July 01, 2008

FLASH: Angelo Mozilo's crimes are now BofA's problem as brain-dead CEO Ken Lewis completes deal for Countrywide Toxic Mortgage


Hi, BofA shareholders, I'd like you to meet Angelo and his corrupt posse at Countrywide Toxic Mortgage - your problem now!

Every state in the US has either filed a lawsuit against your new friends or is preparing to do so. The civil and criminal lawsuits will take years and years to sort out. You'll end up losing billions and billions more on this deal, and the Countrywide brand you bought is probably more worthless than Enron at this point.

But what the hey, a deal's a deal, and you own 'em now.

And BofA CEO Ken Lewis, who might not last the summer, is now a strong nominee for "Stupidest CEO in the World". He may think he can pawn off Countrywide's mess on the taxpayers, and thanks to Angelo's bribery he may well do that, but he won't be able to stop the lawsuits. No, he won't be able to stop the lawsuits.

Bank of America completes buy of Countrywide

Bank of America Corp. has completed its acquisition of mortgage lender Countrywide Financial Corp., making BofA the country's largest mortgage lender.

Under the agreement, Countrywide shareholders received 0.1822 share of Bank of America stock in exchange for each share of Calabasas, Calif.-based Countrywide (NYSE: CFC).

When the deal was announced Jan. 11, it was valued at around $4 billion. However, Bank of America's stock price has since declined from $38.50 per share to Monday's closing price of $23.87 per share. Based on that drop, Bank of America paid about $2.5 billion for Countrywide.

Last week, Charlotte, N.C.-based Bank of America (NYSE: BAC) announced it would cut 7,500 jobs as part of its acquisition of Countrywide.

26 comments:

6% is dead said...

Come on Keith...You are smart enough to see that this deal was not done because it made good business sense. It was done because the powers that be said it would be so...they said it HAD to be so and BOA has agreed to bail Tangalo out.

Dont fret over BOA either...They will be taken care of.

It hath been foretold...

Long Term thinking said...

Ladies and gentlemen, I know I will probably be flamed for the following - but hey that is what blogs are for. First, I agree, B of A buying CFC is a collossal mistake. No doubt on that one. But I would like to highlight something that is barely covered in the media (of course) right now that makes some (very few) Banks a good value right now. I can probably name 2 at the moment that really are good values. This is why - FAS 157. What is FAS 157? It is an accounting rule enacted just before the subprime mess (great timing huh). It basically says that the mortgage securities (and other securities) a firm holds on it's books must be marked to what they will fetch on the open market at the time the financial quarter is closed. It means that if you have a security with an underlying asset that has dropped 15% in real value, however due to panic (margin calls) in the market the mark to market value has dropped 50% or 75% which is the current case you must show the 75% loss even though the asset has only in reality dropped 15%. This was great for Enron since they could "project" what the market they owned would pay for an energy "security" and inflate their profits to infinity. It is working in reverse now. When everyone is ultra bearish as is the sentiment right now, you project and fetch a heightened "fear premium" in the market. For banks that are heavily leveraged and threw underwriting discipline out the window it means a swift death - however for well capitalized banks (cash capitalized, not CDO or MBS), it means that they will be raising even more capital under the guise of mark to market and people will accept the lower profits. Analysts will hit them with low expectations and executives have a rare opprotunity to do what they want without having to show stellar profits to Wall Street generated by huge amounts of leverage ROI. They will buy smaller, in-trouble banks(Market Share) for a song. When the market returns however they will be twice as strong as their rivals. Stronger because their actual assets only really dropped 15%, but they now own their competitors' market share. End result - more cash, strong assets, strong balance sheet and big market share. In the long term (1 year - maybe less when it catches on), that means nice juicey profits if you can stand the temporary pain of the market confusion. Be careful, as I said, there are only about 2 large banks that are strong enough to bet on - but once you do your due diligence and discover which 2 it will be very obvious who they are. You may ask, why is it that hedge funds are not buying these distressed assets? Well, truth is they are. Blackstone, WL Ross & company and Citidel Investment Group have all placed multi-billion dollar bets on distressed assets in the MBS, CDO and direct lending / servicing markets. I am mentioning this because the balance is gone in the market right now - blood and bodies everywhere, and THAT is the time when opprutunity is the greatest. I did not mention the stocks as I am not recommending anything and don't want anyone to think I am a broker or pump and dumper. I simply think that the purpose of this blog was always to bring contrarian ideas to the internet, and I see this as very contrarian just as HP was the only voice in the Housing Boom that rightfully said there is trouble on the horizon. Now is the time to profit from the trouble. You may catch a falling knife in the short term - so find your target and buy slowly - the trouble (and rhetoric - lots of Bears need to get paid) is far from over, but keep your eye on the future consolidation and virtual banking monopolies that this mess will bring about. Mortgages and housing are not dead, they just needed (badly) a correction and washing out of the weak, but the strong will emerge and be the titans of banking with little competition.

Future Ramen eater. said...

Long Term thinking said...

Future Ramen eater.

AMIGAUSER said...

Well you got it wrong again Keith,

just think, Bank of America have just bought the most rcognised brand in the mortgage business, they have written the legislation that will enable them to dump the mortgage toxic waste on the tax payer and they will no doubt discover huge "losses" that they can put against their profits - this means that countrywide will effectively cost them nothing.
I guess this must be the reason why Ken Lewis earns so much :-)

roll on McCrazy for president - load up on the weapons makers - America is going to war again.

Anonymous said...

Thats it the US is officially F**ked!

BondsOfSteel said...

Any word yet on what will happen to CountryWide bond holders? Last I heard, BAC refused to say if they would back all the debt...

Toby said...

Not sure you get this purchase Keith. BofA bought the company. They did NOT guarantee the debts. No different than if you or I bought 100 shares of CW. There is limited shareholder liability. BofA is only into it for $2.5 billion. Given that the book value of real estate is somewhere north of $1.8 billion they probably got a decent deal. BofA will now act quickly to strip the valuable assets from CountryWide and leave it with a shell of liabilities. BofA has always been interested in the servicing platform (est value $1.5 billion), the storefronts and the database of borrowers. Even if the whole thing goes bust BofA can only lose $2.5 billion max. Sound like a lot, but given the huge write downs it is a drop in the bucket for a bank this size.

Anonymous said...

Ken Lewis doesn't care.. it isn't his money.. and his golden parachute will cushion his eventual exit.

So much for the capitalist spirit.

steely damn said...

Brain-dead deal? The fix is in Keith, and Uncle Sam has already set the precedent of paying $750K each to "save" these problem loans. Ken Lewis is grinning ear to ear because he knows BAC won't lose a penny on this deal even with all the lawsuits!

Mark in San Diego said...

long term thinking - actually, I agree that there are some extreem values out there right now - not only in the banking sector. . ., I am "keeping my powder dry" for the moment, because there will likely be a final blowout in the market when companies report in for the second quarter - I would guess even oil companies will tank because of poor margin on refining, etc. Probably August will be a good time to pick up quality companies at near the bottom.

keith said...

There is no limit to the lawsuit downside even if there is limit to the debt. Countrywide is theirs now.

It's like when companies bought asbestos companies. Or like when HFS bought CUC. Or like anyone who sleeps with Pam Anderson. Or like when the US invaded Iraq.

Anyone who wins a judgment against countrywide gets paid out of BofA coffers now. Countrywide's massive legal fees to fight all the upcoming lawsuits (and there will be thousands) gets paid by BofA now.

And the States and others are salivating, knowing that BofA has some cash (still):

"There is technically a deep pocket. They've acquired them, they assume their liabilities," Florida Attorney General Bill McCollum told journalists on a conference call.

http://uk.reuters.com/article/governmentFilingsNews/idUKN0125468020080701

Anonymous said...

.


Doctor

Congratulations Mrs. Mozilo....it's a carrot!


.

Paul E. Math said...

There's got to be something going on here that we don't know about. Does Ken Lewis know something that will limit the liability of BofA? I know BofA gets some massive tax write-offs but there just has to be something more that they're thinking.

Maybe the fact that this bailout is going through proves that our elected officials on both sides are completely controlled by monied interests.

Sounds paranoid but just because you're paranoid doesn't mean everyone isn't out to get you.

Anonymous said...

long term thinking. I agree with u accept your accouting is a little bit on the week side FASB 157 is not a new statement. Were do you get this infoirmatiion? Your obviously not a CPA? FASB 159 is the newer statment paid for by big banks

Anonymous said...

Long Term thinking said...

AHHH HA HA HA.... ahhh... thats funny. You go an "invest" your money in banks. Great idea. Do that.

-FutureShock-

Gerbil said...

B of A looks like it's skidding out of control like New Century Mortgage.

Anonymous said...

Ken Lewis wants to be fired so he can rake in the $$$ for being terminated (even though it is utter incompetence and betrayal of shareholders). I wonder what % of CEO's today are nothing but thieves in suits along with their board members. I guess that would make you and I the lone marshall that has the duty to run them out of town.

W.C. Varones said...

That seekingalpha link sucks. The author is a complete idiot who praises Ken Lewis' recent acquisitions as adding "enormous shareholder value."

Anonymous said...

Anyone who wins a judgment against countrywide gets paid out of BofA coffers now. Countrywide's massive legal fees to fight all the upcoming lawsuits (and there will be thousands) gets paid by BofA now.

------------------------------------

oh, i am sure that bofa will extract their pound of flesh out of the orange one if any of these lawsuits are successful.

I have had companies acquired by larger corporations and every time they have held a portions (sometimes as much as 50%) of the deal in escrow for 1-3 years. this set aside is to be used to may settlements if anything should come stumbling out of the closet.

the set aside probably won't cover the lawsuits entirely but orangeman will feel a little pain.

Lost Cause said...

Do you know anyone who has ever gotten rich off of a bank? If anyone is getting rich, it is not their customers. I can't wait until these a--holes go bankrupt. The sooner, the better.

Anonymous said...

SOME MAY REJOICE AT BEING AT THE HEAD OF THE WELFARE LINE.................................

Toby said...

Keith, you are quoting Florida Attorney General Bill McCollum. The same guy that lead the impeachment prosecution of Bill Clinton. He couldn't get re-elected as a congressman, ran as a senator and go trouced. Snuck in behind Charlie Crist just so he could get a job. He is grandstanding a la Spitzer. He is not a very good lawyer. The insurance companies in Florida have been beating him to a pulp on a regular basis.

Wondering said...

Well, either Ken Lewis is the dumbest CEO around or the smartest and only time will tell. However it seems to me that if they did not have some type of plan he would have bailed, which they did not. That leads me to believe they have a plan.

BofA actually does have an opportunity to create some serious value here. The CFC brand has been so badly beaten and is absolutely the poster child for everything wrong with housing in this country since 2005. However it is also by virtue of that fact, the most publicly watched company in the US for banking problems. If BofA leverages that microscope to make some real postive changes to the way things are handled both with customers and investors, as well as with the assets it holds, it could become a very good turnaround story that will have all the free advertising they could ever want. They could add an enormous amount of value to something that right now is barely worth the asset value of the homes it has repoed. I have been in many business ventures in years past, and I can tell you that sometimes the worst looking hunk of garbage can end up being a very profitable venture if handled correctly. I guess if you are a BofA stockholder, the question you need to ask yourself is "do you feel lucky".

Anonymous said...

I personally think this will go down as one of the biggest financial blunders of Wall Street.

My guess is the government paraded some cushy deal in front of B of A, where they would get major tax breaks if they came in and bailed out CFC. Not unlike what Morgan did for Bear.

However, I think B of A got a little bit pawned here. They have lost almost half their market cap (almost 100 billion!) since the inception of this deal. Not to mention they are being dragged down in general with all the other financials as a result of the credit crisis.

I think the big issue here is that the true nature of this debacle has still not unfolded and my guess is that Wall Street, swimming in its excess hubris, still thinks they will wade through this in the next few months.

Guess again. Once folks realize that this housing problem does beyond just subprime and includes alt-a and prime mortgages, all hell will break loose.

Towards the end of this year and the beginning of next year is when all the exotic option-arm mortgages, so prevalent in places like California, begin to reset. Watch the fireworks after that really begins to gather steam.

Anonymous said...

Our Atty General in FL. is going after BOA with both barrels. He knows BOA has deep pockets.

BOA will not be able to evade paying out millions in fines and penalties, and there will be criminal charges against the top echelon of the former CFC.

Anonymous said...

Long term thinking....thanks for your comments....Everyone WAKEUP, given this mess there are major opportunites to make money buying items at a bargain. Let me keep it brief by saying over the next few years those people on magazine covers who made a fortune....they wont be from shorting....that game is over...they will be from buying the right distressed debt. Lets get some ideas going folks. We are all on our game and smart. Ideas?