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.
Countywide Financial (NYSE: CFC) reported a loss of $893 million for the first quarter. BloggingStocks' Peter Cohan wrote that "Fortunately, Countrywide has an exit strategy. In January, Countrywide agreed to sell itself to Bank of America (NYSE: BAC) for about $4 billion in stock. The question is whether Bank of America will pull out of the deal now that it sees the rising costs it will incur if it moves forward. Since Countrywide trades 15% below that takeout price, the market has its doubts."
But now that may be in further doubt. In a surprise move, Standard & Poor's downgraded Countrywide's debt to junk status, citing concern that Bank of America might not back the company's debt once the buyout is completed.
But some analysts say that the fact that Bank of America hasn't stood up and said it will back the debt raises questions about whether the deal can be completed at all. Friedman Billings Ramsey & Co. analyst Paul Miller said that "A lot of things have changed in the last 30 days. Home prices are still falling very rapidly and Countrywide's credit costs are getting worse from what we hear."
Shares of Countrywide fell on the initial news of the downgrade but rebounded to close down just 1.16% on the day. Still, the wide premium to the proposed takeover offer reflects a great deal of skepticism about the deal's prospects.
Analysts surveyed by Thomson Financial expect Countrywide Financial (NYSE: CFC) to post a much smaller profit for the first quarter, while Archer Daniels Midland (NYSE: ADM) is expected to report a profit gain. Both companies are scheduled to report results Tuesday morning.
Countrywide Financial is expected to earn two cents per share, which is down 97% from the same period in 2007 when it earned 72 cents per share, but that swings from a loss of 79 cents per share in the most recent quarter. However, the company tended to fall short of earnings estimates even before the credit crunch set in; that fourth-quarter loss of 79 missed estimates by 163%.
Formerly one of the top residential mortgage lenders, California-based Countrywide Financial is being bought out by Bank of America (NYSE: BAC). In the past year, Countrywide's revenues were $24 billion, and its net income is in the red to the tune of $703.5 million. Not surprisingly, the consensus recommendation of analysts remains to hold CFC.
The stock has fallen 84.9% in the past year and closed Monday at $5.83.
The Bank of America, seeking approval of its Countrywide Financial Corp. takeover, announced Monday it will modify at least $40 billion in troubled mortgages during the next two years to keep customers in their homes, Bloomberg News reported Monday.
The action could help as many as 265,000 homeowners, Liam McGee, president of the Bank of America's (NYSE: BAC) global consumer and small-business banking unit, said Monday in Los Angeles at a U.S. Federal Reserve hearing on the pending purchase, Bloomberg News reported.
``No one benefits from a foreclosed home,'' McGee told Bloomberg News. ``It is bad business for banks.''
Bank of America's shares moved 10 cents higher to $38.40 while Countrywide (NYSE: CFC) gained 7 cents to $5.91 on the news in Monday afternoon trading.
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 toThe 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.
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 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."
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.
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..."
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 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.
TheStreet.com's Jim Cramer says the guys at the top don't know what they're doing, and it shows.
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The day has finally arrived. Executive compensation bad boys Angelo Mozilo of 
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.
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