern time, with the fall scheduled to chase the 1999-2000 plateau of $400B.
A $600B downtrace of mortgage activity is going to be . . . disruptive.
As is the capital destruction of current mortgage assets that people from Calabasas to Narvik are holding.
CFC has 209B of asset and 194B of liability with 15B+ of stockholder equity. So they leverage their business by roughly 14:1. Lossing 8% of their asset (209B) will wipe off all their equity and BAC's investment of 6B will become zero..
What exactly is the impact to BAC portfolio?
BAC can bulldoze the CFC homes. Gets the supply/demand thing looking better for them.
"If CFC goes under, its portfolio is to be liquidated and nobody can afford that"
We need serious help in understand BK laws and company going through BK. May be Tanta or CR can help us. If CFC were to BK and sell their asset, they won't fetch the full value. The court will hold an auction and someone may pay only 20-30 cents to the dollars. The most likely case is the senior bond holder will exchange their debt and become the new CFC owner. Junior debt holder probably don't get anything but a warrent to buy some new CFC stock after the emerge from BK. Same for common holder. That is the cramp down process in the BK court.
I noticed my chart above didn't have 2007 . . . I fixed this by estimating 2007 by duplicating 3Q07 numbers for 4Q07, which of course errs to towards the happy side of these numbers.
Here's the chart.
The obvious question is will mortgage borrowing kiss consumer credit borrowing again, as they did in 1995.
What do you guys make of this...
My parents have their mortgage with Countrywide. They consolidated their original first+second with CW late 2006 (Oct '06-ish if memory serves) into the single mortgage. Their rate is just under 6% and fixed.
So... Saturday morning (as in the day after the BofA purchase was announced) dad gets a call which states something along these lines:
If you are willing to commit TODAY to refinance with Countrywide, we will knock off a half percent from your fixed rate (so down to low/mid 5%).
What the hell are they trying to do here? Again, my 'rents had the original 1st, added a 2nd then "refinanced" both back into a new 1st with CW in late '06. My mom wasn't sure if their loan is non-recourse and basically no details were given on the purposed refi (I'd assume it was also fixed, else dad wouldn't have listened that far). They declined the offer, BTW.
So... any ideas what they are trying to do here?
C
I think much of what you say is correct, or even too conservative. But I've spent much of my life thinking about how well thought out scenarios can go awry. In this instance, I ask you to consider the following: What is the real value of Countrywide to BOA in the absence of any mortgage problems? I submit that 1x book is FAR too cheap. 1x clean book is a steal. 2x book sounds more like a reasonable number.
Therefore, BOA can afford to lose far more than you are assumuing and still make this deal work.
All of which is not to say that your analysis of the potential magnitude of the problems is in any way off kilter. But there theoretically could be smart plays here (to Buy) even as very draconian scenerios play out.
Just a thought.
Is BofA also buying Countryfried's mortgage processing and servicing technology?
The NYT's article on Financial Accounting Standard 114 quoted Countryfried as explicitly saying that their system's could handle FAS 114. The four big banks (including BofA) did not state whether or not they had the systems in place that could handle FAS 114 accounting.
As I recall, couple of decades ago BofA (pre-Tarheel management) implemented a new accounting system in their custody business. It didn't work so well. Eventually, they had to move the accounting records to a legacy system used by their Seafirst subsidiary. Then, they hired, bought, or stole just about every accountant in the San Francisco Bay area to reconcile and clean up the mess.
Fugly.
Is BofA buying technology that they need or technology that their competitors might need to comply with FAS 114? Is this also strategy technology purchase?
Correction:
should read "...strategic technology purchase?"
Cn: all refis nuke the Section 580(b) protections of purchase-money loans.
Rates have fallen a bit over last year . . . eloan shows a 5% rate is available for refis for 3.65 points. The 0.5% rate step is worth about 2 points.
I would think their angle on this is getting people to do a little cash-out action on this churn.
campbeln at 5:50: I don't know the technicalities, but this kind of pressure salesmanship seems unlikely to be a good deal for your parents.
Can somebody more knowledgable suggest an appropriate regulator to contact if it is necessary to get this deal cancelled ASAP?
Apart from anything else, I think CFC is known for inadequate fee disclosure.
the seemingly unasked question... "who's the bagholder in all this ?"
I keep looking around and can't spot him. I think we all know what that means.
Billy Hill:
Thanks for the concern, but they didn't take the offer (thankfully). I guess it was my parents that taught me "if it sounds too good to be true, it probably is!"
Just with the pressure sales tactics and the "too good" aspects was enough for dad to decline. More then anything, I found the timing suspect, but maybe that was just happenstance!?
Tory:
Thanks for the input. Maybe it was simply odd timing for the call (after the sale and all).
I guess I should loosen my tinfoil hat on the weekends =)
So... is this the beginning of massive consolidation in the banking biz, with the goal to become "too big to fail"?
CR-
the problems with the proposed deal and my interpretation-
per the conference call, too much reliance on reported book value which is a pipe dream.
Lewis's inability to report the proposed "structure" of the deal and whether CFC debt would become a direct obligation of bac, this speaks volumes and if due dilgence was as good as Lewis said it was, this should have been decided.
Countrywide to retain its name, ok, separate operating entity for legal purposes? If it does BK, bac picks apart the carcus.
The MAC will provide much more information as will the proposed structure, whether this deal gets done is a crap shoot. If it does the result may be the same.
Watch the common. Without this deal the bond market was telling you this was a distressed situation with likely bankruptcy, my belief is that bac wished to make sure that in a workout scenario, they had first shot at the remains.
CR-
Expired
Re: shorting CFC
At this point, I think CFC is purely an arbitrage play. You could speculate on the deal collapsing with some LEAPS, though (far out puts), but these should be considered lottery tickets (money you can afford to lose.)
One aspect of the deal I haven't heard much talk here about is Countrywide's CD rates. As of this week they were offering 5.45% APY. If this continues I am way tempted to put some money in a Countrywide CD, as Bank of America will surely end that little sweety.
As long as you are under the FDIC limit and have no moral qualms about lending your cash to an ethically questionable company, of course ...
"Lenders typically change hands for at least one times book and seven times estimated future earnings."
I don't think a thrift has traded hands at one times book value or seven times earnings since the early nineties. If one did sell at that kind of price, it's balance sheet would have carried a lot of bad debt.
Healthy thrifts are more likely to sell at two or three or even four times book value.
What are LEAPS?
From CR's post:
"Even without the actual details of Countrywide's mortgage portfolio, a $8 billion write down might be optimistic. According to another WSJ article:
...Countrywide has $32 billion in second-lien, home-equity loans. Of these, 44% have a loan-to-value ratio over 90%.
This suggests there are about $28 billion in option ARMs in the portfolio. "
Where does the figure $28 billion come from? Naively I thought it should be 80-32=48 billion.
I agree with those of you who think that BOA will either live to regret the plan to buy CFC or that the deal will not go through (or both)
Slightly OT. The local paper for Fort Wayne, IN says that home starts were off 25% for 2007 and 75% YOY for December 2007. This might suggest that next week's new home starts for December will be WAY LOWER than expected. Of course, it's possible that builders are more optimistic in other regions (?)
campbeln
I think your tin foil hat isn't on tight enough. I've seen this done in other industries. Bad news or merger news hits the press. The competition starts calling up the customers of the company in the press (Countrywide) and either posing as CW offering a better offer or some other lie.
Long distance companies do it. Mortgage companies do it.
I'd bet that wasn't countrywide on the phone. If you've ever worked in a company going through something like CW is going through now you probably would know the only thing going on their is people polishing resumes and looking on Hotjobs all day.
Okay - I'm no where near the level of some of the commentators here as far as being able to pull apart a financial statement. I have some questions and observations about CFC that most likely are obvious to those more informed than I - so please go easy on me - I'm still working on my first cup of coffee this morning...
Anyway - of the $3.2 billion in REO property that CFC holds - what "value" is there in that for BAC?? If you mark it down 20 to 25% you still have $2.5 billion in assets right?? At what point does this REO property become a liability from the standpoint of taxes, insurance, upkeep, etc. - in other words how long does a REO have to sit on the books before it gets to the point of "Just sell the farkin thing - I don't care just get it off the books?"
Now for the observation part - WARNING the following is a link to a PDF found on CFC's website from a press release on 1/9/08
CFC Rolling 13 Month Stats
A few things jumped out at me:
1- Look at the number of automated property valuations (page 2) performed in October. It looks like they normally spike up in the month preceding the calendar quarter (Feb, May, Aug). Starting in Aug they appear to have seen something they didn't like - Sept has 25% more automated property valuations performed. Then in Oct it looks like all hell broke loose as they finally try to get a handle on what they were likely to recover in the event of jingle mail...
2 - Look at the steady ramp up in headcount in the servicing area - is this a case of too little to late?
3- Same comment for the banking area - is this them filling storefronts with signs for 5.4% cd rates and plopping someone behind a desk in an effort to raise deposits? I'd love to see that cost benefit analysis on that...
4- Starting in Oct delinquencies as a percent of unpaid balance became larger than delinquencies as a percent of loans serviced. Is this an indication of defaults as a result of ARM adjustments or something else??
Back to the coffee...Thanks everyone keep the commentary coming.
What exactly is the impact to BAC portfolio?
BAC can bulldoze the CFC homes. Gets the supply/demand thing looking better for them
Wow. I'm not sure, but if BAC buys CFC and then bulldozes CFC's foreclosures would that not cause massive losses that are now on BAC's books?
or is CFC going to be bought and held separate from BAC?
"What are LEAPS?
REBear | 01.13.08 - 9:12 am | # "
REBear LEAPs are just long dated options - currently with expirations in Jan 2009 and Jan 2010. When equity options are first listed for trading they normally have just 4 expirations available for trading - the 2 front months and 2 back months with the longest going out no more than 9 months. LEAPS as stated can go out 2 1/2 years...
Just a long dated option and its my own personal bias but I'd never want to be a seller of one...buyer yes but seller "no thanks". Just look at the theta on a LEAP vs a 1 month option for why I'd rather buy em than sell em...
to elaborate on my question>
Can BAC buy CFC and then immediately spin off the crap?
Altria is thinking about spinning off Kraft... AmEx spun off Ameriprize Financial...
could BAC buy CFC and then literally the same month spin off the unprofitable parts.... essentially picking CFC's carcas clean and getting all the remaining meat?
Are there rules against this sort of thing? or does BAC keep liability even for a spun off CFC?
I believe Ken Lewis sees Countrywide's $400 billion in loan origination and $1.5 trillion loan servicing book (9 million customers) as the jewel in the crown. Throw in Countrywide's reportedly best in class computer/servicing systems. He sees those 9 million mortgage payers as credit card, home equity, insurance and other services customers. Offer them 25 basis points off their mortgages if they open up savings, checking and credit card accounts with Bank of America, and I'll bet a lot of them would bite.
Normally, servicing portfolios are valued at somewhere around 1.5% of the total. Because of the problems Countrywide will be having (legally, elevated foreclosures), that value is probably closer to 1% (Lou Barnes). That would put the value of the servicing portfolio at $15 billion by itself. Throw in the loan origination and the bank, and normally you would have something worth in the neighborhood of $25 billion. But of course, we know it isn't.
The downside, of course, is the $209 billion asset base. What is that really worth? According to yesterday's Wall Street Journal, they sent a team of 40 analysts to California in early December to pore over Countrywide's books. Apparently, they believe that the potential losses are manageable.
My problem with that -- are these the same people who did the analysis for the $2 billion investment in Countrywide last September? Time and again, we have seen the smartest guys in the room -- Merrill, Bear Stearns, Citigroup and yes, Bank of America-- severely underestimate the losses lurking in their portfolios. If I were at a Bank of America shareholder (I'm not), I would want a lot of details on exactly how they are valuing the asset base they are purchasing from Countrywide. However, I doubt they will be forthcoming.
Bank of America also gets the bonus of being a nice deep-pocketed target of all the lawsuits filed and to-be filed against Countrywide.
amazingly, Countrywide hasn't even put a press release of the deal on their website!
a href="http://about.countrywide.com/relation/relation.aspx">http://about.countrywide.com/relation/relation.aspx
as a shareholder (albeit I bought at an average of $5.50) I'd really want to know the reason that CFC is selling itself at a fraction of book value to someone they know has been interested at MUCH highers prices within the last year. Of course, I know the reason for this, but I'd just like to hear CFC say it.
Where are shareholders rights here?
It is safe to say that BAC paid $4 bln too much in what clearly is a bailout from behind the scenes by the Feds. It may very well be that BAC will reap nice benefits for playing the game, but not because of anything good in CFC portfolio. Shareholder equity would have been completely wiped out in a ch11, yet BAC comes along and pays $4 bln.
If JPM steps up to the plate and picks up Washington Mutual, at a so called bargain when there's still a few years to go before housing hits bottom, then we'll know with complete certainty that these transaction actions are merely masked bailouts done at the behest of the government.
Thanks Mike.
I own some of those. I didn't know they were called differently:)
--
I am sure that most here have seen the headline:
Countrywide's Mozilo May Reap $83 Million in Takeover
And did anyone listen to the comments that Mozilo made in 2003 at Harvard Housing Studies, reported by Charlie Gasparino on CNBC? This born-and-bred American Crook laid down the groundwork for keeping poor blacks, Hispanics, single women, etc. forever poor by burdening them with huge debt by peddling dreams. Debt Pushers are evildoers. Is that hard to understand?
Back to the announced buyout One Crook is marrying another Crook. It is like some marriages in monarchies to combine the domains of two. Mozilo should be nailed to the cross and left for full public display.
Americans are bred to be total dopes and morally bankrupt (War On Iraq is a minor case) so as not to see the criminality of the banking and financial Crooks, or corporate crooks in general. Because these Crooks control the lawmakers, the President, the Fed (no one unacceptable to the Crooks can get appointed to the Fed), etc., they truly are above the laws because whatever they wish to do is made legal, or not specifically forbidden.
Jesus preached against the legalism of Jews of his time and not much has changed since. We are in much worse shape in terms of slavery to legalism than was the case in Judea at the time of Jesus. Populations are always doped by one group or another, mostly the group in power. We know full well who Americans are doped by. Legalism is a morally bankrupt philosophy.
Never a dull moment in the unfolding saga of Americas banking and finance Crooks. Americans love crime and gangster stories, real as well as imaginary.
Jas
REBear no problem - its JAA just another acronym lol....
LEAP
Long term
Equity
Antici-
Pation
or something like that...
These 2 deserve each other and I wouldn't touch them with a ten foot pole regardless of possible potential.
The one thing I am sure about is that these 2 crooks will look for every way to pass this onto J6P via the government. Problem is that the governement is BROKE! Print away I guess?
I can just see the Tan Man leaning over to Lewis and saying "Bail us out, or I take you down with us!"
I still feel you have to look at who is going to have the dominant currency. Is it really going to be Gold and Silver. I mean silver has some usefulness but gold is just a shiny rock? It's so Stone Age(no pun intended).
To find out why such a generous price was paid for Countrywide just go back a few years and see how often and how much Mozilo was in D.C. greasing all of the politicians and banks. He knew this day was coming and he knew if he didnt cover his behind he was in some serious legal trouble. He is going to walk away with shy of a Billion dollars and leave nothing but heartache and destruction behind. He never cared about any of employees that built that company for him. The only true justice that could come out of all this is if the legal system does what is right and investigates Mozilo and his dirty book keeping.
BofA may know something about the approaching federalization of mortgages, therefore it may make sense that they try to get as much of the pie, even bad pie, before the feds step in and leverage the mortgage market.
RGE - Editor's Pick: The Effective Nationalization of the U.S. Mortgage Market in Q3 07
Considering Citi is writing off another $24 billion, its hard to believe that $4 billion is THAT bad of a deal, but I agree that CFC was probably 3 months from declaring BK, so maybe it is.
Time will tell.
Troy: thanks for the charts. Informative - and daunting.
An astonishing thing about Countrywide is that you can actually make money borrowing from them and buying their CDs, if you have a couple filing separately in distinctly different tax brackets! Say pay 5.85% in a 33% bracket and make 5.4% in a 15% bracket = +0.67% differential in net rates!
Just FYI the rates on 3 and 6 month CDs at Countrywide are now 5.25%. I was about to put some money there and checked before and after the deal was announced. Oops, I missed out on 0.2%! Guess the liquidity crunch has been lessened.
NSA...Woah! Now this is thinking outside the beltway. Very impressive.
Only Jim Sinclair has suggested another which is the CDS links between BofA and CW are so many and so large that if the chain were broken by CW's default, BofA would be stuck with incredible losses because CW would become a non-performing counterparty.
Your idea and Jim's each jolted my unimaginative brain cells.
Jim's idea is small compared to yours.
Yet Jim's idea is a lynchpin to the stability of the entire RE finance and thus credit finance universe.
Comments??
BofA may know something about the approaching federalization of mortgages, therefore it may make sense that they try to get as much of the pie, even bad pie, before the feds step in and leverage the mortgage market.
About the only positive thing I can say about ABK is, at least it's not as bad as MBI, which is not as bad as SCA.
Buffett-pumps are the last refuge. If he takes anything in this space, it's going to be AGO. If I were in ABK or MBI, I'd hit the bid you got on Friday and bail on that sucker.
Long one of the monolines seems to me a bet that it'll be nationalized. I expect there's a pre-packaged BK all ready for these.
Well Buffett didn't want CFC or any part of it. That would be enough for me not to want any part of it either.
the Fed is sending us to yet another disaster:
Biflation is the state of an economy where the processes of inflation and deflation occur simultaneously. During this period there is a rise in the purchasing prices of commodity items and a fall in the purchasing prices of non-commodity items.
The purchasing price of an item is based on the demand for it and the amount of money in circulation to pay for it.
Biflation is preceded by an overabundance of money placed in circulation within the population by a central bank
CR: This does look like a good strategic fit for BofA...
I really think that's kind of spurious. BAC already has a huge consumer banking segment, by far the largest around.
Now they are basically increasing their bet on the American consumer at the beginning of a consumer led downturn.
A good strategic fit for BAC would have been a commercial bank in developing Asia.
Speaking of bets, here's one I was thinking of: Buy far out-of-the-money puts on CFC's shares (well, as far as you can get at a $6 share price)and go long their preferred shares. The preferreds are paying 9-10% and selling at like $18. If the deal goes through, they'll go up to ca. $23. If it doesn't, you stand just behind bond holders, meaning you probably get zip...
I haven't done the math yet.
Am I missing something?
Everyone seems to assume that CFC will be absorbed into BAC. If so, then yes, BAC will be on the hook for all those liabilities.
But the news says that BAC is buying the stock. CFC will be the sole shareholder of BAC, and if BAC goes bankrupt, BAC, as the majority shareholder, loses its investment (i.e. $2bn + $4bn).
As I see it, it's just a relatively small bet for BAC (and the Material Adverse Change clause essentially turns it into a call option... I don't think the deal is going to happen).
What are LEAPS?
REBear | 01.13.08 - 9:12 am | #
People with leaprosy
--
Yal,
Mozilo understands the true nature of the American system and the blind faith in the system that Americans are BRED with from birth onwards with the Propaganda Machine.
Mozilo was and is simply taking advantage of the American system and the suckers that have to pay for it -- honest and hardworking Americans whose % will keep on shrinking. That is why we need immigrants!
Jas
fwiw, regarding option arm losses, the most recent estimates i've seen (which assume 30% HPD) are for 5% cum losses on 2007 vintage OAs. 2007 is the worst vintage, and i would assume countrywide's portfolio is mostly 05 to 07. a blended cum loss rate on those vintages is closer to 4% with 30% HPD.
I've been thinking about something:
BofA bought Continental Illinois way back in 1991 after CI was nationalized by the govt. It made BofA what BofA is today in many respects.
Perhaps this is payback?
I've long thought that there are a lot of back room handshakes and winks/nods in the Financial industry (for example, think of LTCM pseudobailout engineered by the Fed but done privately).
I'm thinking that the Fed and Treasury went to BofA and said "we've never let you down before. You take one for the team... we'll make sure you do ok so don't worry about it"
So BofA takes over Countrywide. It will clearly be too big to fail.
same with JP Morgan/WaMu.
YTL-
just for your knowledge, Altria is past Kraft (long done deal) and onto International potentially.
AMERICAN credit card debt is growing at the fastest rate in years, a fact that may signal coming trouble for the banks that issue them. - Floyd Norris, NYT: Some Debt Trends Are Good. This Isnt One of Them.
Which bank has the largest credit card presence? BAC!!
They want to make sure they're exposed to every risk in the consumer field...
Wouldn't a short on CFC be a pretty good bet at this point?
Hedge funds that want to bet on a further deterioration in mortgage portfolios will play this short CFC and long BAC.
This strategy has a fixed loss if the deal is consumated and a pretty decent upside if the deal falls through.
Most likely, this was the reason for the sell-off in CFC and rise in BAC after the deal was announced. Not, as the bubble-heads like to believe, a sign that the market approved of the deal.
I also think that is why they did the buyout at .18 per share and not a fixed price per share?
Anyone wanting to get cute about this could put on a short of CFC, hedging the position with a long position in BAC. The thesis here is that while the acquisition is still in play, BAC and CFC will move synchronously up or down.
However, if the deal falls through (and I think it will eventually), then your CFC short decouples from BAC and falls like a rock dropped from a high altitude on Jupiter.
I'm not doing this myself, just thinking out loud about the possibilities.
re: short CFC or BAC
We really need the S4 filing. When does THAT come out ? We need that to understand the structure of the deal - whether they are taking on CFCs loans on the books or not, what terms in addition to the material adverse change are part of the deal. As reported on CNBC, it was curious that questions on these aspects were not answered in the press conference and the presentation at BAC's site doesn't address this either.
But, trading goes on regardless so I went short BAC - they are known as cost cutters in their M&A activities not managing distressed debt, they STILL have 2 other recent acquisitions that they are trying to absorb, they are known as serial acquirers and overpayers AND they have the MBNA credit card operation.
If the belief is that this deal will break then of course shorting CFC is right.
Nobody mentions the usual merger arbitrage trade in this case do they - long the acquisition, short the acquirer. That's interesting.
-K
Thank you for the link xofruitcake.
But you are just assuming that "prime home equity" = "junior mortgage". It could include a lot of other things. One can get an equity line of credit for a first position mortgage (I have a couple of these). This number could include Reverse Mortgages. This number could inculde no doc loans that were made based soley upon equity/LTV. Or the number include something I can't even imagine. You don't know. I don't know. But it is my opinion that a portfolio ratio of 40% by dollar of junior liens does not make any sense when the "$" porportion of junior liens to 1st postion liens nationally is much less than 10%.
ps: you were correct about me being egotistical.
Considering that I think Ambac is almost certainly going BK, ballsy doesn't begin to describe it.
The line between ballsy and foolish is broad. If this person is risking his life savings on this gamble, as he says, rather than a speculative portion of his portfolio, then this clearly marks it as foolish in the extreme.
Nobody mentions the usual merger arbitrage trade in this case do they - long the acquisition, short the acquirer. That's interesting.
sk, read my comment just above yours. Indeed, I was considering doing the opposite. But the position would have to be put on later in the year.
Nice analysis, CR, of the potential downside for B of A.
I'm with tj, that the bottom is Marianas Trench depth.
Please, Saudis and Chinese, buy ALL of Citi, ML, B of A, Bear, JPM, and GS. Nothing would warm my heart more than seeing patriarchical dictators and communists lose everything that they invest in these to-be-bankrupt entities.
"buy ALL of Citi, ML, B of A, Bear, JPM, and GS"
Maybe we can buy them all back at a few bucks apiece and start over again.
"Anyone wanting to get cute about this could put on a short of CFC, hedging the position with a long position in BAC. The thesis here is that while the acquisition is still in play, BAC and CFC will move synchronously up or down."
I don't follow you. If the deal falls through, you would do OK, especially if there's a relief rally in BAC. But let's say the deal goes through, you get burned on your CFC short and then BAC tanks further as it becomes obvious it was a shitty deal and their business deteriorates...
The thing with the preferred shares is that they move like bonds, they don't follow common shares. My trade is strictly an arbitrage play, it's exploiting an inefficiency in the market.
Stupid question by a newbie (who locked in a lot of money at high rate CDs at CFC):
Where do depositors stand in the heiarchy of who gets paid back if a bank goes BK? I know the bondholders get paid before the equity share holders.... Do the depositors get first dibs ahead of the bond holders? Or are the depositors at the mercy of the FDIC?
BAC and other banks have lent billions to CFC via lines of credit.
We really need the S4 filing. When does THAT come out ? We need that to understand the structure of the deal - whether they are taking on CFCs loans on the books or not, what terms in addition to the material adverse change are part of the deal.
I agree that these issues are crucial. A number of recent cases have made clear that the phrase "material adverse change" is too ambiguous (although maybe ambiguity is what somebody wants here). I would think one side or the other would be well-motivated to want something more precise included in the offering.
Do the parties who are already suing countrywide have legal standing to challenge this deal?
Why I bought FXP
"Care to explain..."
BAC protects its portfolio by stopping CFC collapse and liquidation as follows: Look back at 1994 and NAVs muni-bond funds. When OC treasury went messy, market for munis became illiquid, thus causing major losses for many muni bonds, not only OC's bonds. Munis funds suffered 20% declines. The same way game goes here -- imagine someone tries to unload $20 billion in mortgages. Look at E-Trade bail-out recently. They got $.17 bid on their $3 billion portfolio (if I recall with large % of 2nd lien loans). Do you think CFC underwriting was that much better that E-Trade's?
It works like a domino effect - if CFC's bonds fetch $.30 on $1, a whole bunch of banks will have their similar MBS downgraded by Fitchs of the world, subsequently forcing writedowns that would put banks below capital requirements. Thus, more capital would need to be raised, at higher interest rates and more equity dilution.
Ken is like a neighbor buying pre-foreclosure from his drunkard buddy, he is trying to save neighborhood values. He hopes soon big rate cuts will slow the slide and give him time and needed margin to make money, to take inevitable charge-offs against.
last!
second last!
BAC protects its portfolio by stopping CFC collapse and liquidation as follows:...
2kt
Can you complete that sentence with some concrete data ? I looked at the latest BAC 10-Q for over 2 hours. They don't write CDS' so I don't see how they are on the hook for a CFC default. They purchase CDS protection sure - but from CFC ? a search of CFCs 10Q shows no match for the acronym CDS.
The risk from swimming with the same reptiles applies to everybody in the financial market - anyway its already caused a 25% drop in the stock price - Not enough ?
I'm short BAC because the (short-term) logic of the merger escapes me - these conspiracy theories for the buyout are always plausible - all financial companies are snakes for sure but I see no evidence. - and in the long run.. well that's for another day far into the future.
-K
CD's are the laziest investment an individual can make...
they border on retardation...imo
I guess was not clear in my note.
BAC is not on the hook for CFC defaults. IF CFC portfolio and MBS that have their mortgages are sold in masse, other similar securities and portfolios (especially those stuffed with loans from CA) will be downgraded thus forcing banks to take further massive writedowns.
Wow, the default rates mentioned in the article (25 %) for second lien heloc correlates to the default rate on auto loans for people with a fico score of 520-539. And many posts above thought that the estimate was low. One post even suggested that people would completely stop buying homes. I have never before seen such negative sentiment
here is another not widely known aspect of the Option ARM mortgages. Current accounting rules allow for lenders to count as income the accrued interest, even if the borrower hasnt sent it in. As the borrower makes the minimum payment, the loan (an asset for banks) increases and the interest that is added on is counted as income. There was a great article in BusinessWeek Sept 2006 about this.
As the Option ARM loans go bad, not only will the asset go bad, but the 'income' to the lender will be decimated. I'm no accountant but this struck me as quite odd that one can book the interest income prior to receiving it.