BofA Getting Cold-Feet over Countrywide ‘Purchase’ – Too Many Toxins!

Posted on May 2nd, 2008 in Mr Mortgage's Personal Opinions/Research

Why would BofA Pay $50 Billion for Countrywide???

This is all my opinion of course…from day-one, the ‘BofA Buys Countrywide’ (CFC)deal reeked of a bailout. As a matter of fact, if you remember that week, David Faber of CNBC actually said he had heard rumblings that ‘some influential folks in Washington told BofA to get in there and fix the problem’.

The problem was CFC was failing. They were running low on credit and heavy on margin calls from their investors. Spreads on their credit default swaps were soaring preventing them from getting more credit, they were quickly drawing down ’emergency lines’ and many deep in-the-know were speculating that CFC was not far from a bankruptcy filing.


Suddenly voila’! BofA announces its intent to buy CFC by Sept 2008, which at that time was a long way off, for roughly $4 billion in BofA stock. BofA had already bought $2 billion in CFC stock for a convertible preferred price of $18 shortly before. Prior to this, they were already CFC’s largest preferred shareholder. At the time, however, their investments looked terrible because the stock was trading around $5.

The ‘buyout’ made sense to many out there, however. Hey, they already owned a ton of preferred at much higher prices. So now while CFC is in distress, they can go in and buy the rest of the company for what they paid for a small percentage in the months prior. BofA is light on the mortgage-side of the business, especially in servicing, so everything is just grand now.  That is until you look under the hood.

Many of us have been very vocal about this deal not making sense. Remember, the way this deal is structured, BofA gets it all. ‘All’ includes ‘assets’ and liabilities. But, all that Bofa really wanted is the servicing platform (office, staff, infrastructure, customers, software, some servicing rights), some select retail loan origination branches in areas in which they do not have a presence and the bank. They surely do not want the liabilities, who would. Especially in the mortgage business, as ‘liabilities come in many forms’.

Getting back to ‘all’, the ‘asset’ side includes the approximate $80 billion in Subprime, Pay Option ARMs and Home Equity Loans/Lines. The problem is those loan types are worth 10-30 cents on the dollar on a great day. I thought everyone knew this. Apparently not.

The questions I have had since day-one were a) ‘why in the world would BofA pay $50 billion for CFC?($4.4 bil for company and losses of 70 to 90 cents on $80 billion in loans that someone has to write down further). Some may have already been discounted but we all know that NO COMPANY has been honest regarding their exposure other than perhaps UBS who is fastly approaching $40 billion in write downs. b) why the heck wouldn’t they just wait for bankruptcy and as their largest preferred shareholder buy the pieces they wanted on the cheap? None of the published story made any sense.

In reality, the deal stunk for BofA, but the pundits kept preaching ‘but, but CFC has a market cap of $30 billion and Ken Lewis is a genius for making the deal of the century’. They were marched across the ‘CNBC variety-show’ stage for a week.

‘But, not so fast’, we said. ‘It isn’t like CFC owned those loans outright. Most are attached to credit lines or Federal Home Loan Bank advances’…the dreaded liabilities. Very few brought up the topic and those that did, at least on national tv media, were dismissed with ‘that is nothing for BofA to absorb’. Granted, the bank, servicing ‘platform’ and some servicing rights CFC owns have substantial value…perhaps about $4 billion. Who knows.

By the way, remember, back a few months back when it was discovered that the Federal Home Loan Bank of Atlanta was lending hand over fist to CFC, IndyMac, Wachovia and WAMU? What do they all have in common? Tons of Pay Options, Home Equity and Subprime exposure.  As soon as that was discovered and the press got a hold of it, it stopped fast.

Actually at the end of 2007, CFC had massive debt to the tune of $11.5 billion in credit lines and $47.7 billion in Federal Home Loan Bank advances. It has likely grown substantially since. This debt is mostly tied to ‘assets’ mentioned above worth pennies on the dollar. This is why it is many people’s opinion, including mine, BofA can’t do the deal the way it is structured and why it was a charade since day one.

My advice is to BofAis to call Bernenke and say “the US can’t handle the largest mortgage servicer going down so you must back-stop $38.7 billion and we will back-stop $1 billion. If it was good enough for Chase and Bear, shouldn’t it be good enough for us? We were your first shill darn-it!”

Reference Article: Bloomberg

Mr Mortgage YouTube Series – Here Comes The ALT-A Crisis


28 Responses to “BofA Getting Cold-Feet over Countrywide ‘Purchase’ – Too Many Toxins!”

  1. Nice article.

    To me that is the problem with the BSC deal, what most people haven’t considered is what happens if these big entities decide they don’t want 5-10 cents on the dollar like BSC stockholders are getting. Why don’t the companies ask for 200 cents on the dollar?

    Ok, either you give us double or we go bankrupt. In the case of BSC, management put too many poison pills, it looks like it’s mostly a done deal but the next time this happens why would management and the shareholders have to go along… they hold all the cards… and in the case of shareholders they can’t be prosecuted.

    What we are witnessing is the fall of modern Rome.

    Nice article, I 100% agree with your assessment.

  2. Just drop the bomb….. :->

  3. […] BofA Getting Cold-Feet over Countrywide ‘Purchase’ – Too Many… At the time, however, their investments looked terrible because the stock was trading around $5. […]

  4. You are a great resource. Thanks.

  5. Good to see you Karl – funny, you and I were scratching our heads for months on this one. If BofA really this stupid or is everyone else who didn’t see the glaring disaster that ignorant.

  6. Straight up, NO Chaser – No SPIN!

  7. And what exactly is wrong with a “bailout”? American business has been doing this for decades. Go back to the 1980s with all the bailouts in the aerospace/airlines, savings and loan and auto industries. Why do you act as if this is such a crime? You want a bail out? How about $500 BILLION paid by tax payers for the S&L bail out of the 1980s? This whole deal is nowhere near that. Further, $80 billion dollars in Subprime, Option ARMs AND Home Equity lines of credit is a drop in the bucket of a multi trillion dollar industry. It just sounds like a lot of money until you break it all down. Not all or even a majority of borrowers holding these kinds of loans are in danger of losing it all. Face it, the only reason people are gunning for Countrywide is that they were at one time the media darling, Angelo Mozilo started a small thrift in NY that became America’s largest mortgage lender. Roland Arnall (Ameriquest) is dead and New Century is long gone so the only potential scape goat left is Countrywide and mores the pity. Countrywide, which did so many right things for so long, got some what caught up in business as everyone was doing in the last few years will ultimately pay the price for all of it and that’s just wrong.

  8. I am fairly sure you mean “reeked” of a bailout, not “wreaked.”

    And yes, the whole deal stinks to hog heaven.

  9. spell check didn’t catch it – thanks for the heads-up.

  10. Sonia – CFC is the modern day ENRON with ALL THE TRIMMINGS! if you cannot see this then you have been drinking the coolaid.

  11. When B of A was investigating Countrywide. The guys at B of A were bragging that they had 50 or 60 people checking out the books at Countrywide. I would love to put those auditors under oath.

  12. CFC / BofA was the first Gov’t arm twist bailout. This goes to show how serious all this is…lies and cover-ups since day one early 2007. They knew this unwind was coming a long time ago. Think back even further- you thin they changed the bankruptcy laws over 2 years ago out of the blue?

  13. Another great article amigo. Great insight and absolutely spot on in the analysis.

    This is nothing but another example of Ben putting one of his fingers in a dyke that is rapidly falling apart. Behind the scenes, the “powers that be” are trying desperately to stick-save us from the biggest economic catastrophe of all time. Thus far they appear to be having significant success… the tide has turned and for the time being everything is much better than it was 50 days ago.

    The final chapter (I think…) will be written by whatever actually happens to the HELOC, Option Arm, and credit card portfolios… whether or not we have another Great Depression is entirely on the shoulders of the good old American consumer. If those assets really do default, proving that the $0.65 mkt prices are legitimate, then the dominos have no choice but to fall… the banks simply don’t have the capital to absorb the losses. If however, those borrowers continue to make their payments then I guess Ben and Pals made the save of all time.

    I tend to think there isn’t a prayer those assets perform… but that’s just me. The turnaround in the mkt and in the sentiment has been nothing short of remarkable however. Just maybe we’re wrong?

  14. […] BofA Getting Cold-Feet over Countrywide ‘Purchase’ – Too Many… …to ‘all’, the ‘asset’ side includes the approximate $80 billion in Subprime, Pay Option ARMs and Home Equity Loans/Lines. […]

  15. Still seems to me the simple math is, government (you and me) eat the $47 Billion advance, Bonds are severely discounted (haircut in industy terms) and other debts are re-negotiated or traded for worthless stock. How the shell game plays out is everyone’s guess, only the people on the hill (DC) and Charlotte know what’s really going to happen. I doubt even Monzillo knows or anyone else at CW.

    CW is being run by BofA and DC and you won’t see anything in the press about it specifically. We all no nothing but the direction seems apparent with the office closings yesterday. Phased shutdown. Closing the operations quickly would send a big shockwave through an already shakey industry and economy.

    When you really get down to it, $47 Billion is not more than a ripple in government and GDP terms.

    Great post and continued thanks for keeping us all informed.

  16. BAC did it to protect it’s own balance sheet. They were hoping if they kept things going long enough prices would recover.

    They were wrong.

  17. I have been following your post for about a month. Your posts are awesome. I came across another post related to Bank of America. I wonder if you got a chance to look at this one.

    Is Bank of America headed towards principal reductions?

    I checked B of A’s press release
    and it says:

    “We will continue to work with distressed borrowers to match the customer’s repayment ability with the appropriate loss mitigation option, including loan modifications, forbearances, repayment plans, lower rates and principal reductions,” McGee said. “We will not assess new late charges for customers in foreclosure and we will waive certain other associated fees, when permitted.”

  18. God, you just KNOW that BofA is digging in their heels and throwing down the gauntlet to the FED because they want the FED to backstop that 38 billion.

    If the FED didn’t see the huge MORAL HAZARD in their decision to completely exceed their mandate and rescue a company that should have FAILED, (Bear) they do now. What a complete disaster!! They know they have Bernanke over a barrel!

    What a horrifying precedent the FED has set.

  19. […] […]

  20. […] Today we had the distinct pleasure of reading an analysis by one of our new and favorite commentators, Mr. Mortgage. His review of the CountryWide Financial acquisition by BAC is devastating, and sure to send a tingle up the spine of any BAC shareholder. BofA Getting Cold-Feet over Countrywide ‘Purchase’ – Too Many Toxins! […]

  21. […] […]

  22. What is to buy anyways ? A hollow shell, a stinking corpse. Was Mozilo a good friend of Geoge W. Bush or Senator Lieberman ? ENRON economic model.

  23. […] Wachovia and WAMU? What do they all have in common? Tons of Pay Options, home Equity and Subpr…COUNTRYWIDE HOME LOAN SUCKS!Tells a story of unfair business practices with countrywide home […]

  24. After the Bear Sterns bailout I saw Morton Zuckerman on the McLaughlin Group talking about it. He has enough money to offer $580 million for Newsday in place of Murdoch getting it. He was talking about how close the entire world came to a financial meltdown from the Bear collapse and he was visibly shaken by it even after the fact.

    No doubt it is in the system’s interest to keep Countrywide from going under, but how many more of these things are out there? Probably at least one too man.

  25. […] […]

  26. […] BofA Getting Cold-Feet over Countrywide ‘Purchase’ – Too Many Toxins! […]

  27. […] Wachovia and WAMU? What do they all have in common? Tons of Pay Options, Home Equity and Subpr…Home – IndyMac BankIndymac bank – Current CD Rates and Mortgage Rates. Banking services for […]

  28. […] BofA Getting Cold-Feet over Countrywide ‘Purchase’ – Too Many Toxins! […]

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