Why is BofA Buying Countrywide?

As a shareholder of Countrywide (CFC) common and preferred stock, as well as a small time investor, I have watched the recent events regarding this company with great interest. I am writing this letter in the hopes that Countrywide’s senior management will answer the questions that many of the shareholders and bystanders have.

Prior to the merger announcement on January 10th, Angelo Mozillo had made many statements that seem to contradict the current price that Bank of America (BAC) is paying for the company. I believe that the most egregious of these statements was on December 3rd when he stated in a CNBC interview that Countrywide had, “Adequate liquidity and adequate capital”. Furthermore, he stated in this interview, that the current price of CFC ($10.68 close on December 3rd) doesn’t adequately reflect the financial position of the company. If this is really the case, then why is BAC buying CFC at 30% of book value?

In regards to the price paid by BAC, I would urge investors and investigators alike to look into the price action in CFC prior to the merger announcement. In the 2 months before the bankruptcy rumors, CFC seemed to have support at the $8-9 level, however, once the rumors hit the street, the stock dipped below $7.5 for the first time since 2000. I recently called the investor relations department of CFC and asked them a couple of questions. The most intriguing one was whether "they were going to pursue an investigation into the rumors of bankruptcy prior to the merger agreement. " Kevin Chamberlain, first VP of investor relations, stated in effect that rumors circulate all the time and CFC does not comment or respond to rumors. When I reminded him that CFC requested a trading halt and issued a statement to dispel the rumors he said that those decision were senior management decisions.

Speaking of senior management decisions, I think the next most telling statements can be found by examining BAC’s statements/actions leading up to, and after, the merger was announced. Ken Lewis stated in a AP News article on Jan 14th by Randall Chase that in regards to CFC they did twice the due diligence and that, “I have confidence that we properly assessed the issues.” Furthermore CNBC reported that as many as 60 BAC auditors had been doing their due diligence since mid December. In the same AP News article Ken Lewis is also quoted as saying, “I think we struck a fair price.”

If this is the case than why are they able to buy CFC at a “fair” price, a price that CFC had never traded at prior to the BK rumors? This so called fair price would only be acceptable to shareholders due to the BK rumors and subsequent plunge in CFC’s common stock price. And if the rumors are in fact baseless, then why isn’t CFC’s management pushing for an investigation into the rumors in order to protect their shareholders?

Quoting more recently from BAC filings is a WSJ article by Heidi Moore on Feb 13th. The filing by BAC stated that CFC needed to do the deal because of the imminent “financial distress” caused by plunging market share, regulatory inquiries, declining home prices and problems with the future of the mortgage-lending industry. This seems to contradict Ken Lewis’s statements in an AP article by Alex Veiga on Jan 29th where Ken Lewis is quoted as saying in regards to CFC’s Q4 losses, “Much more important to us is the dramatic improvement in the underlying fundamentals of the mortgage business.”

Also contradicting BAC’s most recent statement is another Lewis quote, “They had a very impressive liquidity plan; they had their backup lines in place.”

These contradictory statements and “back-tracking” continue to muddy the waters and limit disclosure. All of these things considered the events leading up to this merger at least warrant a second look.

Continuing to go forward, in light of recent Fed decisions, and the raising of conforming loan limits, the mortgage industry has changed. I urge all parties interested to do their own “due diligence”. I also applaud the recent actions by SRM Global and Legg Mason. Countrywide owes all parties involved, not only shareholders, but also employees, an explanation as to the events leading up to the decision to sell, and why they feel that they are creating value with the sale. Even small time investors and college students, like myself, know that selling into weakness is often a losing proposition.

Disclosure: Author holds a long position in CFC

Comments

[LoadedBanker:]

C'mon now. After the wheels had come off in Q307 Mozillo said CFC would be profitable in the fourth. Analysts and industry alike knew he was full of hot air. Every other company with any tie to the mortgage industry was going into the tank, and somehow they were protected? At that point it was clear he had just bought himself 6-months (if he could just report .01 in Q4 the hammer wouldn't drop until Q108 reporting in Apr) to either sell the company or make some wild all-in bet to come up with some black ink. Now we know which it was.

Let's brush aside all the spin. CFC was a deeply troubled company. The business model relied on short-term capital market funding. That disappeared. They didn't have a deposit base nearly large enough to fund their business. Chuck Schumer and the FHLB were about to cut them off because they didn't want to be left holding the bag. Bottom line, it was over. The orange man got squeezed, and had no choice but to pull the rip cord.

2008 Feb 14 08:02 AM

[helplessobs...:]

Regulators forced the issue on BAC. Someone must preserve the lenders records and keep personnel in place to service and workout the mortgage problems. That was then. Now BAC is showing extreme capital stress, raising credit card rates to +20% on current balances and giving any account holder the option to stop charging and payoff their balance, while paying 9.9% interest on the residuals.

2008 Feb 14 12:31 PM

[TA:]

'The orange man got squeezed, and had no choice but to pull the rip cord'

Smartest thing I've read on seekingalpha in years

2008 Feb 17 12:45 AM