Posted on June 10th, 2008 in Mr Mortgage's Personal Opinions/Research
This is all my personal opinion, based upon my knowledge of the situation and what other industry insiders/sources have relayed to me.
My chatter-meter has spiked in the past several days regarding BAC backing out of this deal or at least trying to significantly restructure it to more closely resemble the Bear Stearns “transaction.” As I have said from day one, this is a big, orchestrated sham that will never close the way it was originally portrayed.
Below is a reprint from my May 2nd write-up on the topic. Nothing has changed other than Bank of America’s stock has plummeted, which could be associated with the overall trade in financials as of late, or a loud voice saying “DON’T DO THE DEAL.”
If you look at today’s options action, you might notice some interesting front-month call action and deep-in-the-money put action on BAC. Also, the CFC Oct $4 puts have some volume out in Oct. If BofA backs out or says they do not want Countrywide’s portfolio of toxic loans/MBS or the debt against their ‘investment grade’ loans/MBS, which they have already borrowed against, it could send CFC straight down and BAC straight up…temporarily at least.
Something tells me that this story may hit headlines in the near future.
May 2nd, 2008
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!”