Countrywide Financial Corp. (NYSE: CFC) is paying a high price for the superficial vote of confidence from Bank of America (NYSE: BAC). That's because Countrywide is paying a 7.25% interest rate to Bank of America for its $2 billion preferred investment and providing the bank an option to purchase Countrywide shares at $18 -- 41% below the price they're likely to open at this morning.
As the New York Times reports, there is risk in this deal for Bank of America and Countrywide. One such risk is that Countrywide has agreed to buy back loans in secondary market pools if the terms of the loans are changed to help keep borrowers from defaulting. It's not clear how much cash will be required to fulfill those promises, but it would cost $1.2 billion for Countrywide to repurchase 1% of the loans in the pools at issue. Repurchasing 5% would cost $6.1 billion.
With such big unknown obligations, Bank of America's investment will enable it to get a clearer picture of whether it wants to exercise its option to purchase Countrywide at $18. In the meantime, the $143 million annual interest payments will take scarce cash out of Countrywide's coffers that could have been used for more productive purposes.
I'd say this deal shows how much Countrywide is willing to pay to create the perception that it won't be heading for bankruptcy. Yet, the terms of the deal ensure that Bank of America can't lose if Countrywide does go out of business. If Countrywide stays out of bankruptcy, Bank of America will probably be able to buy in above $18 and make a big profit while receiving that high income stream. If, on the other hand, Countrywide files for bankruptcy, Countrywide will still get those interest payments and a share of Countrywide in its bankruptcy restructuring.
This deal is a good bet for Bank of America and a Hail Mary pass for Countrywide.
Peter Cohan is President of Peter S. Cohan & Associates, teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
8-23-2007 @ 10:15AM
Suzanne said...
Looks like CFC is in more trouble than has been announced...and BAC is willing to take a reasonable gamble with $2 billion.
8-23-2007 @ 10:56AM
Wash6970 said...
This situation bears watching because at this point we are only talking residential mortgages for the most part. I have to believe the commercial mortgage market is teetering as well.
8-25-2007 @ 11:55AM
jane said...
It's time that CFC be exposed for it's disreputable "switch and bait" selling practices in the mortage industry. They have hurt many hardworking families and deprived them of the dream of home ownership. It this deal goes through, Bank of America must clean up this act.
8-23-2007 @ 2:45PM
Gwen Scott said...
I think Bank of America made a big mistake. Countrywide has lots of foreclosures and lots of attitude in helping people or even to try and sell those properties. When have a valid buyer for a short sale or foreclosure they are NOT helpful so big no one in charge. Would never recommend them. Lots of things still on the horizon in mortgages.
8-23-2007 @ 3:06PM
Gwen Scott said...
Bait and Switch is truly their game and many of the Loan Officers have lots of attitude........
8-23-2007 @ 3:45PM
mike lavery said...
Mazillo is a crook. Even he admits that 45% of his loan portfolio is teaser jumbo adjustable loan. He has milked Countrywide for years--giving himself raises even when the company's earnings were falling. Maybe now his misdeeds are finally coming home to roost.
Countrywide will go bankrupt.
8-23-2007 @ 6:46PM
Sherry said...
I curently have a mortgage with country wide. It is a fixed rate at 6.25 and asumable. If they go under will my mortgage still be assumable?
8-23-2007 @ 11:29PM
Lars Bell said...
couple of questions...
Do the terms of the Prefered Stock give B of A the right to veto any new asset purchases or sales or new equity issues from countrywide? If so, does that give B of A powerful sway over another finacial institition?
Some prefered stock terms allow for the auditing of the books of the issuer. Is this true here? Think of the strategic importance of knowing the detailed workings of another institution.
Does this subordinate all other debt under it?
If things go bad and countrywide misses those 6 quarterly payments, how much control do those 2 board members have? Any info on their voting rights?
Just curious.
11-01-2007 @ 2:21AM
Jill Schottenstein said...
"Lay ordered to pay for BWC", the Columbus law firm Schottenstein,,,,,.. (Not rated) 19 second(s) ago Wednesday, October 31, 2007
Man pays for BWC loss
Director of hedge fund convicted, could get 20 years for fraud in loss of $216 million .
"Yesterday, a federal jury found him guilty of fraud in the loss of $216 million of Ohio Bureau of Workers' Compensation money in a Bermuda-based hedge fund that Lay's MDL Capital Management of Pittsburgh managed" "The jury also decided Lay must forfeit $590,526 in fees that MDL was paid to manage the fund."
Click here: The Columbus Dispatch : Lay ordered to pay for BWC loss
"Article published Wednesday, June 29, 2005
ETHICS COMMISSION
Taft dodges questions on golf outings; Noe sold coins he owned to the state
By JAMES DREW and STEVE EDER
BLADE STAFF WRITERS
"COLUMBUS — A week after Gov. Bob Taft acknowledged that “errors and omissions” marred his financial disclosure forms, the embattled governor refused yesterday to reveal any information about the undisclosed golf outings that have prompted an Ohio Ethics Commission investigation."
"Yesterday, Mr. Petro repeated that he didn’t know until June 7 about the state’s $215 million loss in a high-risk hedge fund managed by Pittsburgh-based MDL Capital Management."
"He said the special counsel assigned to review MDL’s activities — the Columbus law firm of Schottenstein, Zox & Dunn — failed to provide “written communications” to the attorney general’s office about the huge investment loss."......