Bank of America Buys Stake in Countrywide

Markets are excellent at setting prices, but they have a habit of over-shooting when things change rapidly. In the case of the sub-prime mortgage mess, the share price of Countrywide Financial fell through $15 a share from its normal trading range around $30 to set a new 12-month low. As the nation’s largest sub-prime lender, Countrywide is vulnerable to rising foreclosures. However, most of the loans are performing just fine, and Bank of America has taken advantage of this fact to buy $2 billion worth of Countrywide at this fire sale price.

Bank of America received preferred stock that pays a 7.5% annual dividend and can be converted into Countrywide common stock at $18 a share. If converted, BoA would own 16% of the mortgage company. Kenneth Lewis, chairman of Bank of America, explained “This investment reflects our confidence in their business and recognizes the importance of the company in providing home financing across the country.” Countrywide’s stock shot up to $26.25 on the news. Is this a foreshadowing of a BoA buyout? Countrywide’s CEO Angelo Mozilo fumbled out, “There’s no, even thought [sic], of Bank of America, at least in my mind, [sic] Bank of America buying.”

And there probably isn’t. Instead, BoA saw an opportunity to grab shares at $18 instead of $30-40 it would have had to pay earlier on. What most of the market forgot was Countrywide is the biggest player in the space. That means it is better positioned to weather the storm than some of the smaller actors. It certainly could go belly up, but it is unlikely to fail ahead of the others in the sub-prime business.

“There is no more chance for bankruptcy today for Countrywide than there was six months ago, a year ago, two years ago, and when the stock was $45 a share,” Mr. Mozilo said. “We’re a very solid company.” He may be pitching it a bit strong, here; a $45 a share company is almost by definition more bankruptcy-proof than a $20 a share firm. But a $15 or $20 a share company is quite a ways from being at $0.00.

There is a real problem in the US mortgage market, and there has been a speculative bubble in real estate in America. Lots of people are going to lose their homes, and more than a few will wind up broke. This will hurt consumer spending, and it will make some of the mortgage lenders less profitable. But the problems are no worse now than they were a month or two ago. People just decided to panic, and in their haste, let BoA make what one expects to be a very profitable move.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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