BofA invests in Countrywide

[sniglet]

Bank of America is investing $2 billion Countrwide Financial. This is going to make the markets giddy with delight for a few days. Unfortunately, I suspect it won't help in the long run. Unless the market for non-conforming mortgage securities re-opens Countrywide will just be living on borrowed time.

What competitive advantage does CFC have if the only product it can offer is conforming loans? People might as well go to their bank or credit union for that. And even if CFC managed to make a business out of conforming products it would be a shadow of what it had previously done (and much less profitable to boot, since conforming products are so competitive).

Anyway, $2 billion doesn't go very far when you routinely write more than $40 billion in mortgages a month (CFC issued something like $48 billion in loans this July).

Come to think of it, why is BofA making an investment in the first place? Why not open some lines of credit for CFC? I wonder if BofA felt an equity investment was somehow more secure than a line of credit?

[deejayoh]

BofA borrowed $500 million from the fed yesterday at 5.75%, and loaned $2 billion to CFC today at 7.25%

oh, and the debt is convertible to shares at $18 when CFC closed today at $21.82 today, and had been trading at over $35 for most of the last twelve months.

Can you smell the desperation?

[rose-colored-coolaid]

So BofA just took a $2billion put option on CFC?

[AwaySooner]

[mike2]

Check out the chart of non-performing assets of the major banks. WaMu's not looking so hot.

[deejayoh]

OK, here is a question I am hoping someone can answer. The fed lowered the funds rate for banks to 5.75%. Why didn't CFC just borrow the money there?

My understanding is that the fed conducts it's open market operations through 22 "". Countrywide Securities (a CFC Sub) is one of these. Why not step up to the window and ask for cash?

I read somewhere that thy "couldn't" but I don't see why not if they are truly one of the big boys. Are there covenants they didn't meet? if so, how are they still on the primarly dealer list? They sure didn't need to give BofA a 1.5 point vig to get the deal done, did they?

[TJ_98370]

DJO,

This is a guess – but perhaps Countrywide's action had a lot to do with "calming the market."



....The lack of financing prompted the U.S. Federal Reserve to cut borrowing costs for banks. The Aug. 17 move, designed to direct more cash to companies that lost access to short-term borrowing, came a day after Countrywide tapped $11.5 billion of emergency credit lines because it had been shut out of the commercial-paper market.....

With the BofA investment, everybody appears to be happy again, the birds are singing, the sun is shining, and CFC stock went back up. What do you think might have happened if Countrywide borrowed $2 billion more a few days after borrowing $11.5 billion from "emergency credit lines"? I'm thinking that Mr. Investor would have thought, "Holy sh*t! These guys are in real trouble!" and immediatly set out to sell all of his CFC stock and withdraw all of his funds from Countrywide Bank.

Again – just a guess.

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And other related late breaking developments.....




Bank of America Corp. (BAC) can't convert its $2 billion investment in Countrywide Financial Corp. (CFC) into common stock, the Office of the Comptroller of the Currency said in its letter approving the investment.....
...

[deejayoh]

[TJ_98370]

Okay,

Listened to the video - What I think Mr. Mozilo said about why they did not use the "Fed Discount Window" was:

(not direct quote)

...Countrywide has a bank but is not a bank. The bank has access to the window but does not have the assets. The mortgage part of the company has the assets, but does not have access. Funds cannot be transferred to the bank because of regulations....

There is some credibility to this statement as per the quoted paragraph from the following linked article:



....Countrywide plans to complete by the end of September a plan to make almost all mortgages through Countrywide Bank, which has access to cheaper funding through the Federal Home Loan Bank System....
...