Wachovia (NASDAQ:WB) effectively threw in the towel yesterday with respect to making a return on their purchase of Golden West when they decided to stop offering option-ARMs. When you consider the fact that Countrywide (CFC) has even larger numbers of exotic mortgages on its balance sheet not to mention being a major subprime player, you have to wonder if Countrywide will become Bank of America's (NYSE:BAC) Golden West.
Don't get me wrong, I understand the value in acquiring a mortgage lending network as large as Countrywide's, and Bank of America did need to act in order to protect its investment in the company. However, it’s going to take a significant investment well in excess of the acquisition price to clean up Countrywide, and I have to wonder if it would’ve been cheaper for BAC to eat their investment, buy pieces of the company via bankruptcy auctions and/or build their own lending network to replace the void left by CFC. Looking at the likely banking environment over the next 2-4 years, I wonder if it’s even smart to take on a rehab project like Countrywide.
Consider just some of the issues Countrywide has faced over the past year or so:
- The CEO Angelo Mozilo declared a bottom in the housing market late last spring, and we all know how off that prediction was.
- The company went on a hiring and acquisition binge last summer only to turn around and sack many of those same people barely a month later.
- After having a disastrous Q3 of last year that included $1.2 billion in losses and negative revenue of $50 million, Mozilo declares that the company will be profitable in Q4.
- The suspicious stock sales and CFC’s very suspect balance sheet.
Now if the above were the only bad things going on/wrong with Countrywide, the company would look like a bad investment; instead, the above barely scratches the surface of a train wreck of a company. At the end of the day, CFC has shown itself to be out of touch with reality, woefully mismanaged and not particularly truthful with investors. I may not be a big time banking executive, so maybe BAC knows something I don’t, but CFC isn’t exactly the type of company I want to put MY hard earned money into.
Better yet, if Bank of America hadn't already invested two billion dollars into CFC back in August, would they have even tried to buy the company, would anyone for that matter? Only time will tell if BAC’s gamble will work out, but if I were an investor in BAC I would be more than just a little nervous right now. Between the lawsuits and balance sheet issues, BAC is going to be cleaning up the mess left behind by Mozilo and company well into the next decade.
Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article.