Value of Bank of America’s Countrywide Stake Down "Nearly 50%

We didn’t pay much attention to the$2 billion investment by Bank of America in mortgage lender Countrywide at the time because we didn’t like it:

I will confess I haven’t studied the details of the deal for a simple reason: I’m appalled that B of A would even consider it. The two banks had reportedly been talking for six years. That means B of A knew, or ought to have known, Countrywide very well…..

I know lawyers who have Countrywide in their crosshairs, and I am certain they have plenty of company.

To put it another way: there’s enough fraudulent selling in the the subprime market in general, and smoke around Countrywide in particular, to deter anyone investor who takes litigation or reputation risk seriously.

In my day, no respectable institution would make a high-profile equity investment or otherwise closely link its name with an organization that had the whiff of serious liability about it (except in liquidation or some other scenario which got rid of the incumbent management team).

Bank of America’s bad karma around this deal has caught up with them, and quickly too. From :

Bank of America Corp.’s $2 billion investment in Countrywide Financial Corp., the biggest U.S. mortgage lender, has lost almost half its paper value as Countrywide fell amid speculation it may file for bankruptcy.

Charlotte, North Carolina-based Bank of America, the biggest U.S. bank by market capitalization, made the preferred-stock investment in August to help bail out the lender amid the global credit rout that cut off its access to short-term financing.

Bank of America has the right to convert the preferred stock to common shares at $18 each. If the preferred shares had been swapped for common stock at the mortgage lender’s high of $24.46 on Aug. 23, the first day of trading after the deal was announced, Bank of America would have made a $700 million paper profit. Countrywide also agreed to pay dividends of 7.25 percent on the preferred shares.

Instead, Countrywide’s shares have tumbled, leaving Bank of America’s investment down $858 million, data compiled by Bloomberg show. Countrywide fell 29 cents to $10.28 today in New York Stock Exchange composite trading as the lender denied speculation it will seek protection from its creditors. The shares have lost about 76 percent this year.

Bloomberg didn’t even do the math right. The economic loss is higher than the $858 billion they indicated (that’s the( $18-$10,28/$18) x $2 bilion) . You’d have to have the expected volatility of Countrywide’s stock and what the restrictions on converting the convert preferred into common were to assess the deal. However, selling a deeply in the money convert is very unusual, to put it politely. BofA made its investment on terms which almost certainly mean that the $2 billion was at a discount to the then-fair value of the securities. So since the economic value was greater, the loss would be correspondingly larger.

But it seems no one can do business with Countrywide and come out a winner.

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4 comments

  1. Jojo

    Plus, BOFA has the lost opportunity cost. How much could they have made by lending the money to someone else or gaining interest on it?

  2. Anonymous

    Perhaps there will be intangible PR value in being able to spin yourself as a “rescuer” after the crisis goes from bad to worse in 2008, in an election year when regulators, Congresscritters and class-action litigators might be sniffing around for an Arthur Andersen scapegoat.

    Anyways, it doesn’t matter what the current stock price is a few short months later. Of course they knew that a falling knife often has further to fall. The success of the investment is really a binary issue: does Countrywide survive or not? Five years from now, housing will have recovered, and competitors that have gone out of business will be faced with staffing up from scratch. For example, the relatively few companies that survived the dot-com crash often did very well in the long term.

  3. whitebeard

    It seems like only yesterday that financial executives and pundits were assuring us that these subprime mortgage problems were limited in scope and their impact should not be exaggerated. When New Century went down, Mozilo was saying how strong Countrywide would be in the wake of the collapse of its more reckless competitors. Then it turned out that Countrywide had been pretty reckless too. Now we see the big brokerage houses and Citi hemorrhaging money. And BofA and WaMu and Fannie, and Freddie…no wonder investors are scared. What would you recommend to a working stiff with about $300,000 in retirement savings, most of which is in mutual funds? Should I sell ’em and buy gold? Guns and ammo?

  4. Anonymous

    Countrywide Home Loans Servicing LP
    Master Servicer

    CWABS Asset-Backed Certificates Trust 2007-12
    Issuing Entity

    Asset-Backed Certificates, Series 2007-12

    Class 2-M-3 Certificates

    This Supplement updates the Prospectus Supplement, dated August 13, 2007 (as supplemented by the supplement thereto dated September 11, 2007, the “Prospectus Supplement”) relating to the CWABS Asset-Backed Certificates Trust 2007-12, Asset-Backed Certificates, Series 2007-12. This Supplement has been prepared in connection with the sale by CWABS, Inc. to Countrywide Securities Corporation of $5,000,000 Original Certificate Principal Balance of the Class 2-M-3 Certificates, and the distribution of those Class 2-M-3 Certificates by Countrywide Securities Corporation to the public in negotiated transactions at varying prices to be determined at the time of sale. The proceeds to the depositor from the sale of those Class 2-M-3 Certificates are expected to be approximately $4,809,179, accrued interest, before deducting expenses.

    This Supplement updates the Prospectus Supplement as follows:

    · for the purposes of the sections captioned “Summary—ERISA Considerations” and “ERISA Considerations” in the Prospectus Supplement, because the Class 2-M-3 Certificates referenced above are being purchased by Countrywide Securities Corporation, those Class 2-M-3 Certificates may be purchased by Plans or persons using Plan assets, so long as the conditions described in the section captioned “ERISA Considerations” with respect to the Class A Certificates are met;

    …The U.S. Department of Labor (the “DOL”) has granted to Goldman, Sachs & Co., the underwriter, an administrative exemption (the “Exemption”) from certain of the prohibited transaction rules of ERISA with respect to the initial purchase, the holding and the subsequent resale by Plans of certificates representing interests in asset backed pass-through trusts that consist of certain receivables, loans and other obligations that meet the conditions and requirements of the Exemption.

    Except as provided below with respect to the interest rate swap agreement, the Depositor believes that the Exemption will apply to the acquisition and holding by Plans of the ERISA Eligible Certificates sold by the underwriter and that all conditions of the Exemption other than those within the control of the investors have been met. In addition, as of the date of this prospectus supplement, there is no obligor with respect to mortgage loans included in the trust fund constituting more than 5% of the aggregate unamortized principal balance of the assets of the trust fund.

    ssuing Entity

    GS Mortgage Securities Corp.

    Depositor

    Goldman Sachs Mortgage Company

    Sponsor

    Wells Fargo Bank, National Association Master Servicer and Securities Administrator

    Avelo Mortgage, L.L.C.

    Countrywide Home Loans Servicing LP

    Wake up people!

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