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Countrywide Shares Tumble

Written By Brian Hicks

Posted May 5, 2008



Here’s some more news about our favorite troubled lender—Countrywide Financial.

Shares of the mortgage company are tumbling today on the news that two analysts have decided that Bank of America’s deal to purchase them is a little rich given the risks.

In fact, one of the analysts, Paul Miller, believes that the deal should be priced for somewhere between $0 and $2 a share. That’s pretty big haircut from original the $7 a share offer.

My only question is why did it take so long for someone to figure out how badly this whole deal stinks?

Countrywide, by the way, is worth zero. In fact, the bondholders will be lucky if they get paid back.

Funny stuff, huh Angelo?

Anyway, here’s the skinny on the latest news.

From Reuters by Tenzin Pema entitled: Analysts say BofA may lower Countrywide deal price

“At least two analysts said Bank of America Corp will likely lower its purchase price for Countrywide Financial Corp  with Friedman, Billings Ramsey analyst saying the bank may bring down its deal price to the $0 to $2 level or completely walk away from the deal.

Friedman analyst Paul Miller, in a note to clients, said Countrywide’s loan portfolio has deteriorated so rapidly that it currently has negative equity and the proposed takeover of the company will be a drag on Bank of America’s earnings due to the elevated credit expenses at Countrywide.

Miller cut his target on Countrywide’s stock to $2 from $7

Bank of America, which in January agreed to buy Countrywide for $4 billion, said in a filing last week there was no assurance that any of the mortgage lender’s outstanding debt would be redeemed, assumed or guaranteed.

“Bank of America announced that it might not guarantee Countrywide’s debt, which is most likely the first step in renegotiating the entire deal,” Miller said. “We estimate that if fair-value adjustments to the loan portfolio could exceed approximately $22 billion, this would increase the odds of Bank of America renegotiating the transaction or walking away.”

Miller, however, added that given the rapid credit deterioration and weak secondary market demand, markdowns on Countrywide’s loans could easily exceed Bank of America’s estimates when the company performed due diligence and the cushion was built into the deal.

He expects markdowns on Countrywide’s $95 billion loan portfolio — which includes $28 billion of option adjustable rate mortgages (ARMs), $14 billion of home equity line of credits (HELOCs), $20 billion of fixed rate second lien mortgages, and $19 billion of Hybrid ARMs — to be material.

“We believe Countrywide has significant credit risk on its balance sheet, not only in its loan portfolio, but in its subprime and HELOC securities and residuals, its representations and warranties on loans sold, and in loans held outside of banking operations,” Miller said.

On Friday, Standard & Poor’s cut the credit rating of Countrywide to junk status on concerns that Bank of America may not support as much as $24 billion of the mortgage lender’s debt once it completes its proposed takeover.

Countrywide, in a February regulatory filing, had said a loss of its investment grade rating would result in the acceleration of some secured debt obligations and hurt its ability to manage and hedge its inventory of loans.

In addition to increasing Countrywide’s financing costs and potentially hurting its ability to attract and retain bank deposits, up to $4.2 billion of its custodial deposits could be transferred to another bank if it were cut below investment grade, the company had said.”


Hmmm now let see what we’ve got here.

There are $34 billion dollars worth of second mortgages that will likely get wiped out and $28 billion dollars of loans in the most toxic mortgage of program of all time—option arms.  That doesn’t even begin to consider the rest of the mess that Countrywide brings with it to the deal.

Any way you cut it, it kind of looks like a death spiral to me.