Is Bank of America Rethinking Countrywide's Value?

At some point, whenever somebody is trying to value a financial institution, a term like "tangible equity" or "book value" will start being thrown around. They're different ways of playing the assets-minus- liabilities game, but that's where the problems start: if the financial institution is in trouble, then its liabilities are worth less, which can mean that it actually rises in value.

So what's happening with Countrywide (CFC), now that Bank of America (BAC) has said that it won't guarantee the mortgage lender's liabilities? Are these kind of calculations being made? Reuters has seen a report from Friedman Billings analyst Paul Miller, but isn't exactly crystal clear on what he's saying:

Countrywide's loan portfolio has deteriorated so rapidly that it currently has negative equity and the proposed takeover of the company will be a drag on Bank of America's earnings due to the elevated credit expenses at Countrywide, analyst Paul Miller wrote in a note to clients...

If mark-downs on Countrywide's loan portfolio are less than $22 billion, then Bank of America can likely offset the adjustments with fair value debt adjustments and the difference between tangible equity and its purchase price of Countrywide, he estimated.

Don't look to Dealbook to translate that into English, they just copy-and-paste it. But one way of reading it is to say that if Bank of America marks down Countrywide's assets, they can mark down the value of Countrywide's liabilities as well and still manage to justify paying money for an insolvent company. The problem of course is that once Bank of America ends up buying Countrywide, it will have every incentive to minimize Countrywide's borrowing costs, which would mean guaranteeing Countrywide's liabilities.

In any case, Miller's now saying that BofA is likely to end up paying rather less than the $6.50 or so that it originally said it would pay for Countrywide, and might bring its bid down to less than $2 per share. Which is within its rights: BofA always had more of a call option on Countrywide than a cast-iron commitment to buy it.

Comments

[Pj568:]

Understanding that a 22B gross write down ends up at approximately 14B after tax, which takes book equity to zero, the question becomes which creditors are willing to settle for less outside of a formal forced liquidation plan. Will it be the general creditors, the bond holders or the Fed? They can't mark it down unless they get actual relief somehow, can they?

2008 May 05 12:58 PM

[H2O:]

Hell if they apprasied themself - BOA - would be wise to look it over.
countrywide - landsafe - apprasiang there own house's???????

You Know When The Crazies Come Out.

Now I don't want any speculation here that I support all the things Bush Has done
- However there are a few things - He did call on help for the poor with owning there
own house - It's just the rich greedy - That took a good thing and made it bad.

Just think - all the families could still be in there house - and making there payments
- housing prices still going up - But nope the greedy got greeder - They want - every
penny out of the poor - but they forgot one thing - you can only get so much blood
out of a turnup.

Simple question? are the Rich-Greedy really as stupid as they pass themselfs off to be?

2008 May 05 01:52 PM

[DSX Lover:]

BofA can always do the MSFT Yahoo, walk away.
And like JPM, buy CFC for pennies, since no one will be willing to buy it for more. And let Helicopter Ben finance the transaction for free to take on the systematic risk.

2008 May 05 02:29 PM

[H2O:]

Het you guys want to know how stupid countrywide is????

They wanted to send over - The same Mark Ozan from landsafe - That faked the apprasial last sept....

Are these IDIOTS so used to stealing from people - They would dare to show back up?????

2008 May 05 08:13 PM