Three Benefits of the Countrywide Buyout

by: Accrued Interest

What should we take away from the Countrywide (CFC)/Bank of America (NYSE:BAC) deal?

First, it's obviously good for market liquidity that Countrywide won't wind up in bankruptcy. While I think the economy could have handled a Countrywide liquidation, it would have been painful and messy. I'm sure Ben Bernanke is happy about this turn of events. Notice that Fannie Mae (FNM) and Freddie Mac (FRE) stock were both up solidly Friday.

Second, it tells you that Bank of America, at least, is willing to look past the current period to a time when the mortgage business has improved. We all know such a time will come, and the banks which have strong capacity at that time will enjoy strong profits.

Third, this obviously puts Washington Mutual (NYSE:WM) in play. Friday WaMu stock opened up about 7%, and its bonds rallied significantly. J.P. Morgan (NYSE:JPM) is rumored as the acquisitor, and there is probably only a couple other banks which would even be possibilities. I heard Wells Fargo's (NYSE:WFC) name mentioned, and it would have the capital, but it would be a strange marriage for such a conservative bank. You could also imagine some Mid-West or East Coast bank having interest in WaMu's geographical footprint, but I'm not sure any such banks have the spare capital to absorb WaMu's problem assets. US Bank? Fifth Third? PNC? I doubt it. If I'm Jamie Dimon, even if I'd really like to own WaMu, I wouldn't let BofA's move force my hand. JPM may be the only actual bidder, and WaMu is probably only going to get more desperate.

We should all remember that the credit market will likely improve before the economic picture does. In other words, the credit market is forward looking, and, currently, spreads indicate that the forward picture is bleak. All it will take for improvement in credit spreads is for conditions to indicate that the future will be somewhat less bleak. I'm seeing too many commentators merely conclude that credit (or stocks) are a bad play simply because the economic picture is poor, which is inadequate analysis. In order to be bearish on a security, you have to assume that conditions will be worse than what's priced in. By the time conditions actually improve, the market will have long since risen.