BofA Will Lose Billions in Countrywide Deal

Countrywide (CFC) in trouble, merger talks and rumors - it kinda reminds me of Northern Rock (NHRKF.PK). Lots of empty promises and we will finish with a nationalized bank, maybe the RTC again.

Bank of America (BAC) has forgotten the $51 billion dollars of advances Countrywide has with the Federal Home Loan Bank of Atlanta. (Search for "countrywide" in this SEC filing for FHLB Atlanta). For Bank of America to even consider taking on debt of such magnitude is nonsense. Bank of America would need to buy $25,000,000 worth of stock in the Federal Home Loan Bank of Atlanta to join and purchase an additional amount of stock representing 4.5% of Countrywide's total advances with the FHLB of Atlanta (25,000,000 + (0.045 x $51,000,000,000) = $2,320,000,000).

Why is this worrisome... The recent implosion of the Federal Home Loan Bank of Chicago has left several member institutions with large amounts of membership stock but no dividends! Essentially they are waiting in line to get back their membership fee. Previously, the nice feature of joining the FHLB was receiving interest in the form of dividends on your membership stockholdings at the FHLB.

Currently, Bank of America is one of the largest members of the Federal Home Loan Bank of Boston. Their capital stock outstanding is at $854,657,000, composing 27.7% of the total stock for the FHLB of Boston. (Search for "bank of america" in this SEC filing for FHLB Boston)

There is a chance many FHLBs will not be able to pay dividends on their membership shares. It is very possible, Bank of America will have somewhere between $3 billion - 3.5 billion dollars worth of memebership stockholdings at various FHLBs without receieving any dividend payments...

By the way, should Bank of America be reading this, you might as well speed up your application to the FHLB of Atlanta. Here is the link. The FHLB of Atlanta will have their heads up after the Federal Reserve approves.

Here are some helpful documents on mergers/acquistion of FHLB member banks.

Disclosure: Author has a short position in BAC

Comments

[TA:]

This is by far the lamest anti BAC-CFC article I've read so far that it's not even worth a comment. You should really pump your shorts somewhere else.

2008 Jan 14 02:12 PM

[JohnnyCPA:]

Why is CFC trading $1 below the BOA offer price of $7.12?

2008 Jan 14 04:16 PM

[JohnnyCPA:]

Why is CFC trading at $1 less than the BOA offer price of $7.12?

2008 Jan 14 04:18 PM

[marinsunshine:]

This writer has not even a basic understanding of M&A.
The piece is self-serving. I love it because it makes for a good arb opportunity. I don't have time to point out every erroneous assumption, but I will mention one thing- if Countrywide already owns FHLB-Atlanta stock then BAC will own the stock, it's on their Countrywide's balance sheet.

This article is absolute garbage. In response to the second question the widening of the spread is an indication of how many shorts are trying to push CFC down so they can bail. In my view, the bears have until Fed approval to cover their shorts. It wouldn't surprise me if Countrywide stock starts popping up on the fail-to-deliver list in the very near future. Just mho.

2008 Jan 14 06:04 PM

[Wow.:]

Is this a serious article? Why am I reading the ramblings of some dolt with less knowledge of basic economics on a community blog? It would be a far better use of my time to take ice picks to my eyes and then skull punch myself for the rest of the night.

Now I get it. This is a poor man's "Motley Fool". I'll be sure to ignore the rss feed on Yahoo Finance. Thanks

2008 Jan 14 08:48 PM

[TN Jim:]

Sometimes it's better to remain silent and be thought a fool than to publish drivel at SeekingAlpha and remove all doubt.

2008 Jan 15 10:07 AM

[elan:]

the article appears to be a paper written at the last hour without checking sources-the prof would give c+ for the balls this student has

2008 Jan 15 12:11 PM

[kurt walter:]

Forget CFC stock. The whole deal moves with BAC stock now. The .1822 ratio is all that matters now. BAC hopes the CFC loan servicing business turns out to be a moneymaker. The rest of CFC is probably worthless. All those HELOC and 2nd mortgage loans are mostly worthless. BAC did make 1 major investing error: after putting $2 billion into CFC they are now going to throw more good money into a poor situation. Averaging down is a very risky thing. It is going to take years for the current real estate bubble to correct. Proof that CFC management knew their boosts about becoming profitable in the 4th quarter were false. No insider buying by CFC management. It was all talk and no action.

2008 Jan 15 12:58 PM

[W.C. Varones:]

Or maybe not:

wcvarones.blogspot.com...

2008 Jan 17 11:55 PM