Bank of America Must Know Something

Bank of America (BAC) just dropped $2 billion on what looks like incredibly advantageous terms into Countrywide Financial Corp. (CFC). The dividend yield at 7.5% is outstanding and being able to convert into stock at below the so called current market value has usually been only an investor fantasy. So much for all the Warren Buffet speculation.

We all know Countrywide needs help. When it gets this bad, the question is what is good for the economy, not what is good for an individual issuer. Everyone will surely remark on Countrywide's lack of negotiating ability. Countrywide's ability to negotiate was mitigated by the large caliber financial gun that was firmly pointed to its forehead.

Big players like Bank of America can and will do favors for the regulator in the hopes of something else breaking their way. The current favor is probably tax deductible if the mark to market moves unfavorably. Bank of America is close to bouncing off of the 10% deposit cap, when taking the ABN LaSalle acquisition into account. So while an offical outright acquisition seems to be out of the question, if Bank of America can help Countrywide settle down, the Fed should be beholden in a strategic fashion at some point in the future.

The danger is that if the subprime slime compromises the deal, a huge negative develops in the market and accelerates panicky thinking. The line needs to hold. The sharks will test the steel cage quality of the deal. If there are chinks, the slide will continue for quite some time.

In the meantime, another savvy player, Citicorp (C), dips into the discount window and takes out an armful of money. The Fed has pointed out that under the circumstances, they would not see this as a sign of weakness. So the thinking is different.

Comments

[Sr. Pessimist:]

The concept of a social company is popular now (workers own the company). That's more competitive than workers being enslaved by a company. When I started some recently, I talked with my contact at The Company Corporation, my agent filing service, and asked him about recent activity. He said right now a lot more people are "taking the plunge." People out of work are just starting companies. They see how easy it is to simply find a niche, produce equity for their niche, and sell it. You just need to put your mindset on producing it all yourself and then offering it to the public. So there are a lot of startups picking up some production slack as the US Dollar dies and loses its ability to import what goods and services the rest of the US economy needs to continue operations.

2007 Aug 24 12:48 PM

[nicholas.co...:]

As to the Warren Buffet Speculation, Berhshire Hathaway bought an initial position in BofA of 8.7 million shares (4.4 B outstanding)..."someti... during the 2Q07." Like perhaps August 14th? WB loves convertible prefered stock (witness Solomon Brosl in 1991 and others). Then BofA "coincidentially" arranges a convertible preferred stock "arangement" with CW...hmmm. Let's see if BRK adds to its BofA position...and/or see if BofA buys CW.

2007 Aug 24 05:38 PM