No Moss

Countrywide: Potential Short Squeeze in the Offing

I have a small position in BAC that is, of course, under water. I'm also skeptical about the short-term wisdom of buying CFC. That said, I think the long-term prospects for BAC are excellent. They are focusing on being a retail bank, and I think that will be rewarded.

In the long run, the CFC purchase will be accretive to business, increasiong the bank's revenue from mortgage originations and mortgage servicing, but more importantly, funneling new mortgage loan business into BAC, with new bank accounts following. I mean, you'll get some sort of discount from BAC if you have your bank account there. Bank deposits = cheap money plus additional service revenue.

It's one way to get around that 10% cap.

Absorbing CFC would seem to require either selling some of that China Construction Bank stock, further diluting BAC stock, or cutting the dividend. We'll know the results of all this by year end, after we get a couple of quarters of writeoffs behind us.

Who knows, the economy could come riding to the rescue and make Ken Lewis look like a genius. Stranger things have happened.

Are Countrywide Shares Worthless?

Well, I had thought, long ago, that this was a pretty good deal. I underestimated the seriousness of the credit crisis. I think BAC has two options now. One is to offer the $1-2 per share that would be better than nothing for shareholders. The other is to let the thing go into bankruptcy and pick up the assets, like the servicing business and the loan portfolio, at fair market value.

That's obvious, of course. My question is, would they have the rights to the assets if the company went bankrupt, or would they have to bid competitively to get them?

And, am I missing an option?

BTW, kurt walter, that was hilarious!

BofA's Countrywide Purchase is a Huge Mistake

I think West_S got it. Everybody is pointing to this thing like BAC bought a loan portfolio. They bought a franchise. Now there's no question that the franchise is damaged. It's best money-maker, the subprime loan business (Full Spectrum unit at CFC) is history. There are suits against CFC, and the ability to place loans with Freddie Mac and Fannie Mae is seized up right now. However, the business of writing mortgages gets you points, placement fees, and loan servicing fees. It makes money, and it makes pretty good money in a normal market, which the mortgage will be in a year or two.

The loan portfolio at CFC, including the stuff held for resale, is not great stuff, but you've got a lot of negative goodwill (that's what happens when you buy for less than book value) to write it off against. S&P estimated a writeoff of 1% of the loan portfolio in 2008.

Ken Lewis wanted this company. He got it for what one writer on this web site characterized as a rounding error on BAC's books.

He wanted to reduce his dependence on investment banking, which he doesn't understand, and increase his footprint in retail banking, which he understands far better than you and I. BAC is a little clumsy, but so is your average 500 pound gorilla.