BofA's Countrywide Purchase is a Huge Mistake

Includes: BAC, CFC
by: Stock Traders Daily

This might be one of the biggest mistakes I have seen in a long while. Bank of America (NYSE:BAC) should not have bought Countrywide Financial (CFC).

Let me start by saying that we have been short BAC since $54.5 in our longer term portfolio. We were considering a cover, but this makes us second guess that move. The reason we shorted BAC was that the company had reached a cap in terms of the percentage of assets that they could hold in the United States. In effect, they had reached a limit and could not grow, save some non-core business acquisition. The decision to buy CFC could be analogous to that. They were searching for something...

Imagine a rookie investor sitting on a wad of cash, and itching to invest it. He makes a decision to invest in a stock and it goes down. Yeah, bad move, but the stock will go up, I just know it will, he thinks. So he throws the rest of his money at the stock, in effect catching that falling knife with both hands. Next thing, he's nearly wiped out. How many times have you heard this story? Better, how many times have you seen a major firm make this mistake? The answer to #2 is, not many.

BAC has just made the worst decision on 2008, so far. They can review CFC's book all they want, but there's no way they can determine what the impact of the subprime 1.8 million resets are going to have on CFC going forward. The risk is extremely high, and the conservative nature of BAC has been compromised. BAC, with CFC, is a much more volatile company, a much riskier play, and unnecessarily so. BAC was a good, conservative company, and management had no business bruising the foundation that BAC was built on with this ridiculous move. Every dime that BAC has invested in CFC will be lost to the continued deterioration of the CFC assets in the next two years.

Coupled with the finding of the Investment Rate, this was the worst mistake I have seen in a long time.

Disclosure: Author is short BAC