S&P Slashes BofA to a Sell – Thanks Countrywide!

Posted on June 21st, 2008 in Daily Mortgage/Housing News - The Real Story

Only abut 6 months after I told clients “there is no way in hell without a bailout that BofA will take on all Countrywde’s toxins” and a couple of months after I put out the story below on the subject, S&P slashes BofA to a sell reducing their price target to $24. They cite “worries over the mortgage portfolio the bank will inherit” and “take unfavorable note of the large Countrywide option-adjustable rate mortgage portfolio that Bank of America will inherit.” They believe that Countrywide’s portfolio is “yet to be stress tested.”

So you know exactly what they are referring to, below is a re-post of my May 2nd report. My advice to BofA was to call Bernanke 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 JPMorgan and Bear, shouldn’t it be good enough for us? We were your first shill, darn-it!” BofA did one better. Instead of asking for a Bear-Stearns style bailout, they are gunning for the FHA “you can only lose 10%” bailout.

If there was any time in your life you were thinking about getting politically active now is the time. I am no tree hugger, far from it. But I am doing all I can to fight this $300 billion bailout that BofA wrote for Dodd and Shelby because it is a pee-hole in a snowbank and will fleece the taxpayers. Another trillion will be needed on top of this and if they give the $300 billion, the trillion will follow. The subprime implosion is abating and the Alt-A, Prime, Pay Option ARM and HELOC implosions are just heating up. Individually, they dwarf the subprime implosion. -Best Mr Mortgage

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’slargest 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. BofAis light on the mortgage-side of the business, especially in servicing, so everything is just great 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 quickly 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 BofA is 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


20 Responses to “S&P Slashes BofA to a Sell – Thanks Countrywide!”

  1. Some shareholders should ask to fire the CEO of Bank of America. Shareholders should sue the management.

  2. Sell short too.

  3. I thought that I had heard or read a while back that BofA could do this deal WITHOUT honoring the debt. While I understand it is not as if they can just toss their arms in the air and say “So sorry but we are not paying you all a dime” I was under the impression at the time of OH… OK now this makes sense to me. I haven’t read or heard anything since so I took it as that was what would take place. Now I read your column and I am thinking I heard or read a lie???

    Did anyone else hear that or understand the possibility that this could happen?

  4. No. Ultimately, you the taxpayer will be paying. It’s coming. Bank of America management are a real bunch of nincompoops. This thing is a mess. Good I will be taking some puts on tehm next week. What lying ? The system is based on it.

  5. I don’t know…acquiring a company with the ability to author and pass its own beneficial legislation would seem like a good move to me. As long as Countrywide has key members of congress and Washington Bureaucrats in its pocket, I don’t see how BofA can lose here.

  6. This name “Countrywide” is just horrible. It presupposes that it’s not just California that is in trouble. Dave I suppose you are right. It’s countrywide after all. No it’s worldwide.

  7. Dave – LOLOL – sounds like a win to me too, if it wasn’t so darn criminal.

    marc, it isn’t just Calif. we are all in sh*t even if you are like my family that has tried to be conservative all the way – so yeah right, it is “countrywide” the pun works. 🙂

  8. Communism China tried its best to save its capitalism big bro US by increasing its domestic gas price at 18% and letting Chinese dollar keep shooting up against US Dollar.

    Now, the Chinese manufacturing is under much more pressure to make a living.

    Yes, US is bring everyone down in the whole world.

  9. What if it is all a big ruse by BofA to entirely eliminate CFC as a player? String them out until the last possible moment claiming an intention to buy, then ‘changing their mind’. Wouldn’t CFC basically crater? Then they could simply pick up the assets they want in a bankruptcy. Sure, they could have taken a chance of a CFC bankruptcy anyway. But wouldn’t a last minute withdrawl, with a very public disclosure about the weakness in their books, virtually ensure a bankrupty almost immediately? Just a thought…

  10. Hey China is making a superb move. Plus 18% on diesel and gazoline. It decided to stop subsidizing Wal Mart and OPEC. Expect your MADE IN CHINA products, consumer electrinics, clothes, Nike, costing much much more. Sorry Labour Department. This hike, you buggers in Washington you will not be able to hide. The MADE IN CHINA products sold at Wal Mart will go DIRECTLY in the “CORE” inflation rate ! POW ! Did I mention it ? Don’t buy bonds specially long term bonds.

  11. If CFC craters it’s 20% of the mortgage market that goes down the drain. Systemic risk. Sugar daddy Bernanké at the rescue. No not Sugar Daddy. Sugar taxpayer at the rescue. What is feared by all the gang is the domino effect. They will come to the rescue again and pump the thing to death. “Inflate or die.”

  12. well, I believe, by increasing gas price and Chinese Dollar’s value dramatically, China lost its best opportunity to become the world super power…

    Yes, US citizens gonna suffer a lot more in short term, especially those non-saving-credit-abuse suckers.

    In the long run, a lot of US manufacturers will be forced to move back to the States, thus create a sound foundation for our future.

  13. Nice article and probaly solid stats. Problem with the stats is, it does not matter. Portfolio could be worth zero cents on the dollar and BfA will still come out smelling like a rose. It absolutely 100% is a bailout of an institution that is too big to fail. BofA will not pay back the FHLB advance and the credit lines will be settled for pennies on the dollar or bought with treasuries is some disguised manner. BofA CEO is a superstar for exploiting their political cronies and will make billions personally when all the dust settles.

    Don’t say it can’t happen because it has all happened before. FSLIC went bankrupt in 1988 resulting in FIRREA. FIRREA created the RTC which had virtually a blank check to cover all losses. Results of the act today are the massive banking structures that took all the deposits and the massive mortgage entities that took all the loans.

  14. Here is nice of candidates for eventual downgrades to zero, for bankruptcy or at least for massive shareholder dilution.Scary all over. You can call them “the bag holder”.

    No place to hide and not just homebuyer hit. Pension funds and company balance sheet hit.


    (Financial Sense Online june 18th 2008 Deepcaster)

    Assets That Aren’t

    Moreover, the prospects are slim-to-none for U.S. headquartered businesses-in-general having or achieving the capacity to catalyze an economic turnaround. Indeed, ten major companies have more “Level 3” Assets than capital. They are (as a percentage of total shareholder equity):

    Bear Stearns 313.97%
    Morgan Stanley 234.88%
    Merrill Lynch 225.4%
    Goldman Sachs 191.56%
    Lehman 171.18%
    Fannie Mae 161.47%
    Northwest Air 142.02%
    Citigroup 125.06%
    Prudential 119.36%
    Hartford 108.52%

    Remember that the essence of a Level 3 Asset is that it has “no observable input.” That is, the company which owns a Level 3 Asset also determines its ostensible value.

    Companies having a significant portion of their portfolios in Level 3 Assets claim that they are valuing these Assets by “Marking to (their subjective) Model.” Deepcaster’s view is that this is “Marking to Myth.”

    A number of Level 3 Assets have, unsurprisingly, recently tended to be illiquid.

    Reality Check: That which is illiquid has no market and therefore no market value.

    Indeed, these harsh realities, and the consequences for consumers of Hyperinflation and a contracting economy, are starting to percolate into the mainstream consulting and media worlds.

    ““Suddenly consumers are focused on buying what they have to have as opposed to buying what they want to have,” said Howard Davidowitz, Chairman of Davidowitz & Associates, a New York retail consulting and investment-banking firm. “This is a permanent change for Americans who will face a declining standard of living over the next 20 years,” he added. (emphasis added) Jennifer Waters, MarketWatch, June 17, 2008


  15. Marc – add level 2 to that and the numebrs jump 300%. Remember, level 2 assets are worth much less than par too. Everyone forgets about this chosing to focus on level 3. Level 2 would be considered alt-a while level 3 is subprime in mortgage terms.

  16. I forgot. Thanks for reminding me. LEVEL 2.
    The names have a science fiction ring to it.
    Massive recapitalisation is coming.

    The problem is so huge that I can’t even imagine what these companies are really worth. It’s evident that PPT is at work. Morgan Stanley is not worth 40$ in the real world. Same thing for most of the companies in the list.

    It will be interesting to see what will happen to UBS monday morning. Another -30% ?

  17. MortgageMan – you are probably right.

  18. I’m still waiting to hear the responses to the following questions (or even the questions themselves) from those promoting this bailout:

    What do you tell the responsible neighbor of the guy who gets his loan forgiven that he has to continue paying his full mortgage despite the fact they have the same house and paid the same for it? Or the other neighbor who bought the smaller, more affordable house/condo and now has to watch his neighbor get a huge break on the mortgage? Or the renter who saved and didn’t act irresponsibly and buy beyond his/her means only to find out the Federal government is now attempting to prop up the house prices?

    If this has been asked on National TV, I’m curious as to the responses. Or, if it has not been asked, why not?



  19. […] S&P Slashes BofA to a Sell – Thanks Countrywide! […]

  20. […] MR Mortgage – S&P Slashes BofA to a Sell – Thanks Countrywide! – Only abut 6 months after I told clients “there is no way in hell without a bailout that BofA will take on all Countrywde’s toxins” and a couple of months after I put out the story below on the subject, S&P slashes BofA to a sell reducing their price target to $24. They cite “worries over the mortgage portfolio the bank will inherit” and “take unfavorable note of the large Countrywide option-adjustable rate mortgage portfolio that Bank of America will inherit.” … – MR Mortgage […]

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