TheStreet.com's Jim Cramer says the guys at the top don't know what they're doing, and it shows.

AIG's (NYSE: AIG) (Cramer's Take) making everyone's life difficult today. That's in part because AIG had been the biggest proponent of "super senior," meaning they repeatedly said that their collateralized debt obligation (CDO) exposure was of the kind that was intelligent, measured and thoughtful. They talked endlessly about how their due diligence made the difference and that unlike all of the other buyers, they kicked the tires three times and never bought the plain ol' CDOs. Then they brought in professors from Wharton to be sure that even if all heck broke loose and they were being too aggressive, they would be hedged.

They also were the first to give you the percentages of how much could go bad and that even in the worst-case scenario, they were overcapitalized. And, most important, they were insurers, no need to mark to market, they can play it all out.

Plus, they touted their own struggles. They made the point that because of the turmoil at the top, they hadn't bought any bad stuff and stopped buying residential real estate products after 2005. What they did buy -- they assured us in that big teach-in dog-and-pony show in December -- was the extra-special nature of their particular buys and that, unlike everyone else, risk officers scrutinized every single piece of paper that went into their super senior insurance, meaning only the top-top part of a CDO-squared, the part where everything had to default ahead of it; they made a point of how impossible that would be.

In January, Bank of America (NYSE: BAC) made a gutsy move when it decided to purchase Countrywide Financial (NYSE: CFC). True, it would greatly expand its mortgage footprint, but it would also mean taking on lots of risk.

Of course, since then, the financials went into a swoon. In fact, the US financial system almost imploded because of the Bear Stearns (NYSE: BSC) debacle.

As a result, there is much skepticism that Bank of America will close its deal, as evident by remarks from an analyst with Friedman, Billings, Ramsey & Co. – Paul Miller – who thinks that Bank of America should forgo the deal.

His belief is that there will be a need for a whopping $30 billion writedown, which would be tough to swallow for Bank of America's shareholders.

Interestingly enough, there are already signs that Bank of America is getting skittish. Last week, the firm was not clear that it would back Countrywide's debt. The upshot was that S&P downgraded the debt to junk status.

And yes, in today's trading, Countrywide's stock is down 10% to $5.35.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates MergerBook.com.

Countrywide Financial (NYSE: CFC) is recently up 14 cents to $6.28.

CFC has been recently subject to unconfirmed chatter Bill Miller of Legg Mason Value Trust and other major CFC shareholders want Bank of America (NYSE: BAC) to increase its offer for CFC.

BAC announced on Jan. 11, 2008 it will pay CFC shareholders 0.1822 per share of BAC for each share they own. The BAC buyout premium spread is wide at 22% ($7.46).

CFC May option implied volatility of 74 is near its 12-week average of 77 according to Track Data, suggesting non-directional risk.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com

If you can make money lending money to people who can't afford mortgages, why not make money buying them back. Several former Countrywide (NYSE: CFC) managers have linked up with Blackrock (NYSE: BLK) to set up a firm, Private National Mortgage Acceptance Company, to buy troubled mortgages. According to The Wall Street Journal the new operation "seeks to raise more than $2 billion to buy distressed mortgages on the cheap, work with borrowers to restructure them, and then resell them as performing mortgages at a profit."

The new venture stinks a bit. The people running the venture learned the business at Countrywide, the source of so much of the pain in the current mortgage crisis and the project makes Blackrock appear to be a firm ready to profit from the misfortune of others. Beyond that, the new company seems like a real money-maker.

The Blackrock-supported mortgage-buying operation will have to be careful when it enters the market. If it buys big packages of home loans and the market keeps falling, the start-up could lose a lot of money. Let's hope so.

Douglas A. McIntyre is an editor at 247wallst.com.

With shares of Countrywide Financial (NYSE: CFC) trading at a 35% discount to the price that Bank of America (NYSE: BAC) has agreed to pay for the company, it appears that traders have substantial doubt about the deal's prospects.

Of course, an FBI investigation into the company's accounting is also doing little to boost investor confidence. If the company's financial statements are misleading, Countrywide's estimates of default rates could be off. And if they're off by a lot, the company could be in big trouble.

One banker warned [subscription required] the Wall Street Journal that Countrywide's financial position "isn't a mark-to-market balance sheet," which make the arguments of investors like Jon Wood that the company should be sold for something closer to its $22 book value irrelevant.

MAJOR PAPERS:

• What Countrywide Financial Corporation (NYSE: CFC) knew about its mortgage borrowers, and how it handled that information, is under review by Federal investigators, according to the Wall Street Journal. Some of their findings reveal that Countrywide had questionable information, which it then put together many of those mortgages into securities, and sold them to investors.
• The Air Force's award of a $40B contract for aerial refueling tankers to Northrop Grumman Corporation (NYSE: NOC) and European Aeronautical Defense & Space, will be protested by The Boeing Company (NYSE: BA), reported the Wall Street Journal.
• The Financial Times reported that News Corporation (NYSE: NWS) CEO Rupert Murdoch dashed the hopes of Yahoo! Inc (NASDAQ: YHOO) executives seeking an alternative to Microsoft Corporation's (NASDAQ: MSFT) $40B offer after Murdoch endorsed the view of analysts and investors that it could not match the value offered by Microsoft.

OTHER PAPERS:

• According to General Motors Corporation (NYSE: GM) president and COO Frederick A. Henderson, the New York Times reported that the auto maker will not intervene in the dispute between parts supplier American Axle and Manufacturing Holdings Inc (NYSE: AXL) and the United Auto Workers union. Given that the strike has not yet hurt the company's ability to sell vehicles, Henderson said company officials "just have to keep to our own knitting."

MAJOR PAPERS:

• According to sources, the Wall Street Journal reported that Countrywide Financial Corporation (NYSE: CFC) is under investigation for possible securities fraud. People close to the situation say the inquiry is in its early stages but it involves an inquiry into alleged misrepresentations of the company's financial position and the quality of its mortgage loans.
• The Financial Times reported that Credit Suisse Group (NYSE: CS) has teamed up with three leading academics to create products that will deal with the potentially lucrative hedge fund replication industry. The upcoming suite of products will attempt to mechanically replicate the returns of the major hedge fund strategies.

OTHER PAPERS:

• Rio Tinto Plc (NYSE: RTP) is expected to announce this week that its aluminum business is worth up to $20B more than current estimates, after a rise in aluminum prices; the UK Times reported that the statement could raise pressure on BHP Billiton Limited (NYSE: BHP) to increase its takeover bid for Rio.
• Asset manager Ameriprise Financial Inc (NYSE: AMP) is pairing up with MasterCard Incorporated (NYSE: MA), the Associated Press reported, to become a credit card lender for the first time, the two companies reportedly plan to announce today.

The day has finally arrived. Executive compensation bad boys Angelo Mozilo of Countrywide Financial Corporation (NYSE: CFC), former Citgroup Inc. (NYSE: C) CEO Chuck Prince and former Merrill Lynch & Co. Inc. (NYSE: MER) head Stan O'Neal will be hauled before Congress to be subjected to pseudo-populist grandstanding.

The evidence is pretty damning. At Countrywide, the board of directors brought in a new compensation consultant after the current one said Mozilo's pay was inflated. In an email released by Congress [subscription required], Mozilo responded to a consultant's email that the board's proposed compensation plan lowered his earnings potential by saying that "At this stage in my life [...] this process is no longer about money but more about respect and acknowledgment of my accomplishments.... Boards have been placed under enormous pressure by the left wing antibusiness press and the envious leaders of unions..."

MAJOR PAPERS:

• As chairman and CEO of Countrywide Financial Corporation (NYSE: CFC), Angelo Mozilo refused to take pay cuts, according to a report by a House committee, and reported by the Wall Street Journal. The focus of a meeting today with the House Committee on Oversight and Government Reform on executive compensation at companies involved in the subprime fiasco will be on Mozilo, who was paid about $250M between 1998 and 2007, plus $406M from his sale of Countrywide shares.
• The Wall Street Journal also reported that Corning Incorporated (NYSE: GLW) is looking to sell crystal business Steuben Glass, a unit that has lost $30M over the last five years. If Corning cannot find a buyer for the unit, executives said they will consider other options, including closing Steuben.

OTHER PAPERS:

• After failing to meet repayment requests, the UK Times reported that Carlyle Capital Corp Limited (OTC: CARYF), the Dutch-listed affiliate of U.S. private-equity firm Carlyle Group, held emergency restructuring talks with its banks Thursday evening. CCC disclosed that it had received one default notice after receiving margin calls for over $37M from banks since Wednesday but was "unable to meet the demands" of several. The firm expects "at least one" more default notice.

WEB SITES:

• Despite shedding several units, Vikram Pandit, Citigroup Incorporated's (NYSE: C) CEO, denied rumors that the bank could put its unit in South Korea up for sale. According to sources, Pandit, currently reviewing operations in an effort to boost earnings and cut costs, said "absolutely no" when directly asked about a divestiture, Reuters reported.

During the days when subprime lending wasn't widely seen as a quagmire, pay-options mortgages were popular. Here's how it worked: "homeowners" (I will hence forth put "'homeowners" in quotes when I'm referring to situation where the borrower owes more on the home than it's worth) could choose to make a smaller monthly payment than normal, and then tack the difference on at the back-end of the loan. This came in very handy for borrowers looking to travel to Cancun or invest in plasma-screen televisions.

Now, Countrywide Financial (NYSE: CFC) is worried about these negative amortization loans. At the end of December, the company had $29 billion in pay-option loans, with $26 billion of that amount having increased beyond the original loan amount. People with pay-option loans are exercising that option and will likely continue to do so -- the housing downturn means that you have to think that the increased loan balances are leaving a huge chunk of those subprime borrowers upside down.

Here's the best part: 81% of those loans were made to borrowers who provided little or no documentation of income.

I wonder how much of this carnage Bank of America (NYSE: BAC) was aware when it decided to buy into the company. Obviously it sees value but I can't help being skeptical: Given its status as a poster child of pathological stupidity, does the Countrywide brand really have any value at all?

Countrywide Financial (NYSE: CFC) shareholders may be able to take some level of comfort in the fact that apparently they're not the only ones being treated like crap by the beleaguered mortgage giant.

According to the Associated Press, "U.S. trustees in Georgia, Ohio, and Florida on Thursday asked the courts to enjoin 'Countrywide's sustained bad faith conduct' in its treatment of distressed consumers trying to save their homes in bankruptcy court, according to a complaint filed by U.S. Trustee Donald F. Walton."

Walton wrote that "Countrywide's failure to ensure the accuracy of its claims and pleadings has resulted in an abuse of the bankruptcy process." The company is accused of filling bankruptcy proceedings with mishandled payments, unexplained or erroneous fees, and inaccurate paperwork.

Courts in Pennsylvania, Texas, and North Carolina have previously imposed punitive damages on the company for misconduct in bankruptcy cases.

The Wall Street Journal reports (subscription required) that the Countrywide deal has been a lightning rod for Bank of America (NYSE: BAC), which is set to close the deal in the third quarter.

The possible legal, regulatory, and financial hassles aside, I think that Bank of America has to wonder what exactly they're getting here. Countrywide Financial is being acquired presumably for its strong brand and network, but you have to think all these accusations of sleaze and extremely negative media coverage (I'm proud to say I've contributed my fair share) are doing a lot to hurt the brand.

And from this latest bit of news, it doesn't seems like those problems are going away anytime soon.

With media outlets and politicians heaping sympathy on subprime borrowers on the brink of losing everything, it's important to keep in mind the real victims on this mess: that's right, the mortgage brokers who got us into it.

As if plummeting earnings from the decline in subprime lending weren't bad enough, subprime write down poster child Countrywide Financial (NYSE: CFC) canceled its annual ski party at the Rittz-Carlton Bachelor Gulch in Avon, Colorado, where the company puts up 30 of its most valued correspondent lenders (at $725+ per night) and treats them to skiing and $140 caviar and Kurobuta pork osso bucco at Wolfgang Puck's restaurant.

It looks like this year the closest they'll be getting to Spago is the Wolfgang Puck canned dumpling soup available for $31.20 per 12-pack on Amazon.com. Even that might be a stretch in this market. But there's always Chef Boyardee.

Are you disgusted yet? This week MBIA (NYSE: MBI) testified -- no they lobbied, hmm, actually they complained -- well the truth is they whined to Congress that short-seller William Ackman had trashed its reputation, and its stock for personal gain -- gee, no kidding -- but the big problem is he seems to have been correct to a major extent. For more on this see MBIA asks Congress to fight its battles with Ackman by Peter Cohan or MBIA plays the spooky short-seller card by Zac Bissonnette.

I own MBIA shares and recently "adventured" into more, but it was not based on management crying foul and everything being just fine. I did it because I think the company will work through the mess over time and that it is oversold now based on fear. MBIA needs to focus on cleaning up its exposure to risk and underwriting standards and stop looking for scapegoats.

Others are in the same boat. There are times the squirming around the truth is painful to watch. This week we watched a baseball pitching icon, Roger Clemens, remind us once again of the first rule of holes: "If you're in one, stop digging." I'm afraid this truism that I often refer to will continue to be a recurring theme in my stories every so often, because some folks just don't get it.

I've been banging the drum on Angelo Mozilo's heinously bad stewardship and overcompensation for awhile now but sorry folks: I gotta get at least one more post out of this travesty.

Mozilo, who is CEO of troubled lender Countrywide Financial (NYSE: CFC), is eligible to receive stock awards valued at $10 million this April. The awards consist of performance-based restricted stock units and stock-appreciation right and will vest upon the consummation of Bank of America (NYSE: BAC)'s acquisition of the company.

The fact that Mozilo sold hundreds of millions of dollars worth of stock at prices 5 times the current price raises questions about whether he really need to be compensated further.

But that's not the worst of it. Chief Operating Officer David Sambol could receive a $1.9 million retention bonus upon completion of the merger.

The purpose of a retention payment is to keep an executive from jumping ship to another more lucrative opportunity. But I've got to ask: Given that Countrywide is the poster child for idiotic lending, bad management, and poor corporate governance, is Mr. Sambol really that in demand that a $1.9 million retention payment is necessary. Or is this just more of the "loot the company while you still can!" stuff that has come to characterize the descent of Countrywide?

Bank of America, Citigroup and other major U.S. banks and lenders announced Tuesday a revised plan to help some borrowers in danger of default remain in their homes.

Encouraged by U.S. Treasury Secretary Henry Paulson, the banks will offer a 30-day freeze on foreclosures while loan modifications are considered for borrowers who are at least three months late on payments. The program will include borrowers with prime mortgages, as well as those with poorer credit histories.

Second wave of defaults

The program is being initiated as the United States prepares for the second wave of mortgage defaults as variable mortgages rates reset in 2008. The U.S. Federal Reserve estimates that about two million mortgages will reset to higher rates, with foreclosures expected to soar to one million, absent an intervention. In a typical year, the U.S. has about 500,000-550,000 foreclosures.